In his Washington Post column about our present federal spending trajectory George Will does a lot of throat-clearing about big numbers, the history of the national debt, etc. before getting to the meat of his argument:
Writing in the Wall Street Journal, John Greenwood, chief economist at Invesco in London, and Steve H. Hanke, professor of applied economics at Johns Hopkins University, note that by the Federal Reserve’s broadest measure of the quantity of money, the annual growth of the money supply averaged 5.8 percent over the 10 years from 2010 to 2019. Since last February, however, the quantity of money has increased 26 percent. And, they say, “we already know that the money supply will likely increase by at least another $2.3 trillion over the current year†— nearly 12 percent, which is twice as fast as the 2010-2019 average.
Should we call all this “stimulus� The economy’s problem is not inadequate aggregate demand. The surge in the saving rate signals pent-up demand poised to erupt when vaccinations allow the economy to open up and begin supplying demands, from restaurant meals to airplane tickets. A letter writer to the Wall Street Journal illustrates the folly of a gusher of untargeted government spending:
“How can sending checks to a retired couple whose combined income has remained steady at $150,000 a year in any way address the problems we currently are facing? A household with school-age children and adults who are now working at home and drawing the same (if not higher) salaries they did in 2019 would be much better served by programs aimed at getting schools reopened rather than receiving a stimulus check.â€
There are significant constituencies for increased spending and, as we have learned, no constituency whatever for fiscal prudence. The principles that I would advocate using in forming your views on the subject include:
- The best knowledge we presently have is that a public debt overhang impedes economic growth. The debt is right around 100% of GDP right now.
- Our present system in which the Federal Reserve buys most of the bonds from the Treasury and pays for them by expanding their own balance sheet is a perpetual motion scheme. Whatever your theory about why it will work it won’t work.
- Our present system exacerbates income and wealth inequality which I believe has a corrosive effect on society.
- Consumption is not investment. Getting a degree in art history may enrich your life but it’s consumption not investment. A public investment would be making our power grid more resilient or enabling it to serve future needs. I don’t believe that building more interstates is investment. It was in 1960 but now it’s just consumption.
- Increased federal spending distorts economic risks and rewards and impels people to make what would otherwise be unwise judgments, creating deadweight loss. When our economy was growing rapidly we could afford a little more deadweight loss. It isn’t growing rapidly any more and hasn’t been for some time. Also, see above about economic growth.
- What we’re doing now is risky. Maintaining our present course has many constituencies but if the worst happens the most vulnerable of those constituencies will suffer the most and we won’t be able to mitigate that with more spending.
Lockdowns are still largely in place, and that is creating production shortfalls, as evident from any walk through your local Kroger. Most recently, in ours it is bird seed and cat food. But entire brandnames have disappeared from the pasta aisle.
I also have to wonder about the rent moratoriums. They’ve been going on for a year or so. When will the landlord bankruptcies begin?
It doesn’t really change the thrust of his point – we should spend covid money on covid-harmed individuals – but to offer a bit of perspective, those $150,000 couples aren’t exactly hanging around on every block or corner.
Suppose you had $500K in liquid savings, and $250K in home equity. Consider:
A. a (lucky to get) 4% yield would be $20K/yr.
B. 2 maxed out SS recipients would get $72K/yr
C. if you deplete capital over a 25 yr horizon that’s $20K/yr
D. but you need a purchasing power deflator (say, 2%/yr); that’s ($5K)
E. And you at some point convert your home equity and amortize it over the planning horizon: that’s $10K/yr
Do the math. You have cash inflow of $117K/yr. Not $150K. How many people do you know with $500K in the bank?
To get to Will’s number you need roughly $1MM in the bank. How many of those do you know?
The point is two-fold. The Fed and Washington are just completely immoral for reducing fixed income yields, and for the pork in this bill vs real covid relief. Just shameful.
I agree that the debt situation looks untenable, but, I thought that 35 years ago when the 500B$ savings and loan bailout went through.
I wonder now, If confidence in the dollar drops precipitously, will people flee to crypto and hasten the fall.
Concerning points 1-6, I think they speak for themselves.
I would point out that points 5 and 6 are what Trump was all about. Its not just the “most vulnerable,” it quite a few that have been screwed for the benefit of the ruling class and the zealots.
I think that certainly increases the risk.
I agree with him that getting schools opened would be better, for most people, than getting stimulus checks. I wouldn’t make this an either/or situation. Stimulus checks for those who actually need them and then work on getting schools open.
I predicted that we would start talking about debt once we had a Des in office again. Nice to see my cynicism paying off. As far as Trump goes, he kept pushing for lower rates. See link. We did not have rapid growth while he was POTUS. We did have increased spending and increased debt. I would also point out that there ruling class is largely the wealthy on both sides of the political spectrum. Conservatives, as part of their playing the victim, are convincing themselves that all of the elites and rich people are Democrats. Not true.
Steve
I wouldn’t argue with that.
I’ve been whining about over-extending ourselves consistently over the last dozen years–no hypocrisy here. You may recall that I disapproved of Trump’s decrease in the personal income tax on those grounds. Additionally, when circumstances are different it’s reasonable to take changing positions. Owing $3 trillion (the amount in 1995—about $6 trillion in today’s dollars) with a GDP of $7.6 trillion is different from owing $28 trillion with a GDP of $20 trillion.
My view on deficit spending is that although we can afford to spend small percentages over receipts indefinitely we can’t spend trillions over receipts indefinitely.
I will point out a counter example.
Japan has a debt to GDP ratio of 237%. It has run a fiscal deficit of more then 5% a year for the last decade. It also has run the most aggressive monetary policy in the developed world since 2013.
Yet no financial crisis, no real inflation. The only outcome is a persistent deflation.
Could it be the US is on a Japanese trajectory and the government’s fiscal situation is no concern?
I have my opinions about what’s similar and what’s different, and how those differences could matter eventually.
“we can’t spend trillions over receipts indefinitely.”
Totally agree. There have been exceptions like Japan and early 20th century Britain, but baby and large I dont think it works. Unfortunately we have now adopted a pro cyclical approach to our taxing/spending. When the economy is doing well we should working the debt down, not piling on more.
Steve
The Fed buying private debt (QE) is far worse, and since the 2008 Financial Collapse, the Fed has most likely taken even more liberties with its balance sheet, making everything far, far worse. My fear is that the Fed’s balance sheet is going to collapse and take the money supply with it.
From the Washington Post column:
… The surge in the saving rate signals pent-up demand poised to erupt when vaccinations allow the economy to open up and begin supplying demands, from restaurant meals to airplane tickets. …
There are several assumptions in “from restaurant meals to airplane tickets”. Will there be a restaurant or other small business to supply the demand. The airlines have been through this multiple times, and they have resources to survive.
From the smallest lemonade stand to the largest corporation, an economy requires liquidity to create the supply for that “pent-up demand”, and all savings is invested somewhere. Furthermore, much financial-type wealth (including stocks) is high dependent upon liquidity.
When the switch gets turned on, there is going to be a lot of unanticipated destruction of capital. The closed restaurant will need cash to begin supplying the pent-up demand, but if the available cash is spent on back rent and extended credit, it is likely the restaurant will be out of business fast.
The landlord, who has been carping about rent forbearance, will quickly learn that the liquidity problem prevents anybody else from renting the now vacant space, and the mortgage company, which has been whining about loan forbearance, will soon learn that the liquidity problem prevents anybody else from purchasing the now foreclosed property.
As the Robinhood users have learned, the stocks they purchased on margin were actually owned by Robinhood, and Robinhood was actually financed on margin. The hedge funds, who actually know all this, were howling the loudest.
While government spending has been problematic for 50 years, Phil Graham’s Modern Monetary System removed the limits. The present spending problem started almost 20 years ago with the post-9/11 recovery.
All “stimulus money” goes somewhere. Government debt created money through lending, and that money will exist until the debt is repaid. So, all “stimulus money” stimulates something, but not all stimulating is good.
In a way, it is quite comical. Usually, “stimulus money” would end up in China, but because of the shutdowns, it cannot. Instead it goes to Wall Street, and the peasants stage a revolt. The Democrats are horrified that anybody would try to hurt the wealthy, and the Republicans are revolted that the government would actually use the printing press they created.
RE: Japan
What is occuring in Japan is due to the MMS, and the US will have the same results. It is a holding action, and because the existing system does not collapse, it stagnates. Eventually, it will rot and decay, but because of the amount of eurodollars, the US would be able to sustain it far longer than Japan.