The Rock and the Hard Place

Tax increases and mandatory program cuts, due to take place January 1, 2013, are the so-called Fiscal Cliff. In its May 2012 report (link), the Congressional Budget Office put the effect of that event—falling off the cliff, thus letting the laws now in place go forward without change—at $559 billion for FY 2013. I’ve cited a slightly lower number in yesterday’s post. This in effect results in a lowering of the total FY 2012 deficit from $1,171 to $612 billion in FY 2013. The CBO then goes on to say that this change will weaken the economy. Therefore unemployment will increase and GDP growth will slow. The logic behind this is that people will have less money to spend. Spending less, the private sector will have less income. It will respond by laying off people. That is the rock.

The hard place is the level of the National Debt.  It has a legally set ceiling of $16,400 billion. According to the Treasury’s website (link), the actual debt was $16,245 as of yesterday . We are going to exceed it fairly soon. The downside of that, nominally, is that U.S. national debt will be down-graded as it reaches ever higher levels of GDP. The current debt, measured against current GDP (for the 3rd Quarter of 2012, annualized) was 102.9 percent and trending up—comparable to China’s at 16.3 percent, and trending down.

This means that if we reduce our deficit, by gladly falling down that fiscal cliff, we shall lose jobs and economic momentum. If we resist going over the cliff, we shall have decent GDP and jobs growth but, by 2016 (the next national elections), our debt to GDP ratio will be 111.9 percent (China’s at 9.7%).

Not quite sure which way I want to jump. What helps, somewhat, is to contemplate 1945. That year our Debt to GDP ration was 134.5 percent—and we survived. To be sure, that was war time. Maybe we are again, at war. In more ways than one. If the GOP has its way, tax cuts will not expire and therefore, in theory at least, people will happily be spending money to whip that sluggish GDP into a faster trot. But to save us from breaking the Debt Ceiling—and again and again—will require very massive program cuts. And what will that mean? Less income for people, actually. Get rid of Social Security, Medicare, Medicaid, Unemployment Insurance, agricultural subsidies, pensions, highway funds, etc. But doesn’t that amount  to the same thing? No money, no spending, no jobs? Surely it does. So it’s a rock and a hard place, whichever way I look.

Related post.

Marron’s Last Word on the Debt Limit

The very best take on the debt ceiling debate came in the July 18 issue of Christian Science Monitor in a contribution written by Donald Marron, Director of the Urban-Brookings Tax Policy Center. The story is here. Marron points at the obvious—and no one even mentions it. It is that Congress passes all the laws (including those that require expenditures), appropriates all the money, and has the last word on what revenues will be collected. As Marron puts it, summing up the matter:

When Congress decides how much to spend and how much to tax, it is also deciding how much to borrow.

By seeing the debt limit as a separate something—separate from all of the actions that make borrowing necessary by the Executive, an Executive who has sworn faithfully to execute the laws passed by Congress—Congress can pretend that its left hand doesn’t know what its right hand has already done. Thus it can vote for everything it likes—and look good in the eyes of its constituency—and then vote against raising the debt limit—and look good in the eyes of other elements of its constituency.

Thanks for that reminder Donald!

Federal Debt and Tax Receipts

I published this chart the first time last February in the earlier version of LaMarotte. I thought it should be shown again on this platform in the context of the current debate about the debt ceiling and whether tax increases should or should not be a part of the discussion surrounding debt levels.

The chief point here is the relatively flat performance of Federal tax receipts since 1944. That flat performance suggests that taxes are not the problem—but the contrast between spending and taxes might be. The blue line, showing debt, tells ... the rest of the story

In addition to the trends, I’ve added some indicators to show when tax receipts hit low points since the Eisenhower years. These came in 1959 under Eisenhower, in 2004 under GW Bush, and under Obama at present.

What this graph shows through the harsh lens of national statistics is the weakening character of our political establishment. World War II produced a very sharp upward climb in tax receipts intended to fund that conflict. In 1934 (not shown) tax revenues were 4.8 percent of GDP. By 1944 they had reached 20.9 percent, never topped since. This 16 point increase in revenues managed to bring the debt down after the war was over. Pause for a deep breath. But then, beginning in 1981, the national debt began a slow but relentless upward climb. It went from 32.5 percent that year to 93.2 percent of GDP by 2010. This 61 point ascent of debt was not, repeat NOT matched by any upward motion of tax receipts. (The source of this graphic is the Office of Management and Budget (here), Tables 2.3 and 7.1.)

My conclusion in February was—and it hasn’t change since—that the nerve of the American political elite has simply failed! It didn’t have the intestinal fortitude to match expenditures by taxation. It asked us to read its lips rather than to feel its guts and biceps. That same failure of nerve—or insight, or responsibility, or will—is manifest now in attempting to solve the debt problem entirely by program cuts without any additional revenues.

Anarchy Lite

I view the controversy over the debt ceiling as a fake debate. What is now going down is simply a naked clash of power in which the need for a vote to raise the debt ceiling presents a convenient object of focus. I agree with today’s New York Times editorial position, namely that if U.S. debt were dangerously high, interest rates would signal that danger. U.S. debt instruments would not be attracting money unless they offered very high interest rates. But we have no problem selling them. The assets of the United States are there—and real. And interest rates—not only federal but all—are actually ridiculously low. I think we’re earning one percent or less on our personal cash holdings. The banks don’t want to pay for money because they cannot lend it. Nobody wants to act when the ruling element seems to have gone erratic.

The signals—meaning the words I hear repeated and words I never hear—are also wrong. All expenditures on “programs,” especially if these are “entitlements,” are viewed as evil by the Republican forces that control the House. All taxes are evil. Defense expenditures may be “on the table,” but they are never labeled outrageously, monumentally, or obscenely high. I do not hear Republicans screaming about evil “wars of choice”—such as we’re engaged in. I don’t hear loud calls for privatizing defense—although Republicans show plenty of passion in defending the right to bear arms.

The silly idea that now holds a significantly large enough element of the Republican party in its thrall to cause absolute stalemate might be described as Anarchy Lite. Behind it is a very fuzzy notion that society is effectively self-governing without any institutional government at all—except for pieces that the Republicans happen to favor. The military belongs in that domain, and evidently very little else—except perhaps those elements of the state department able to project power overseas to make foreign markets favor U.S. interests beyond our borders. Negative pressure by defunding is laid on all regulatory elements—regulation itself being viewed as evil, but a lesser evil than taxes. The worst category of expenditures is Social Security and Medicare—this despite the fact that we pay earmarked taxes to fund those programs. And the absolute evil is Medicaid, which goes to the poor.

This wooly not-quite-thought has absolutely no support in historical observation, theory, law, tradition, or custom. It is incoherent. It has never ever held sway anywhere—pre-fossil fuels or after. It can only be held by people who have not thought things through and who lack experience of just how bad things can really get unless you do your homework. But there are now millions of people who honestly think that their temporary wealth is a consequence of individual achievement without broad social support—and that those who don’t enjoy their advantages don’t do so because of personal laziness, immorality, and self-indulgence—and therefore can be jettisoned without much consequence beyond raising a few walls around gated communities.

Okay. Perhaps I’m overstating. But what I’m actually doing here is boiling that idea down so that only its nasty essence is left at the bottom of the pan.

It occurs to me that 63 years have passed since, with U.S. leadership (Eleanor Roosevelt having been the chairwoman of the Commission on Human Rights that first drafted it), the Universal Declaration of Human Rights was passed and adopted by the 48 countries with 8 abstentions (the Soviet block). That document represents an articulation of principles broadly held across the globe and only criticized (for not going far enough) by Islamic countries that want to see more emphasis on religion. These principles are never mentioned in the current debate—as “entitlements” are put on the table and the altogether insufficient health care law that managed to pass is damned and double-damned. If we take a generation to be 30 years, two full generations have reached maturity after World War II with no direct memory of it. Indeed, I sincerely doubt that today’s Congress would actually approve that declaration if it had a chance to vote on it again.

The current debate, I would submit, is not a clash between liberals and conservatives—but between two wings of a political establishment that has entirely lost its sense of reality. The Republicans have turned into anarchists and the Democrats have long since lost their only redeeming role—defending the powerless against organized wealth; they’ve become mechanical progressivists feeding at the same trough as the GOP—the corporate campaign contributions table. Campaign contributions are always on the table. It might surprise some readers, but I am a conservative. Meaning? Meaning that I want order and justice for all, not just for wealth—and I don’t worship dead things, like hidden hands. I also lack all interest in that famed vox populi—unless it cries in anguish. The true conservative feels responsible—for other people—and willing to do the necessary things to ensure a functioning and just community.

Does the Constitution Forbid Default?

A little blue copy of the Constitution is always on my desk, courtesy of the American Civil Liberties Union. Therefore, getting a hat tip from the Huffington Post here, I looked up the 14th Amendment of the Constitution. It says, Section 4:

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. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

Some hold that this amendment in effect makes debt ceilings unconstitutional. Here is a good example of the deeper problems that underlie the concept of “a government of laws, and not of men.”† Those rather loose words of the amendment were written by men. What exactly does “shall not be questioned” mean? And what is the meaning of that qualifier, “authorized by law”? In turn it will take men to decide whether this amendment applies to our current situation.

In any case, an interesting wrinkle. It appears to provide the President with plenty to lean on if Congress does not extend the debt limit.
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†Words by John Adams in Novanglus; or, A History of the Dispute with America, From Its Origin, in 1754, to the Present Time. To be sure, Adams was attributing the concept to Aristotle, Livy, and James Harrington (a seventeenth century political theorist).

Take Five for Budget Sanity

This post for those who suspect that our representatives are losing their marbles in the latest fight over the U.S. debt ceiling. In that context I got to wondering: Just how big is government as measured against the Gross Domestic Product? The answer turns out to be that it was 20.5 percent in 2010, thus in round numbers, a fifth of all economic activity. But how much has it grown? It must have grown fantastically when you listen to our representatives. Must it not? Well, folks, in the last sixty-two years government, as a percent of GDP, has grown a whole, monstrous four-tenth of one percent. In 1951, government was 20.1 percent of GDP. Now lets look at that—and then some detail beneath it.

What this chart shows, courtesy of Table 1.1.5. of the Bureau of Economic Analysis, the keeper of these number, that the small increase in total government expenditures as percent of GDP came from state and local government. It went from 6.8 percent of GDP in 1951 to 12.2 percent in 2010, an increase of 5.4 percent in this period. At the same time, federal government declined from 13.3 to 8.3 percent of GDP, a loss of share of 5 percent. The difference between these sectors, that 0.4 percent, is the only increase. Just to show it, I’ve also charted a sub-component of the federal, the national defense component. It grew within the federal budget by 1 percent in this period. The overall decline in federal expenditures, therefore, has been due to shrinking expenditures on domestic programs.

I remember the 1950s pretty well. What I don’t remember is the hysteria surrounding budgets then. I conclude that the current madness has nothing to do with job creation, efficiency, or the government growing oppressively huge. Based on these numbers, its basically the same size it was in 1951. Money has shifted to the state and local level, away from the federal, except defense.

What is this clash all about? It is a curious upheaval by a portion of the population against anything that represents collective effort. It takes the form of refusing to pay taxes. This disease first attacked the national government. Now it has spread to attack the state and local—so that we are roused from sleep by headlines telling us of bankrupt Minnesotas.

The people are aroused—but they are also a little confused. The fetid airs of failing capitalism are finally reaching the people—and they mistakenly believe that the evil odors they smell arise from those who’re trying to keep the roads paved, children in school, sewage treated, and food and drugs inspected. It’s not like that, Mr. and Mrs. America. Look at the chart. Lots of things are wrong, but it’s not government going for broke. It’s only going—broke, that is—because we refuse to pay the bills while expecting the services to keep on coming. Think again. Think again.

U.S. Debt Ceiling: Perspectives

The U.S. debt ceiling is now in the news. At times like these, passions high, historical perspectives are usually neglected, hence this small effort to look at the issue over some period of history. Herewith then the debt ceiling since 1940.

Before we get there, a simple definition. The debt ceiling is a legislatively set number. Congress designates a number that the U.S. Treasury may not exceed in cumulative borrowing. The current Debt Ceiling is set at $14.66 trillion, and Secretary Geithner may not borrow more than that. Now, by definition, if the Federal Government must borrow in order to make any payment—and it cannot—because it would exceed the debt ceiling—why then the U.S. Government is technically in default.

With that out of the way, let’s look at some charts. The one we’re most likely to see is the raw dollar level over time. And here it is:

Now the interesting feature of this chart is that the debt ceiling on the left of the chart is virtually invisible—whereas on the right it forms an Everest. But what this chart really shows is that the U.S. economy of the 1940s, in comparison with the economy of the 2000s, was puny. Therefore, to get some necessary perspective, let’s look at another chart.

What we see here is the debt ceiling as a percent of Gross Domestic Product. Interesting, isn’t it? Suddenly the highest peak is now on the left, in the 1940s. In point of fact, at the midpoint of that decade, in 1945, the United States was at the highest level it has ever reached, at 134.5 percent of GDP. On the far right of the chart, in 2010, we are evidently striving for another peak, but we’ve a ways to go. In 2010 the debt ceiling stood at 97.5 percent of GDP.

Now in the 1940s the United States was engaged in a global conflict, World War II. The question then arises, who is the big enemy in 2010? Does the War on Terror really amount to a world war? Or is that bar aspiring to the level of the 1940s really a war against an internal enemy, the Lords of the Universe in Red Suspenders? I incline toward the latter explanation.

But let’s look at growth rates in the following graphic.

Here I’ve calculated the compounded annual growth rate of the debt ceiling from 1940 to each respective year shown. Here the growth of the economy makes itself felt. The most stupendous annual growth rates are shown in the 1940s again, with the highest growth rate achieve in the years 1940 to 1943—62.4 percent a year! Since 1994, however, the annual growth rate, again measured from 1940, has never exceeded 9 percent, and for the entire period, 1940 to 2010, it was 8.4 percent a year. Big growth that, to be sure.

To give a more nuanced view, here is a graphic that shows growth by decade:

Once more we see that the debt ceiling grew most in the 1940-1950 period, least in the following decade—a time when the top tax rate was double that which prevails today. Second highest growth took place in the 1980-1990 period. In the most recent decade, 2000-2010, the ceiling grew at 9.2 percent a year as our mindless military activities coincided with our amoral speculative fevers. Imagine what might have happened in the 1940s and 1950s if, back then, the Greatest Generation had behaved like we do.

The conclusions I draw from these graphics are mixed. First, the sky is not falling down just because our debt ceiling now almost touches 100 percent of GDP. It’s been much worse in the past—and we’ve not only survived that but have had immense economic expansion. But when the debt ceiling rose sky high in the past, we were engaged in genuine global conflict. That’s not the case today. Our current indebtedness is way, way too high. But it is due to our lack of will—to tax! We’re spending billions on wars, but our tax rates are not at war-time highs. That’s the real problem. We should stop wars that don’t defend our borders, and we should tax the people in line with what we spend.

I have the debt ceiling data from a compilation prepared by Wikipedia here. I’ve taken GDP figures from the Bureau of Economic Development.