I materially agree with the editors of the Washington Post about the irresponsibility of the way we’ve been borrowing to spend and cut taxes over the last 40 years. Here’s a snippet:
Cheers greet those who announce new benefits, while those who suggest raising taxes to pay for them meet with voter fury. This is why the United States has a persistent budget deficit exceeding 6 percent of the economy.
This behavior is bipartisan, though the details vary by party: Democrats boost spending without raising enough revenue to pay for it; Republicans hack away at taxes without offsetting spending cuts. Both, however, have relied on irresponsibly large sums of borrowed money to finance their priorities.
Most of their ire is directed against the Republicans but make no mistake: the irresponsibility is bipartisan. I did want to make some additional points.
First, the empirical evidence remains that borrowing faster than we’re growing impedes growth. In other words as the federal debt overhang increases it becomes decreasingly likely that whatever economic growth is generated by cutting taxes will pay for the tax cut.
Second, as an increasing proportion of the economy depends on federal spending, the increase in deadweight loss will outrun whatever growth the spending produces.
Third, as long as stock index funds make 20% per year, why would anyone make investments that would actually increase the productive economy or make it more efficient?
Fourth, we don’t need a Congress to spend more than we can afford. We can accomplish that without Congressional help. We need a Congress to make the tough decisions and set priorities. IMO the priorities have been wrong for decades. For example, we still have people in the United States, one of the richest countries in the world, who meet the definition of poverty by global standards. That is unconscionable. Most of those people either live in Indian reservations or are rural blacks so they don’t have enough votes for anyone to care. They don’t matter.
The deficit spending orgy cannot be curbed. Every member of Congress owes his seat to some group of special interests, and total spending cannot be reduced. This is built into our Constitutional system. It would take a coup d’etat to and a dictatorship to end deficit spending. Economic collapse is guaranteed, and so is the dictatorship. Only the timing is in doubt.
“Third, as long as stock index funds make 20% per year, why would anyone make investments that would actually increase the productive economy or make it more efficient?”
20%? In point of fact, since its inception in 1957 the S&P index (probably the best measure) has returned 10% per year. About 12% the last 10 years, and 15% the past three, although there is a rebound effect in play. Returns on capex price out all over the map, but 10% is not a bad proxy, not exactly a bonanza for financial investing vs plant and equipment.
The Fed has studied this whole phenomenon and concluded stock market buybacks (the usual boogieman) are uncorrelated to with Capex. The ratio of capex to BB’s has been 4-5x since about 1970. Before it was higher, but that was before inflation became a fixture of the economy, and current return considerations and dilution protection for stock buybacks. In any event, why buy equity securities without capex to grow. One follows the other. No capex, no S&P equity returns. You can’t have it both ways.
I think you will see the capex to securities allocation rise as reshoring and bolstering supply chain strength become more prominent.
Before a final thought, I know some want to cite Citizens United as the big spending problem, but we spent to much long before that. The only solution is term limits, to prevent political careerists. never happen, so its going to be a train wreck.
In any event, I think the most interesting question is how we can structure SS and Medicare around the baby boom bulge. We have to get from here to there first. Personally I think we dug the hole too deep. They will need to inflate away the debt.