Champagne diet on a beer budget

I’ve been exchanging facebook comments with my friend Dave Snellen, who is a good, smart guy, a former Commodore of a sailing club I belong to, and at least as far over on the conservative side of the political spectrum as I am on the progressive side.  We were discussing whether the federal budget is like a family budget, and whether the current budget is has veered disastrously off-course due to Obama spending projects over the last four years.  He argued this way:

“Like a family, it is fine for the government to borrow money IF it leads to an increase in GDP/income. Otherwise the interest on the debt just leads to increase outflow without a corresponding inflow…

Over the past four years, we've had an increase in debt of about $6B without a corresponding increase in GDP. Not good. No increase in income to pay off the new debt. So we have just added to our burden and need to borrow more. This trend cannot be sustained.”

He recognized that

“We are 'borrowing’ it from ourselves. The major purchaser of government bonds is the government.”

And concluded with

“The point being you cannot continue on a champagne diet with a beer budget.”

I thought his arguments were well stated, and they are widely shared over on his side of the political world---as a progressive, of course I have different views.  In fact, I seem to reach different conclusions even when I nod in agreement to many of his phrases, such as the last one about beer and budgets, and many of his facts.  I’ll use this blog post to try to state why.

First, I’ll at least brush the question of whether we can treat federal budgets as analogous to family budgets.  It would take its own long blog post to set out all the implications of this, and to show in any detail what mischief can be done by this analogy, so here I’ll just say that nations live much longer than families do, that they are organized completely differently, have different goals and purposes, that unlike families the money that national governments pay for goods and services is largely internal to the nation they govern, meaning that the money largely ends up in the hands of the nation’s own citizens and benefits them (which is part of the nation’s purpose), and finally that nations that control their own currency can’t go broke in terms of that currency. They, unlike families, can simply create money if they have to.  They might cause themselves a lot of economic misery by using that power too liberally at the wrong times, but they can do it, and families can’t. States can’t. Counties can’t. Cities can’t.  Businesses can’t. In our system, only the Federal Reserve has that power, delegated to it by Congress, and delegated to Congress by the Constitution.

But all of that doesn’t mean that I’m indifferent to national debt.  Contrary to Abba Lerner’s view on this, I think excessive debt does create possibly harsh limits for national governments, even for governments that control their own currencies and could, in theory, simply print money to pay their bills. If I thought that we were really on a champagne diet with a beer budget, I would agree with Dave completely on this---but I don't think either of those descriptions is right. 

Our revenue is low right now for two reasons: one, because while we emerged from the recession some time ago by the official definition, we are still in its dismal grip out here in the real world, and two, because we have been on a tax cutting binge for the last 30 years. 

The tax cutting was intentional.  As a nation we voted for it, or at least for the representation in Congress that enacted it, and the general opinion of a large segment of the voting population is still that we haven’t cut taxes far enough.  But whether you agree or disagree with that, the impact of those tax cuts is pretty clear.  Here’s a graph from the Federal Reserve Economic Data (FRED) web site, showing federal receipts from 1970 to July of 2012:

 

The blue line is total federal receipts presented as a natural log because changes in growth rates are easier to see that way.  The red dotted lines are mine.  They show the slopes of the lines from 1970 to 1980, then from 1980 through 2000, and from 2000 through the present.  The changing slopes are in part due to changes in tax policy.  It could, and should, be argued that they are also in part due to decreased overall economic growth rates---but I don’t think those who argue for low marginal tax rates want to depend on that argument.  It doesn’t lend a lot of support to the general philosophy that drove our move to lower tax rates and looser regulations, does it?  Those policies were supposed to increase economic growth.  There may be other, more basic reasons that growth has declined, and it may be sheer coincidence that the decline seems to coincide with the emergence of a new governing philosophy.  But at the very least, we can say that this data doesn’t add credibility to the new vision.

But the real force behind the current large deficits is, without question, the huge recession we are still slogging our way through.  Here’s a second graph from FRED, showing federal receipts and federal expenditures as a share of GDP from 1970 through July of 2012:

I know it looks like static, but slog through it with me for a minute.

The blue line shows federal government receipts as a percent of GDP, and the red line shows expenditures.  The gray vertical bars are the narrow official dates of recessions---and look what happens whenever there is a recession, no matter who is president or which party controls Congress: in or near every gray bar receipts decline and expenses rise.  In the mid-1970s we had a recession under Gerald Ford; look at the gap between expenses and receipts that quickly develops.  The gap gradually improves until the big recessions in the early 1980s under Ronald Reagan, which caused expenses to take off yet again, and revenues to collapse.  And look at this century: that big collapse of revenues from well above 20% of GDP in 2000 down to about 16% in 2004 resulted from both a recession early in Bush’s first term and from the impact of the Bush tax cuts.  The blue-line bulge after that was the housing boom, and the collapse in 2009 to less than 15% of GDP, from which we have not yet fully recovered, was the massive recession that began at the end of Bush’s second term. 

So it makes no sense to blame Obama, or any president, for the widening deficit that this massive recession, this Great Recession, caused.  In fact that collapse happened during 2008, before Obama took office.  In January of 2007 revenues were 19.2% of GDP; by January of 2008 they had dropped to 18.4%, and by January of 2009 they had dropped to 15.9% and were still on their way down.  Obama was inaugurated on January 20^th of  2009.  By 2010 revenues were once again rising as a share of GDP, and by the middle of 2011 expenditures as a share of GDP were falling.

 So, with respect to the title of this post, even though federal receipts have declined as a share of GDP in this recession that doesn’t mean that we are necessarily on a long run beer budget.  The recession, eventually, will pass, and the budget constraints we are left with after that are those we choose to impose on ourselves.  We are the largest, wealthiest economy in the history of the planet, and since that’s true it’s more than passing strange to claim that we are forced to remain on a beer budget---if the United States budget is a beer budget, whose budget anywhere is not?  We can choose to spend less or more through our government; conservatives would prefer to spend less, and there’s nothing wrong with that as a choice.  But low taxes and low revenues are a choice, not a requirement for us.  We’re not constrained by national poverty to a small federal budget. 

As for the champagne diet, that has to refer to the size of the federal budget deficit as a share of GDP.  And it’s true that in January of 2007 the deficit was about 1.15% of GDP, and in January of 2011 it was over 8.6% of GDP.  From the FRED graphs above it’s clear that a large chunk of that deficit growth was a collapse of revenues that resulted from the recession.  Most of the rest of it, the increase in spending, is also a result of recession, rather than a result of Obama initiatives.  How do we know that?  Because in January of 2009, before Obama took office, the deficit as a percent of GDP was even higher: it was 10.1% of GDP.  That percent actually declined over Obama’s first term, and continues to fall.   There was a big jump in FY2009, which was the last Bush budget (ie, it was passed in 2008), and it included the bank bailout (Bush) and some fiscal stimulus (Obama).  But the trend since then has was pretty flat for a bit over a year, and then started to fall. There’s a belief on the right that Obama has been on a spending spree, but that simply isn’t true*.  We, as a nation, have had much smaller revenues and higher expenses because of the recession.  But there haven’t really been any great increases in federal profligacy in other areas.

As a last point, I do agree with Dave’s support of government investment in things that will increase economic growth.  That’s why, along with many others, I’ve been hoping that we could get support from both progressives and conservatives for providing stimulus by investing in infrastructure, particularly now when interest rates are close to zero, and real interest rates are actually negative. 

__________________

* For a Factcheck.org discussion of this, go here. 

Oh, and...

Did I mention that  dockworkers are set to close down American ports along the east coast and on the gulf by going on strike this Sunday? No?  That's because I didn't know about that until I read this morning's Washington Post. 

So let's see---dockworkers strike on Sunday December 30, and we squash our heads on the debt ceiling on the 31st, and we fall off a fiscal cliff the following day. 

The first days of 2013 are going to be a real kick in the pants, aren't they?

A toast to debt ceiling eve.

It turns out that the debt ceiling debacle will coincide with the fiscal cliff debacle, to create a perfect fiscal storm to start the new year.  We will reach the debt ceiling on New Year’s Eve.  

For those new to this topic, here's the short version: Congress has enacted a ceiling on our national debt, and Congress has also passed budgets and tax laws that imply that the Treasury must violate that ceiling to pay for all the things that Congress has required the government to do.  That debt ceiling will be reached on New Year's Eve, and if Congress does not raise the debt ceiling by that date the federal government will not be allowed, under the law, to pay any more of its bills than current revenues will support: it will have to simply default on some of the financial obligations that Congress has enacted.   At least that's been the interpretation for a long time now.

Note to the Republican Party: come back to Earth.  I say this as a concerned American.  I’m not always with you on issues---ok, to be honest I’m very rarely with you on issues.  But I’m very much in favor of continuing to have at least two sensible, viable parties in this country, and you, the Republican Party, are in real jeopardy right now; you are about to do something very, very foolish. Seriously.  If your plan is to try to use the debt ceiling as a bargaining tool, find a different plan. You can’t really expect to gain friends and influence people by holding our national honor hostage to your whims. Yes, the debt ceiling drama will be carried out over a couple of months as the Treasury twists itself silly around “extraordinary measures” to avoid complete financial collapse, so even thought the ceiling itself is reached in a few days the drama can be teased out for some time to come.  But I mean, what is the negotiating theory here?  That this gives Republicans some kind of leverage because Republicans don’t really care whether the United States defaults on its debts but Democrats do?  It comes very close to treason, frankly, which is not the kind of image that is likely to make a national party grow. 

And of course, as I’ve said here before, the whole concept of a debt ceiling makes no sense.  Congress passes all the bills that create national deficits; it creates the tax laws that provide revenue, and it passes every single line of every single budget---in fact, it hast to pass those lines twice, in a sense, once to authorize an expenditure, and a second time to appropriate funds to expend.  Let me repeat that last phrase: Congress has already voted to expend these funds.  The debt ceiling vote is to determine whether Congress intends to pay the bills for the budget expenditures it has already agreed to make, and which it has already legally appropriated the funds to make.

The Fourteenth Amendment, section 4, says that “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”  I don’t want to get into the issue of whether the existence of a debt ceiling is itself unconstitutional once the budgets that require the Treasury to violate that ceiling have passed through Congress, although I thought that Lawrence Tribe’s arguments against that interpretation were intellectually vacuous.   Still, I’ll leave that issue to lawyers, I have no expertise there.  But whether or not a debt ceiling vote violates the Fourteenth Amendment in a technical legal sense, it certainly violates its spirit.  Congress enacts an obligation for the federal government to pay for every line item in the budgets it passes.  If Congress, and particularly the Republicans in Congress (because no one else is suggesting that there will be a contest over passage of the debt ceiling bill), refuse to allow the Treasury to borrow money to meet that obligation, then Congress must either find an alternative way to make those payments, or it is very explicitly stating that the public obligations of the United States are not valid, and that Congress has no intention to pay them.   

Now, there are only three methods that I know about to raise money to pay our national bills.  We can borrow it, we can raise it through increased taxes, or we can print it.  If the Republicans in Congress do not intend to invalidate the nation’s public obligations, and if they refuse to allow the Treasury to take the first option, then they must pick from the other two.

Which will it be?

Back on the air slowly…and a call for Lori Montgomery and Paul Kane to please, please get a grip.

In my last post on October 29^th , I told you that my father was experiencing “sudden, surprising weakness”.  The weakness continued and deepened over the next days.  He died on November 1^st.  Blogging took a back seat for a while. 

It's been a month.  It’s time to try to get back on the air again.  Blogging will be a little slow for a few weeks as I get back into the routine, but a few weeks is actually pretty good timing.  The economic news right now seems slow, at least to me, and the op-eds in the Post have been mild.  But in a few weeks the fiscal cliff frenzy will probably be well underway, and there will be a lot to respond to.

For the moment, let me just say that the fiscal cliff itself offers little terror: it can come and go, and the economy will survive.  If nothing is done over the next six months it could hurt, but is that really likely?  Once we pass the fiscal cliff moment the Defense department will be facing enormous sequesters, and the Bush tax cuts will all be gone.  All of them, not just for the top 2% but for the top 100%.  There will be a sudden increase in payroll tax deductions as the payroll tax holiday (an Obama economic stimulus policy) expires.  And a few other spending cuts and tax increases will happen automatically, all of which will cause anger, disgust, wailing and rending of garments among the populace---which means among the voters in every Congressional district. Is it really likely that Congress will offer no better alternative in the face of all of that constituent anguish?  My guess is that we will go over the fiscal cliff first, and then Congress will act.  But provisions of the cliff will not last as they are.

Obama’s first proposal is interesting, and contrary to the huge outcry from the Republican side, it is useful.  It presents a Democratic first offer perfectly.  The Republican reject it on the grounds that it doesn’t offer a proposal on Medicare reform---but, of course, it does: by default it’s a proposal to leave Medicare as it is.  That may be a proposal the Republicans don’t like, but it is a proposal.  It is one of the many options available to us.  If the Republican side has a better option, they should offer it, rather than demand that the Democrats create their counter-offer for them.

One line from the Washington Post’s front page article on this needs a response---in fact, it’s the first line, the topic line.  Here it is, complete, from the piece by Lori Montgomery and Paul Kane:

“President Obama offered Republicans a detailed plan Thursday for averting the year-end ‘fiscal cliff’ that calls for $1.6 trillion in new taxes, $50 billion in fresh spending on the economy and an effective end to congressional control over the size of the national debt.”  (emphasis is mine)

Ms. Montgomery, Mr. Kane, please get a grip.  The Constitution is pretty clear on this: Congress exercises absolute and complete control over the size of the national debt, every penny of it, every time. Every single deficit is enacted through Congress.  Congress passes the budgets---all of them, every line.  The President can (and of course does) propose budgets, but it’s reasonably clear that Congress does not feel any binding obligation to pass the President’s proposals.  Congress passes tax policy.  Every single tax policy, every time.  Yes, there is wiggle room both on spending and taxing sides, and the Executive branch does use it.  But every bit of wiggle room is provided in legislation passed by Congress.  Every time.

I have to guess here, since I haven’t actually seen the Obama proposal to the Republican leadership.  But my guess is that Obama has asked Congress to stop the regular habit of threatening to default on the national debts that Congress has created.  He has, probably, asked them to abandon the truly odd process of having to pass a debt ceiling increase in addition to their votes on taxes and budgets.  He has probably asked them instead to treat their votes on budgets as granting the right to finance any deficit they just voted to create: in other words, to vote, every time, as part of the budget process, to raise the debt ceiling if necessary to cover the deficit the new budget implies. 

This shouldn’t be controversial, frankly.  Congress has the right, and the power, to default on our national financial obligations if it really wants to. But the rule should be that if it really feels that is the best course of action it should have to propose that, and vote on it specifically.  Right now, under the current process, default on our national debt is the default position: under current law the nation will default automatically unless Congress votes to prevent it by raising the debt ceiling over and over and over.  

And we’re about to go through that painful, shameful, process again. That absurdity is approaching too, right on the heels of the fiscal cliff.

Sorry about the silence…

 

We’re bumbling toward the core of FrankenStorm Sandy.  That will reach us in about two hours or so, and is expected to last late into the night, with gusts well up above 60 to 70 MPH, and perhaps even higher.  But there are serious winds already puffing and shoving up under the eaves, and bending whole trees sideways.  So of course I thought I’d sit at my computer as long as the power is on, and offer an excuse for the long silence in this blog.  I have several to choose from. 

The first, and biggest, is that I have had some family responsibilities. Nothing really unexpected.  My father is 97 years old.  But he is suddenly surprisingly weak, and has lost a lot of weight in a short time.  The responsibilities that implies have kept me from this space for a while.

And I was tired, because I am also not 20 anymore.  It was great to be out on the Chesapeake last weekend, but it took a few days to recover. The trip included as much motoring as sailing, but there were a few of hours of good wind both days.  On Saturday we had our sails up coming out of the West River and pretty far down the bay toward our destination for the day, which was Hudson Creek in the Little Choptank.   We had to motor for an hour or two at the end of the day to get there in daylight.  But in the evening the wind came back, and we had a cold, very clear night at anchor with winds, judging from the volume of their drone through the rigging, somewhere up near twenty knots.   I slept like a baby, which means, of course, that I woke up every two hours, and since I was awake I went topside to check the anchor.  The cold felt very good.  I probably spent too much time up there, looking at stars I never see in the city, and the trees along the skyline, and the anchor light about 200 yard away of the only other boat out there in the night.  We had a rocking rolling ride all morning out of the Little Choptank on Sunday.  We were well into the Bay before the wind died, and we finally had to take our sails down and motor south to Solomons.  My thanks to Jeff and Monica for the opportunity to spend two days on a sailboat, which is something I haven’t done nearly enough in the last year or two, and probably won’t again for a while. 

There was a bit of discussion in the columns of government job creation, the topic of my last post.   The New York Times agreed with me, and Robert Samuelson exhibited an awe inspiring failure to grasp the implications of his own words in a column responding to the Times editorial.  If you read his column carefully, his argument is simply that government jobs don’t count because the private market will always achieve full employment without them.  If people aren’t required to fund government jobs by paying taxes they will buy something else, and that will create private sector jobs, so the government is just displacing jobs in the private sector.  In other words, he is relying on Say’s law.  Private markets will, in his mind, always achieve full employment of resources.  Of course the same argument can apply to jobs at General Electric or Apple, or any charity or church.  If Apple goes out of business and people can’t buy iPhones they will still have the money they would have spent on them, and they will presumably buy something else instead.  So by Samuelson's logic the jobs at Apple don’t count either.  If full employment is always guaranteed, then Apple didn’t really create those jobs building iPhones, it just displaced them from some other purpose. 

I was disappointed.  I had hoped that the argument for Romney’s (and apparently Samuelson’s) view that “the government does not create jobs” was more sophisticated than that.  I had hoped, and thought, that it was some misunderstanding of the Solow growth model, for example, which uses variables like population growth, savings rate, depreciation and capital investment to show how economies grow.  The misunderstanding would be that “capital investment” only means lathes and backhoes, but does not include roads, bridges, dams, and so on; in other words, that growth only occurs when private industry invests, not when government invests.  Of course that’s absurd. But it would at least show some background in the topic, and some knowledge of the theories of economic growth.

I have to wrap this up.  The storm is getting insistent.  But I’ll try to get back to this topic soon with more details.