The editors of the Washington Post are getting queasy about the trajectory of the Biden Administration’s spending plans:
THERE ARE two assertions we can confidently make about the level of federal debt the United States can sustain. First, it is higher than many commentators — ourselves included — commonly supposed until recently. Second, it is not infinite. Congress needs to take both of those points into account, as it considers what to do now that President Biden’s $1.9 trillion covid relief package has passed — with a proposal for another $2 trillion or more in infrastructure spending on the way.
They follow that with a paraphrase of Augustine’s wisecrack (“Lord, grant me chastity—but not yet”):
The right answer is not to pivot to deficit reduction immediately. We had reservations about the size of the newly approved bill; the $350 billion allocated to state, local and tribal governments and U.S. territories, in particular, seems excessive given their strong recent tax revenue recovery. Nevertheless, there is a case for borrowing to meet a crisis as great as the one the pandemic imposed on public health and the U.S. economy.
Their solution to the conundrum, as you might expect, is to raise taxes:
As Mr. Biden and the Democratic Congress move to infrastructure, however, they should plan to offset some or all of the cost, through higher revenues, reduced spending on lower-priority items or a mix of the two. The latest Congressional Budget Office projections show the federal debt on course for exponential growth after this decade, reaching twice the size of the economy by 2051 — whereafter it continues to rise. This estimate does not include the covid bill, which had not yet passed when the CBO produced its report on March 4.
Increasing marginal tax rates is one thing; increasing revenues is another. The former is within the power of the Congress but the latter may prove elusive.
There is one proven way for the federal government to increase revenues: economic growth. However, the present state of knowledge tells us that the larger the public debt relative to GDP, the more difficult growth becomes.
As I have tried to make clear in the past I am not a deficit hawk in the sense that I believe that we can spend 2-3% more than we take in with impunity indefinitely as long as aggregate product is growing by at least 2-3% per year. That’s not the case now. As noted in the editorial we’re spending 10% of GDP more than we take in per year. And as I have repeatedly pointed out not all spending results in an increase in aggregate product. Sometimes it just disappears. That’s the nature of deadweight loss.
I’ll conclude with just four observations:
- For goodness sake don’t build any more interstates. At this point that’s just money thrown away.
- Don’t expect to be able to tax your way to solvency.
- The more we owe the less we’ll grow.
- I’m less worried about inflation than I am about a catastrophic loss of confidence in the dollar. Such an event is not within the control of the Fed. They can induce it but they don’t have the tools to stop it.
To be helpful, here are some suggestions.
(a) Cut military spending to 2% of GDP. That’s 300 billion dollars a year, 3 trillion over 10 years, in the proximity of infrastructure bill of 4 trillion dollars. Even a cut of that magnitude shouldn’t affect national security if defined narrowly as securing US territories.
(b) Land sales. The Federal Government is estimated to hold 2 trillion dollars of value in public lands (mostly in the West).
(c) Relocating Federal Government functions out of DC. We know technology now enables most “back office” functions to be done anywhere. $290 billion is spent on Federal employee wages each year; how much could be saved by relocating those functions to cheaper locales then the DC area (the highest wage metro in the country).
(d) Institute a VAT. Desirable anyway to smooth out income tax fluctuations.
As for confidence in the dollar — from history that is in the domain of the political branches. i.e. Weimar hyperinflation, Zimbabwe, Argentina, etc, those happened because the political actors considered inflation a lesser evil. In that regard; the fireworks is who will be the next chairman of the Fed.
a catastrophic loss of confidence in the dollar.
This should be: “a catastrophic loss of confidence in Treasuries.”
When Nixon defaulted on the dollar, there should have been “a catastrophic loss of confidence in the dollar”, but there was not. ‘With the stroke of a pen,’ the dollar’s went from 1/35 oz. of gold to 0 oz. of gold. Every dollar on a foreign balance sheet was rendered worthless, but confidence was not lost.
Had Nixon defaulted on Treasuries, things might have been different, and in today’s financialized economy and oversized trade deficit, it would be much worse. (The problem is not simply the trade deficit amount or the trade deficit to GDP ratio. It is the secondary manufacturing and services that are lost with the primary losses.)
A financialized economy is one that uses non-traditional financial leverage to create value. Stock buybacks using borrowed money is a form of financialization. The increased stock value is a result of increased borrowing capacity not production capacity.
Financialization is an upside-down pyramid, and the structure is dependent upon the ability of the “apex” to support the entire structure. Lending begets more lending, and so on, and so on. Due to the borrowing capacity of the US government, Treasuries are capable of supporting substantial leverage, but this support is not infinite.
… I believe that we can spend 2-3% more than we take in with impunity indefinitely as long as aggregate product is growing by at least 2-3% per year.
I agree, but it is often misunderstood that the borrowing must be accompanied with growth. Furthermore, that growth must be production, and when combined with a misunderstanding of Keynes, it leads to the belief that borrowing capacity is untethered to production capacity. In a financialized economy, much of the deadweight loss is financial, and again, lending begets more lending.
RE: interstates
In most instances, “build it, and they will come.” How much underutilized interstate highway is there? In my opinion, there are a lot of places that would benefit from new or expanded roadways, but then, I know that the world will not end in 9 years.
TastyBits:
Some time ago I did the math on interstates. IIRC at this point every city in the U. S. of 50,000 or more is within a few miles of an interstate. I seriously doubt that ensuring that every town of 25,000 or more will is near an interstate will materially improve matters. d includes the provisos that it replaces the personal and corporate income tax (rather than being pile on) and there are very, very few exemptions from it. Maintaining the interstates is largely the responsibility of state and local governments which explains why they aren’t being maintained. AFAICT one of interstates’ most important effects is as a backdoor subsidy to the real estate and construction industries.
CuriousOnlooker:
I agree with a, c, and d. a includes the proviso that we reduce our military commitments commensurately, i.e. no troops stationed in Europe, East Asia, or the Middle East; no wars of choice; etc. d inc
We can afford much more social safety net than I used to believe.
Per capita average wealth over $320,000.
http://scottgrannis.blogspot.com/2021/03/this-is-very-wealthy-country.html
@Dave Schuler
I agree that maintenance is an issue.
I am sure that Chicago could use some of the interstate highways widened, spurs added, and possible a loop. If Illinoise is anything like Louisiana, the interstates not built straight. There are miles of dips and curves to include major cities.
Here, I believe that expanding I-10 between New Orleans and Baton Rouge to six lanes would increase commerce along that stretch. Since Amazon is taking over the world, they could build warehouses everywhere.
I think the railroad infrastructure should be upgraded, as well. I mean for freight not passenger.
Fat chance. They’ve been pulling up the rails as fast as they can for decades.
“A financialized economy is one that uses non-traditional financial leverage to create value. Stock buybacks using borrowed money is a form of financialization. The increased stock value is a result of increased borrowing capacity not production capacity.”
Just a few basic questions:
1. What, exactly, is “traditional” financial leverage? Financial leverage has been used since the inception of business (or the family for that matter).
2. Exactly how is value created by use of leverage? Hint: There is a difference between “value” and “return.” Does anything else change other than the leveraged “expected return” granted by pieces of paper representing claims? And I think you mean debt, or leverage, and not “debt capacity.”
3. FYI – stock buybacks, although a useful term because of its generally perceived negative connotation (which is just an ad hominem fallacy) is properly, if perhaps too formally, actually known as a version of “recapitalization.”
4. Can you think of a benefit to recapitalizations? See “1,” above. Also give some thought to the wisdom or willingness of increasing that oh-so-desirable productive capacity.
5. What would be your idea of “good” use of leverage? How about “bad” usage, and why is it bad? Under what circumstances is it bad?
Look it up, take a read, and really give some serious thought to what Miller-Modigliani is really all about. (On one level its just common sense; but its backed up by a tremendous body of statistical analysis.) As friendly advice, I’d avoid the pop literature.
De-industrialization means that the railroads are not needed as much. Removing them makes re-industrialization harder, but I do not think that is the reason they are pulling up the rails.
“Fat chance. They’ve been pulling up the rails as fast as they can for decades.”
Heh. Its unfortunate. Its rather energy efficient. Not much friction on those rails. Other than causing traffic delays in small towns I don’t really understand why. And its occurring even as Warren Buffet lobbies like crazy against pipelines for the benefit of his precious Burlington RR.
Presumably, they want to repurpose the land and build homes.
@Drew
1. Banking.
2. Engineered financial products. Collateralization. Interest rate swaps. Currency swaps.
3. Qualified by “using borrowed money”.
4. Transferring money from a lender to a stockholder does not increase productive capacity.
5. The US has ~$70T in debt against ~$4T (M1) or ~$15T (M2), and this does not include private and eurodollar banking. Unfortunately, good and bad are relative terms. Collateralization is not necessarily bad, but at some level, it becomes bad. That level is relative as well depending upon the existing circumstances.
RE: M&M
So, the US government is simply recapitalizing, and the source is irrelevant. That sounds a bit like MMT.
If I am not mistaken, the Phillips Curve is “backed up by a tremendous body of statistical analysis”. How’s that working out. Yeah, that’s what I thought. “As friendly advice, I’d avoid ” statistics. FYI – MMT will become accepted because of statistics.
RE: pop literature
I am not sure what “pop literature” you think I am reading, but with a few exceptions, I usually go to primary or secondary sources. Because most of what is written is commentary on commentary on commentary on analysis, there are only one or two people that I will read without checking their primary sources, and since I have gotten of following these circular references, I do not read much.
In fact, there is little of what I write that you will find anywhere else. Everytime I use the term “hyper-deflation”, spellcheck wants to fix it. I think you might be confusing me with @steve.
@Drew
I try not to be a dick because I am really good at it. That is why I have not brought up your sudden change on imported Chinese goods.
After years of kindly explaining to me why putting Americans out-of-work and importing cheap shit for them to buy was a grand idea, some event on 01/21/2016 caused you to realize that you were wrong about the greatness of importing Chinese shit..
Depending on the outcome of the 2024 election, some event on 01/21/2024 may cause you to realize that you are wrong about financialization.
Rails:
It’s consolation. Farmers buy better, larger trucks, get slightly higher grain prices at the bigger elevators farther away.
Then the local storage shuts down and the rail spur isn’t needed.
Here, they blacktop it for a bike path.
The main line is maintained, we have Warren’s 110 car coal trains
going through town every ten minutes headed eastbound from Wyoming.