The Overhang

I’m in substantial agreement with the views expressed in this newsletter from First Trust Portfolio, particularly this passage:

Every dollar the government spends must be either taxed or borrowed from the private sector. The bigger the
government, the smaller the private sector. Not only does increased spending mean higher tax rates are expected in the future, but also a smaller private sector as it’s forced to fund a bigger government. It’s the Spending that crowds out growth, not deficits themselves.

Look, we get it. The world is a dangerous place and we are sure there are parts of our military that need better funding. But the government can’t do everything. If we need more spending on defense, those funds should be found by reducing spending elsewhere. Otherwise, eventually, the country won’t be able to afford to defend itself, either.

But, in order to reach the minimum of 60 votes needed in the US Senate, Republicans capitulated to Democrats demands for more non-military spending. The result was a budget blowout.

That’s not 100% true. The federal government as a monetary sovereign could simply issue credit to itself, “print money”. That has risks of its own and wouldn’t negate the point that choices need to be made.

I’m also skeptical that absolutely everything our military is presently doing is positively required for the country’s security. Some is being mandated by Congress but some of the necessary cuts could and should come from within defense. The military needs to be a better steward.

Making tough choices is not only the role of Congress, it’s the only role of Congress. We do not need a Congress that is too stupid or too cowardly to do its job which, after padding its portfolio for 40 years, retires to lobbying its former colleagues. Endlessly increasing the budget can be done with a computer program. A computer program would do a better job—it wouldn’t be self-serving.

5 comments… add one
  • Gustopher Link

    The article assumes that government and private spending are a zero sum game, but that’s not true. A lot of government spending can reap huge dividends in the future for both.

    For instance, prenatal care for low income women. You end up wIth a healthier, better functioning little worker/taxpayer in the future. Contrast with spending the same amount to keep an elderly person alive for a bit longer, where the economic effect is short term and limited.

    The article doesn’t distinguish between types of spending. It doesn’t pass the smell test.

  • A lot of government spending can reap huge dividends in the future for both.

    Or, alternatively, it can result in deadweight loss.

    Although longer ago it did produce the sorts of benefits you’re suggesting, over the period of the last 30 years government spending hasn’t resulted in those sorts of benefits. An example of that is the Apollo program.

    However, with services it’s rarely the case. When the supply of a service is limited, increased government spending is likely to just increase the price of the service.

    If you have evidence of major financial benefits to government spending programs over the last thirty years, please produce it.

    There are lots of reasons for that: low-hanging fruit, government has largely gotten out of the goods and services business and is now in the redistribution business, etc.

  • steve Link

    1) I don’t think anyone really expects much in the ways of return from Medicare and Medicaid, though there is a substantial body of research showing they contribute to keeping people employed or to becoming employed. Same with Social Security. How many families could afford to keep two people working absent these programs when their parents get older just as one example? Still, their role is to provide care to old and/or sick people. Please explain why, if you so believe, we should expect returns on this. AFAICT, we don’t expect this of private insurance.

    2) Basic research.–final-report.pdf

    3) Fracking.

    More broadly, it is apparent that you can’t have a functioning economy if you have no government. The communists showed us that if government runs everything, that sucks. So somewhere in between is where we should be, but I don’t know how we figure out where we should be with any rational metrics.


  • Please explain why, if you so believe, we should expect returns on this. AFAICT, we don’t expect this of private insurance.

    I didn’t make the claim. The implication of the claim was that government spending pays for itself. I don’t think that’s any more true than the idea that tax cuts pay for themselves.

    My view is that the circumstances under which government programs actually pay for themselves is a rarity these days. There may be other benefits but they don’t pay for themselves.

    You can do a lot of things you’d really like to do and that have a lot of hard to quantify benefits with an economy that’s growing briskly. Spending more than you’re willing to pay for risks a slower growing private economy.

    When you spend beyond your means sufficiently to slow economic growth you’re in a vicious circle.

  • Guarneri Link

    I want to apologize in advance. This off topic. But it is topical and the subject of a number of Dave’s posts. The following is from a chap named Jack Ablin, the former chief investment officer of a significant Canadian bank with a Chicago subsidiary. He is someone worth listening to. BTW – this is public info. I’m not divulging proprietary info. So the topic is the current public equity market dynamics. In particular, the sell off.

    Valuation – the market entered 2018 about 18 percent overvalued when gauged not only against current earnings and dividends, but against anticipated earnings and dividends for the next four quarters. Part of the reason for the equity market premium was artificially low bond yields. (Guarneri: yield chase). Historically, the 10-year Treasury tends to track nominal gross domestic product, which at about four percent, was 1.6 percentage points higher than where the benchmark Treasury started the year. Improving wage growth in the U.S. and stronger-than-expected economic results in Europe pushed global rates higher, prompting investors to reassess the relative attractiveness of equities. Conclusion: Don’t lose sleep over this. Thanks to the pullback, the market is now trading about 5 percent above fair value. Bond yields are higher, too.

    Unbridled optimism: Investor enthusiasm was at an extreme going into 2018, emboldened by sweeping corporate tax cuts and the perpetually rising stock market. As of January 4, the ratio of investors characterizing themselves as “bullish” versus “bearish” was in the 98th percentile of its 10-year historical range, according to a survey by the American Association of Individual Investors. Optimistic investors have high expectations. In a world where short-term market movements reflect the intersection of reality and expectations, widespread optimism made the market vulnerable to disappointment. Historically, the S&P 500 performs twice as well over the subsequent six months after periods when investors characterize themselves as extremely bearish versus periods when they’re extremely bullish. Conclusion: Don’t lose sleep over this. Thanks to the pullback rain spoiled the bull’s picnic. Bullish sentiment has slipped to a skeptical 34th percentile of its historical range.

    Economic peak: The perception is growing that the economy can’t get any better. Washington has pulled out all the stops with monetary and fiscal policy. Rarely in our nation’s history has fiscal stimulus amounted to more than 5 percent of GDP while the unemployment rate was below 5 percent. Economically speaking, investors increasingly believe we’re sitting on the North Pole, where every direction is south. Though President Trump has been flapping his arms (Guarneri: 😈) for infrastructure spending, it’s not a formal plan. The idea of unlocking $1.5 trillion in investment on $200 billion government spending is far-fetched. Conclusion: This is a valid concern. Easy money has been fueling risk taking over the last decade. Central bank reversals have the potential to turn monetary tailwinds into headwinds.

    Who is Jerome Powell? The equity slide earlier this month coincided with Federal Reserve Chair Janet Yellen’s last day on the job. Jerome Powell, the new Fed head, is a policy outsider and an unknown quantity. Over the years, equity investors took comfort with the central bank’s willingness to coddle risk takers and inject liquidity whenever the equity market got dicey. Equity investors aren’t sure whether or not Chairman Powell would come to the equity market’s rescue if stocks suddenly turned south. Conclusion: This is a valid concern. Central bankers have been helicopter parents since 2009.

    Bottom line: Investors should not lose sleep over the equity market near term. Fiscal policies on top of already simulative monetary policies have whipped the 2-percent donkey into a 3-percent racehorse. Running an economy above its potential will eventually result in inflation as production capacity and wages respond.


    Historically, equities reflect the real economy. It’s ownership in a piece of the economic pie. So where does the economy head now………….?

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