Keynesian economists argue that when the economy is not providing enough jobs, the problem is a lack of demand. If more consumers were clamoring for additional goods and services, businesses would hire workers to provide them. If borrowers are tapped out, either overloaded with debt or saving more because of uncertainty, they cannot increase spending.
Governments, however, can usually continue borrowing even if individuals cannot. When the economy is in recession, the government can run a deficit, and spend the money to pump up demand. Once demand is higher, businesses will hire more workers. With more money in their pockets, workers will spend more, creating even more demand. Once the consumer demand recovers, government can then drop the deficit spending, as aggregate demand will have recovered. Keynes likened it to priming a pump.
This is the economic theory behind the various government stimulus packages that we have seen in the last few years. President Obama’s job program proposal was another along these same lines. It did not get off the ground, due both to partisan politics and a legitimate concern that the Federal government is already carrying too much debt.
It occurs to me, however, that the private sector is about to undergo a burst of increased demand. It’s called the Christmas selling season.
Goods are moving from the warehouses onto store shelves in anticipation of Black Friday. Retailers are hiring additional staff to handle the expected surge in buyers. And the increase in demand is not just limited to presents. At my employer, we are already making deposits for the caterer and DJ at our annual Christmas party. Folks are booking airline flights as they plan their holiday travel.
Viewed as a temporary increase in demand, the holiday season fulfills the same function of a government stimulus package. But we all know what happens after the first of the year. Seasonal workers get laid off. The inevitable credit card bills arrive, causing December’s free spending consumers to retrench in January. Economic activity drops back down again as people tighten their belts.
So when the private sector does a stimulus package, the effects are short term in nature. I wonder why we think it will be longer lasting when the government does it?
Showing posts with label Deficit. Show all posts
Showing posts with label Deficit. Show all posts
Thursday, November 3, 2011
Thursday, August 4, 2011
The Debt Ceiling: The Aftermath
Proving that when the chips are down, our elected representatives can craft a deal that nobody likes, the debt ceiling was successfully raised before the government ran out of cash. So, unless you’re working for the FAA, let the good times roll.
I have been stunned by the outpouring of scorn that has been heaped upon tea party Republican freshman in the House of Representatives. One op-ed piece in the New York Times actually compared them to terrorists. They have been called irresponsible for creating a crisis in Washington. How dare they threaten the full faith and credit of the US? The insolent nerve, to demand spending cuts and refuse to increase taxes! Didn’t they understand how bad a default would be? If government spending had forced to be reduced by 40% overnight, that would have been like running into a brick wall!
The attitude of the tea partiers seems to have been that it was better to run into the brick wall with $14 trillion in debt than wait ten years and run into the brick wall with $28 trillion in debt. And by run into the brick wall I mean have the Chinese government impose austerity plans on us in exchange for continued access to credit, ala the IMF and Greece. Created crisis? Certainly. Crisis that needed to be created? Maybe.
Looking at the deal that finally got done, I’m not entirely sure that it would not have been better to hit the wall now. At least that would have forced some tough choices. As it is, the deal that got signed does nothing to address entitlements and transfer payments. And the increase in the debt limit pushes the issue down the road two years, until after the next election. In two years we are going to go through all of this all over again. Only next time, the national debt will be $17 trillion, not $14.3 trillion.
So after all the Sturm and Drang, what we ended up with is pretty much business as usual. So much for hope and change.
I have been stunned by the outpouring of scorn that has been heaped upon tea party Republican freshman in the House of Representatives. One op-ed piece in the New York Times actually compared them to terrorists. They have been called irresponsible for creating a crisis in Washington. How dare they threaten the full faith and credit of the US? The insolent nerve, to demand spending cuts and refuse to increase taxes! Didn’t they understand how bad a default would be? If government spending had forced to be reduced by 40% overnight, that would have been like running into a brick wall!
The attitude of the tea partiers seems to have been that it was better to run into the brick wall with $14 trillion in debt than wait ten years and run into the brick wall with $28 trillion in debt. And by run into the brick wall I mean have the Chinese government impose austerity plans on us in exchange for continued access to credit, ala the IMF and Greece. Created crisis? Certainly. Crisis that needed to be created? Maybe.
Looking at the deal that finally got done, I’m not entirely sure that it would not have been better to hit the wall now. At least that would have forced some tough choices. As it is, the deal that got signed does nothing to address entitlements and transfer payments. And the increase in the debt limit pushes the issue down the road two years, until after the next election. In two years we are going to go through all of this all over again. Only next time, the national debt will be $17 trillion, not $14.3 trillion.
So after all the Sturm and Drang, what we ended up with is pretty much business as usual. So much for hope and change.
Wednesday, July 27, 2011
Debt Ceiling Talks: The Scale of the Problem
We are less than a week away from hitting the debt ceiling, and there does not appear to be a bargain in sight. If both Houses of Congress and the White House do not get their act together, the US government will be limited in spending only what it receives in tax revenue. The result will be an immediate 40% cut in Federal spending.
I don’t think there has been enough said about that 40%. Congress has authorized spending for almost twice as much as they take in. Twice as much. The idea that we are going to close that gap, either by shutting down the national parks, NPR, and the State Department, as the right wishes, or by making the people in the top 10% of incomes pay another 4% of their income in taxes, as the left envisions, is ludicrous.
To close the gap on the revenue side would require the government to increase taxes by 67%. Since the top 5% of income earners pay 59% of total income tax, if you wanted to close the gap solely from that group, their taxes would have to double to about a 80% marginal rate. We would be telling people “if household income exceeds $200,000, 80 cents out of every extra dollar you earn is going to be taken away. If we did that, who would be left to contribute to politician’s reelection campaigns?
On the expense side of the equation, you would have to make huge cuts in the defense budget, along with eliminating all other discretionary spending to close the gap. No Federal prisons. No air travel, because no air traffic controllers. No repairs to the Interstate system. Nada.
Or, you could stop paying Medicare. Medicare accounts for about 40% of current Federal spending. Interestingly, most of the commentators I have been reading have assumed that Medicare spending would be a priority in the event the debt ceiling is reached, right after interest payments on the debt. But that topic is the subject of another post.
Another interesting thing about the current crisis is that it is completely made up. Created out of whole cloth. The debt ceiling has been raised 78 times in the last 50 years. It is simply a matter of Congress giving the Treasury Department permission to go out and dig the hole a little deeper. Congress could come back from lunch this afternoon and raise the debt ceiling on a voice vote. It is, as they say, merely a stroke of the pen.
The Republicans started the crisis going by declaring that the debt limit wasn’t going to go any higher until a deal was reached on spending cuts. Big spending cuts. The President then doubled down by threatening to veto any increase in the debt ceiling that didn’t include a “Grand Bargain” on spending cuts and revenue increases. The revenue increases to start right away, the spending cuts to take place sometime in the future. Preferably after the next election, when he is settling into his second term. Both sides think they can win the political game by being intransigent, and here we are.
At this point, there is not enough time left to put together major legislation on either spending cuts or revenue increases. This means that the most likely scenario is that at the eleventh hour both sides will toss in the towel and agree to increase the debt ceiling enough to get through the rest of this year, and part of next.
That only takes a stroke of the pen.
I don’t think there has been enough said about that 40%. Congress has authorized spending for almost twice as much as they take in. Twice as much. The idea that we are going to close that gap, either by shutting down the national parks, NPR, and the State Department, as the right wishes, or by making the people in the top 10% of incomes pay another 4% of their income in taxes, as the left envisions, is ludicrous.
To close the gap on the revenue side would require the government to increase taxes by 67%. Since the top 5% of income earners pay 59% of total income tax, if you wanted to close the gap solely from that group, their taxes would have to double to about a 80% marginal rate. We would be telling people “if household income exceeds $200,000, 80 cents out of every extra dollar you earn is going to be taken away. If we did that, who would be left to contribute to politician’s reelection campaigns?
On the expense side of the equation, you would have to make huge cuts in the defense budget, along with eliminating all other discretionary spending to close the gap. No Federal prisons. No air travel, because no air traffic controllers. No repairs to the Interstate system. Nada.
Or, you could stop paying Medicare. Medicare accounts for about 40% of current Federal spending. Interestingly, most of the commentators I have been reading have assumed that Medicare spending would be a priority in the event the debt ceiling is reached, right after interest payments on the debt. But that topic is the subject of another post.
Another interesting thing about the current crisis is that it is completely made up. Created out of whole cloth. The debt ceiling has been raised 78 times in the last 50 years. It is simply a matter of Congress giving the Treasury Department permission to go out and dig the hole a little deeper. Congress could come back from lunch this afternoon and raise the debt ceiling on a voice vote. It is, as they say, merely a stroke of the pen.
The Republicans started the crisis going by declaring that the debt limit wasn’t going to go any higher until a deal was reached on spending cuts. Big spending cuts. The President then doubled down by threatening to veto any increase in the debt ceiling that didn’t include a “Grand Bargain” on spending cuts and revenue increases. The revenue increases to start right away, the spending cuts to take place sometime in the future. Preferably after the next election, when he is settling into his second term. Both sides think they can win the political game by being intransigent, and here we are.
At this point, there is not enough time left to put together major legislation on either spending cuts or revenue increases. This means that the most likely scenario is that at the eleventh hour both sides will toss in the towel and agree to increase the debt ceiling enough to get through the rest of this year, and part of next.
That only takes a stroke of the pen.
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