Greece, Ireland and—to a lesser extent—the UK have just demonstrated to the world the inevitable fruits of running a modern social democracy. Living safely under the protective umbrella of the U.S. military since WWII, these countries have turned themselves into "nanny" states, promising to banish every last pea from beneath every last pillow. Plus they handed out lots and lots of new pillows. Alas, as Margaret Thatcher remarked about Europe's socializing instincts, "eventually you run out of other people's money."
And they finally have. No longer can these countries offer lavish pensions for truck drivers. No longer can they pay two-thirds of their children's college tuition. No longer can they bail their bankers out of moral hazards. And their citizens react to spending cuts exactly as expected from folks who feel entitled—they throw a fit.
But what about us here in the USA? Have you continued to spend unabated this past year? No. You've made real, concrete reductions in your disbursements—even if your income held steady. When great numbers of us—I dare say all of us—decide to tighten our belts due to conditions in the land, we are literally exercising common sense.
So what about our government? Why they've increased spending, of course. And I don't mean just the so-called "stimulus" of early 2009—two-thirds of which was transfer payments to rescue state and local governments from themselves—I refer to everyday, garden-variety federal departments like Agriculture and Energy.
My current favorite plan (CATO) would cut $1 trillion per year from the U.S. federal budget, which sounds pretty drastic until you realize even that won't yield a balanced budget. The co-chairs of Obama's Deficit Commission called for cuts just half that size—but couldn't get their own commissioners to go along. Still, I am confident Americans will not follow their European cousins off a cliff. We have time to avoid their fate by holding our politicians accountable to make deep cuts.
So here's my modest suggestion to save $100 billion in one fell swoop: finally get rid of Jimmy Carter's needless, intrusive and wasteful boondoggle—the U.S. Department of Education. We got along just fine for 204 years without it, and I feel certain parents in cities and states across the fruited plain are smart enough to teach their kids without any expensive "help" from Washington, DC.
Who's with me?
I couldn't agree more. I find it interesting that politicians argue about taxes, but no one's actually attacking the budget. Isn't the budget the problem in the first place?
ReplyDeleteTurns out, Mike, that the budgets have actually NOT been the problem. Even if gov't were to abide by them--which they don't--indexed entitlements and interest on the debt make up over half of federal spending.
ReplyDeleteHeck--Nancy Pelosi didn't even TRY to submit a budget this year. Our government doesn't need or even use budgets anymore--they operate on two mechanisms:
1) Continuing Resolutions. (ie: "Spend what you spent last year, only give your union employees a raise.")
2) Emergency Authorizations. (ie: "Here are another 73 weeks of UI bennies, not subject to our own 'Pay-Go' rules, because emergencies don't count.")
Like I say: ITSS :-)
Historically when we have really big ticket items in this country, like $4T across two wars, we monetize the debt away. We did it after WWII and I would bet we do it again shortly.
ReplyDeleteIreland's tale is completely different from that of Greece, and therefore far more tragic.
Jeff, what does "monetize the debt" mean? Sell bonds? Aren't we already trying to do that?
ReplyDeleteAnd don't you think America's fiscal and monetary situation was much stronger after those earlier wars than it is today? The US dollar isn't gonna be the currency of reserve much longer, and if the world looks at our congress as unable to do the hard things, to whom could we monetize our debt?
I agree that Ireland's situation was unlike Greece's. The Emerald Isle had a real-estate bubble similar to ours, followed by the government thinking it could bail out banks--only to learn that the government ITSELF wasn't too big to fail. So now they give up a good bit more of their sovereignty.
And, in fairness to the Irish people, they are not rioting. Yet. :-)
We were in much worse shape financially after WWII than we are today. Our national debt in 1946 stood at 122% of GDP. As of September 30, 2010, the most recent data we have, our national debt was 94% of GDP. Not an admirable number, but far from the worst we’ve ever seen.
ReplyDeleteSelling bonds is generally referred to as “financing” the debt and “monetizing” the debt generally refers to diluting the money supply (the M3). By 1956, our national debt was down to 61% of GDP. Nominally, however, over that same decade, our national debt actually went up, from $271 billion to $274 billion. We certainly had some productivity gains in that decade but a 100% difference? No way. We inflated our way out of that debt. We monetized it, something Greece and Ireland, now that they’ve adopted the Euro, can no longer do.
It would be a wonderful thing for both the US and the world if there were another large currency with the stability and strength of the US dollar. Alas, at least for now, the US dollar is peerless. Due to wide-spread and almost accepted political corruption the Russian Ruble isn’t anywhere near as stable; Chinese Yuan is pegged to the US dollar; and the Euro suffers from being a single currency that must serve multiple political boundaries. The Japanese Yen and the Pound Sterling are the closest. The Brazilian Real has been extremely well managed over the last eight years, possibly even better than the US dollar, but at this point, it’s far too small of a currency to compete. It is absolutely in our best interests to cheer on the progress of all comers however, as this is not a zero-sum game and more strong and stable currencies would be a reflection of stronger and more stable economies around the world.
Even the quantitative easing our Fed is currently doing likely amounts to only a 4.5% dilution of our money supply. That’s a baby step toward fighting possible deflation. Right now core inflation is running 0.6%, the lowest level ever recorded. That’s not deflation, but it’s way too close for comfort. The ideal rate of inflation is probably between 2%-3%.
Why is a low-grade inflation desirable? When consumers see that things they want cost less now and more in the future, they have a small incentive to spend now. When we have no inflation, no such incentive exists. When we have deflation, consumers are right to hang on to every penny for as long as possible, because those pennies will buy more in the future than they do right now. That causes demand to plummet. Less demand means fewer goods moved. Fewer goods moved means less production needed. Less production needed means fewer employees needed. Ergo, if you want to reduce unemployment, a low-grade inflation is desirable.
Yes, inflation will make homes, and commodities and stocks and labor and everything else, cost more – nominally. In “real” terms (that’s economist for inflation adjusted) the costs don’t change. If you were acquiring houses in trade for boats instead of dollars, their cost wouldn’t change. Supply and demand can change real cost, but inflation does not.
Spending, taxation, debt and currency strength are an interesting discussion to be sure, but we’d have to include more variables to discuss them intelligently, such as currency velocity and labor supply.
Here is as good an explanation of Ireland’s woes as I’ve seen (broadly, you've got it exactly right): http://www.nytimes.com/2010/11/26/opinion/26krugman.html?_r=1
Thanks Jeff:
ReplyDeleteMonetizing the debt via inflation. Hmm...that does seem to be the plan, for sure. 2-3% inflation may be desirable if you look at consumer spending as the engine of growth...and maybe that's necessary with a mere 2.1 live-births per woman of childbearing age. Right now we rely on immigration and adoption, which evidently aren't doing the trick--so I guess inflation is the only other way to grow.
And I wasn't thinking anybody else's currency would supplant the dollar--I think gold is shifting into that role to some extent, unofficially.
Aren't the non-discretionary chunks of U.S. spending, like entitlements and interest, a big impediment to fiscal improvement? We have less and less latitude to make meaningful cost reductions.
ReplyDeleteInflation isn’t real growth, but it does assist it. We are still growing our population by roughly a compounded 1% annually, so we don’t have Japan’s issues (the Japanese population is projected to decline by half over the next century; that will cause all sorts of serious economic challenges). Productivity gains and new technologies will also help us grow. The more you educate our populace the brighter our prospects become.
What spending would you like to be our engine of growth besides the consumer? The government? Business? Count on it, they will all increase spending over time (and help us grow).
Gold is probably a smaller currency than the Real. It’s certainly far far smaller than the US dollar. Beware the precious metals and stones markets. Historically they can be devastatingly fickle (a ten-year chart might look good, but pull back and examine a hundred years; yikes). We would have severe deflation if we were somehow on the gold standard right now, with no way of controlling it. Unemployment rates would be astronomical. And a country can only progress to the degree it is making use of its potential labor supply.
Government spending and the broader world of fiscal improvement for everyone are a little more complex than the relationship you’re suggesting. For example, if you write a check to your government to cover your possible health care expenses it is not different for your personal wealth than if you write a similar-sized check to a private insurer. You may hate the care you get from either one, but you are not better off economically as an individual. Yet the percentage of government spending changes dramatically. Same with government-purchased or private police, government-purchased or private education, etc. To you, the cost is the cost, even though we alter the percentages of government versus private spending dramatically.
We still have many options to improve our financial situation over time, and ideally we will act before monetizing is our only option. In a perfect world, we’d get our financial situation cleaned up during good economic times. Trying to do that during a short-term (five years?) downturn would create a lot of needless pain. Even worse, we would be squandering a lot of productivity from labor, and you can never get that back.