Greed and irresponsibility


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This displays a profound misunderstanding that is also likely shared by the McCain campaign.

From an email from the Obama campaign to supporters sent last night.

Friend —

The era of greed and irresponsibility on Wall Street and in Washington has created a financial crisis as profound as any we have faced since the Great Depression.

While not technically incorrect in terms of defaults and a few other financial measures, the financial crisis of the depression resulted in a collapse in GDP and double-digit unemployment. This financial crisis hasn’t even yet caused two quarters of negative GDP, and unemployment of 6.5% isn’t (yet) anywhere near the levels of recent recessions.

Congress and the President are debating a bailout of our financial institutions with a price tag of $700 billion or more in taxpayer dollars. We cannot underestimate our responsibility in taking such an enormous step.

The $700B is not the price tag for tax payers. The fiscal cost is equal to the losses government might take if they overpay for the securities they are purchasing.

Whatever shape our recovery plan takes, it must be guided by core principles of fairness, balance, and responsibility to one another.

Agreed, and a good working knowledge of public accounting would go a long way to getting there.

Please sign on to show your support for an economic recovery plan based on the following:

• No Golden Parachutes — Taxpayer dollars should not be used to reward the irresponsible Wall Street executives who helmed this disaster.

• Main Street, Not Just Wall Street — Any bailout plan must include a payback strategy for taxpayers who are footing the bill and aid to innocent homeowners who are facing foreclosure.

• Bipartisan Oversight — The staggering amount of taxpayer money involved demands a bipartisan board to ensure accountability and oversight.

Show your support and encourage your friends and family to join you:

http://my.barackobama.com/ourplan

The failed economic policies and the same corrupt culture that led us into this mess will not help get us out of it. We need to get to work immediately on reforming the broken government — and the broken politics — that allowed this crisis to happen in the first place.

Yes, like putting controls in place to minimize fraudulent loan applications. But I suspect lenders have already done that.

And we have to understand that a recovery package is just the beginning. We have a plan that will guarantee our long-term prosperity — including tax cuts for 95 percent of families, an economic stimulus package that creates millions of new jobs and leads us towards energy independence, and health care that is affordable to every American.

Increasing demand before cutting our crude and gasoline imports will result in deteriorating terms of trade and a declining standard of living.

It won’t be easy. The kind of change we’re looking for never is.

Particularly when no one in Washington seems to understand public accounting.

But if we work together and stand by these principles, we can get through this crisis and emerge a stronger nation.

Yes, worst case the fiscal ‘automatic stabilizers’ will get us through as they always have.

Thank you,

Barack


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Reuters: Obama says bailout may delay other programs


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(email to J. Galbraith – one of Obama’s economic advisers)

Hi,

The ‘bailout’ adds nothing to aggregate demand and should not be a factor regarding other spending initiatives.

Any chance you can straighten him out on this?

Warren

Obama: Wall St bailout may delay spending programs

by Steve Holland
NEW YORK, Sept 23 (Reuters) – Democratic presidential nominee Barack Obama said on Tuesday a $700 billion Wall Street rescue plan would likely delay some campaign spending promises, as the reality sank in of the costs of the mammoth bailout.

Obama, who faces Republican John McCain in their first face-to-face debate on Friday in Mississippi, said if elected he might have to phase in some of his plans such as an overhaul of the U.S. health care system.


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Comments to questions


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Looks like Q4 was the bottom for the real economy, and government spending now kicking in strong for quite a while to keep things muddling through.

Housing has been ‘subtracting’ from GDP with exports picking up the slack.

From this point it won’t take much of an upturn in housing to pick up any slack that might be happening with exports.

Also, while unemployment figures lag quite a bit, seems to me GDP is strong enough to see a few unexpected new jobs in time for the elections.

Meanwhile, seems chunks of the financial sector are still hurting due to the reduced demand for financial services, but they’ll figure it out with new and rehashed products and come back strong, but maybe not to the benefit of existing investors.

Been watching a lot of tv lately:

The Democrats really got blindsighted by McCain’s Rambolita as the convention was forgotten within 24 hours, and the Republicans found someone to rally around.

Seems Biden has turned into a big weight around Obama’s neck as the enthusiasm flows away and they become ‘old news’ and another case of peaking too early. And now with the convention pretty much canceled, Bush and Chaney are kept off prime time to McCain’s benefit, and with New Orleans II now a ‘model of federal efficiency’ the Democrats are scrambling for something to say.


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Re: Resource allocation


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>   
>   On 8/3/08, Craig wrote:
>   
>   Ok. And the irony is as prices fall, demand increases again.
>   Until consuming governments get their head around that fact
>   and put some kind of floor under crude prices to incent
>   substitution (which may be beyond their thinking and/or impossible
>   politically), it seems like crude prices are gonna play rope-a-dope
>   with consumers.
>   
>   
>   Craig
>   
>   

Crude will be rationed as is everything else (scarcity, etc.).

The question is how. Ration by price or by other things?

Rationing by price is the most pervasive and means the wealthy (by definition) outbid the less wealthy for the available supply.

Make you wonder why the Democrats support higher prices, as that means they support their supporters going without while the wealthy drive any size SUV they want. Much like wondering why Obama supports Bernanke after Bernanke explained to Congress how he’s keeping inflation down by keeping a lid on inflation expectations after explaining the main component of inflation expectations is workers demanding higher wages, meaning Obama, Kennedy, and the rest of the left is praising Bernanke for doing a good job of suppressing wages.

Non-price rationing is less common but not unfamiliar, such as mandating cars get an average of 27 mpg, minimum efficiency standards for refrigerators, windows, etc. This takes an element of rationing by price away and results in the wealthy consuming less and leaving some for the less wealthy to consume a bit.

So seems to me the logical path for the Democrats would be something like my 30 mph speed limit for private transportation, which is ‘progressive’ and also drives the move towards public transportation with non price incentives as previously outlined. But there hasn’t even been any discussion of a progressive policy response. All seem highly regressive to me.

So I expect the world’s new and growing class of wealthy will continue to outbid our least wealthy for fuel and other resources.

Also, there may be limits to how high we want world consumption/burning of fuels for all the various ‘green’ reasons.

That would mean drilling and other production increases are out, as would be increased use of coal via the electric grid for electric cars.

And, again, it would be the world’s wealthy outbidding the less wealthy for consumption of the allowable annual fuel burn, as somehow allocation by price continues to rule.

Most paths keep coming down to the continuing combination of weakness and higher prices.

Warren

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(comments from my brother, Seth, who was cc’d)

>   
>   I think democrats have lots of business and profits waiting
>   in govt subsidies for wind and solar. If oil prices fall that goes
>   away for now and they can’t produce on the subsidies for
>   them-cynical view but probably true
>   
>   There are also a lot of wealthy democrats and they want their
>   votes. Poor people all vote for democrats anyway-even with
>   declining lifestyles they are not going to McCain. So I think
>   Obama is pandering to the wealthy-it might be who he is-no
>   one really knows.
>   
>   With all of their green talk I have not seen any of them reduce
>   air travel, suv caravans or turn off the a/c in the capital. Just a
>   way to get votes and sound concerned. I saw a tv program
>   about how the chinese olympic swimming building is a green
>   sustainable building. It is 7 acres, pools, 25,000 people.
>   they finally said it uses about 25% less energy than a comparable
>   building would have. That is not green or sustainable, especially
>   since the building was not needed in the first place. I think “green”
>   is about making money, not the environment.
>   
>   
>   Seth
>   

I just can’t allow myself to be that cynical like you new yorkers!

:)

Warren

>   
>   
>   I think I am cynical usually, but this green thing drives me nuts
>   it started 30 years ago but is now all about money
>   when I see some lights turned off in Times Square (even in the
>   daytime) or the 5 huge spot lights on the CBS building lighting up
>   Katie Couric’s 50′ x 30′ poster which are on 24 hours a day turned
>   off, then I will believe it is about resources and not money.
>   there is a long way to go.
>   they advertise expensive green buildings here-I am not kidding-the
>   big thing is thermostats with timers on them and bamboo floors-didn’t
>   we have those 30 years ago??
>   
>   they talked about the oscar ceremony being green this year-the
>   celebrities were all giddy about it-what they did was use red
>   carpet made of recycled fibers????? what is that?
>   absolutely nothing-
>   anyway, time to calm down. too much excitement here
>   seth –
>   
>   

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Professor James Galbraith on Obama economics team


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More on Obamanomincs:

It was announced Professor James Galbraith was on the new list of economic advisers.

  • He knows that government spending is not revenue constrained.
  • He knows solvency is not an issue for the government.
  • He knows the ‘pay-go’ notion is flawed and works against our standard of living.
  • He knows the criticism of Bush leaving the debt to our children is absurd.
  • He knows there is no operational risk of social security ‘running out of money.’
  • He knows social security payments are not ‘paid for’ per se by taxes or the trust fund accounting.
  • He knows the Fed is about price, and not quantity.
  • He knows imports are a real benefit, exports a real cost.
  • He knows our policy of blocking central banks and monetary authorities from accumulating $US financial assets is killing the goose that’s been laying the golden eggs.
  • He knows that unemployment is the evidence that the deficit is too small.
  • He knows that loans create deposits and reserves.
  • He knows that savings is not needed to have funding for investment.
  • He knows that our taxed advantage pension and retirement systems and programs reduce demand and cause the need for the government to run deficits to add that demand back.
  • He knows the price level is a function of prices paid by govt. and not a function of interest rates set by the Fed.
  • He knows the Saudis (and maybe Russians) are setting the price of crude.
  • He knows this is causing a cost push ‘inflation’ that is punishing working people disproportionately.
  • He knows biofuel policy is converting the world’s food supply to fuel and starving millions to death.
  • And a lot more.
  • And he knows the others on the Obama economic adviser list either don’t know, pretend to not know, or have long forgotten all the above.
  • And he knows Obama’s vision can only accidentally be achieved with his current economic rhetoric.
  • And I know he has a fighting chance to be heard.


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Bloomberg: Jason Furman now top dog for Obama


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Obama Names Rubin Ally Furman to Economic Policy Post

by Kim Chipman and Matthew Benjamin

(Bloomberg) Barack Obama’s presidential campaign today named Jason Furman, who worked closely with former Treasury Secretary Robert Rubin, as economic policy director.

Not a good sign – Ruben has the fundamental accounting identity of national income accounting- government deficit = non-government surplus – completely confused. He thinks deficits take away from savings when they add to savings.

Furman, 37, most recently worked as an economist and budget expert at the Brookings Institution in Washington, where he headed the Hamilton Project, an economic policy research group aligned with the Democratic Party that was founded by Rubin, now chairman of Citigroup Inc.’s executive committee.

A bunch of deficit terrorists.

Obama today begins a two-week tour of tightly contested states including Missouri and Florida to tout his plan for jumpstarting a slowing economy. The Illinois senator says he, not Republican rival John McCain, is best suited to create jobs, provide tax relief and revive the middle class. Obama, who has struggled to attract lower-income workers, seeks to link McCain to what he deems the failed policies of President George W. Bush.

All he’s going to do is link himself to higher taxes and link McCain to tax cuts. Not a good strategy!

Hamilton Project

Furman’s appointment allies Obama’s campaign with leading economic centrists in the Democratic Party, foremost among them is Rubin, 69, who helped found the Hamilton Project in 2006 and is on the group’s advisory council. Furman is a former adviser to 2004 Democratic presidential nominee John Kerry.

Rubin orchestrated President Bill Clinton’s economic policy of promoting free trade and reducing the federal budget deficit.

Clinton caught the tail wind of the 5% GDP deficits of the early 90’s that pumped in income and savings, and allowed the economy to expand until the surpluses generated by the countercyclical tax structure destroyed almost $1 trillion in net financial equity and caused the economy to collapse in 2000.

Obama says he favors free-trade pacts as long as they include stronger protections for workers and the environment. He also advocates budgeting rules that require new spending proposals or tax changes be paid for by cuts to other government programs or new revenue-generating sources.

Pay Go – he’s all about ‘fiscal responsibility’ which is the road to high unemployment, slow growth, and expanded inequality.

Furman and Austan Goolsbee, a University of Chicago economist who until recently was Obama’s top economic adviser, told reporters today that Obama’s “pay-as-you-go” position contrasts with McCain’s. They claim that the Republican senator from Arizona doesn’t provide details about how he would pay for his economic proposals.

McCain has it backwards and is anti-deficit as well, as he wants to cut taxes now to bring deficits down later. But while that strategy is confused, at least it will initially add to demand, employment, and growth. And inflation…

Consequence of Bush Policies

They also criticized McCain, 71, for what they say are proposals that would increase the federal budget deficit and fail to provide short-term stimulus to the economy

Most any increase in the deficit will add aggregate demand and help support GDP.

and tied him to Bush policies they said were responsible for the current economic slowdown.

He let the deficit get too small as it tailed off after the 2003 fiscal package.

Note they never mention inflation, and McCain probably doesn’t either. When you believe the Fed alone is responsible for inflation, you can run any deficit you want without worrying about it. And it was Bernanke who ran to Congress urging them to add to the deficit not long ago, indicating he also believes inflation is solely up to the Fed.

“We did not arrive at the doorstep of our current economic crisis by some accident of history,” Obama said today. “This was not an inevitable part of the business cycle that was beyond our power to avoid. It was the logical conclusion of a tired and misguided philosophy that has dominated Washington for far too long.”

Right – fiscal responsibility is the enemy, and both parties push it.

McCain’s campaign responded today, saying that Obama’s proposals will lead to higher taxes, further weaken the economy and hurt job creation.

Why is Obama taking the initiative of branding himself as the symbol of higher taxes?

“While hardworking families are hurting and employers are vulnerable, Barack Obama has promised higher income taxes, Social Security taxes, capital gains taxes, dividend taxes, and tax hikes on job creating businesses,” McCain spokesman Tucker Bounds said in a statement.

Obama opens the door to damaging counter-punches with every economic initiative.

Neither party has any obvious economic initiative to ‘fix’ things, so they are both better off allowing the other to lead and then get shot down by the press. Obama seems to be falling into this trap more than McCain.

McCain Fundraiser

McCain today attended a fund raiser in Richmond, Virginia, raising $800,000 for his campaign and other Republicans.

Obama today repeated his calls for a middle-class tax cut, an overhaul of energy policy, the rebuilding of the country’s infrastructure, protection of Social Security and making college more affordable.

And, as per ‘Pay Go’ higher taxes elsewhere to pay for it.

He also singled out Exxon Mobil Corp., the world’s biggest oil refiner. Obama said he would seek to tax oil companies such as Irving, Texas-based Exxon on their record profits.

First, these wouldn’t be nearly enough. Second, he opens himself to all kinds of destructive criticism he can’t respond to about the presumed failures of this in the past, effects on investment and equity prices in general if government can target specific companies for extra taxes, etc. Also, about 75% of Americans are shareholders, and want their stock to do better.

“We’ll use the money to help families pay for their skyrocketing energy costs and other bills,” Obama said today.

The critics will say that directing more money to help pay for energy will only encourage more consumption, even higher prices, and inflation, as well as promote all kinds of environmental damage.

Obama says that McCain’s tax proposals would result in almost $2 trillion in breaks for companies, including $1.2 billion for Exxon alone.

You hear this with every election, and with subsequent examination of the details, it always seems to evaporate.

The Congress is in Democratic hands, and Obama was a senator, so why didn’t he/doesn’t he propose this kind of legislation?

Furman said in an interview that the Obama campaign’s economic goal is based on “broadly shared, bottom-up growth,” similar to the views espoused by groups such as the Hamilton Project and the Economic Policy Institute, a Washington research group funded partly by labor unions.

Not a source of broad based support.

‘Empower People’

“You need to empower people to make the economy work for them,” Furman said.

Sounds like Reagan?

As Obama’s economic policy director, Furman said his priority would be to expand the range of advice and proposals flowing to the presumptive Democratic nominee by reaching out to a wider group of economists.

???

“My key mandate, which came directly from the senator, is to bring him a diverse set of voices and ideas, because that’s the kind of debate he likes to hear to make up his mind about his economic agenda,” Furman said. He named Rubin, former Treasury Secretary Lawrence Summers and former Federal Reserve Vice Chairman Alan Blinder as advisers the campaign would turn to.

Bringing back both Rubin and Summers- Letting the foxes back into the chicken coop.

Furman also named Jared Bernstein of the Economic Policy Institute and James Galbraith, a University of Texas economist and son of economist John Kenneth Galbraith, who was an adviser to President John F. Kennedy.

Galbraith and Ruben on the same team? What’s next, Mitt Romney as Obama’s VP?

Furman attended Harvard University in Cambridge, Massachusetts and the London School of Economics and received a doctorate in economics from Harvard. He worked as an economist in the Clinton administration and at the World Bank.

Goolsbee will continue to play a leading role in the campaign, Furman said.

Why not?!


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From Obama’s economic advisor


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Why Deficits Still Matter

by Austan Goolsbee

Chief economic adviser to Obama.

The United States has run massive budget deficits every year the Bush administration has been in office. The latest budget projections from the White House show annual deficits in the $250 billion range for the rest of the president’s term, at which point nearly $3 trillion will have been added to the national debt.

And thereby added to aggregate demand, non-government income, and ‘savings’ of financial assets.

1
In fact, George W. Bush has presided over the biggest fiscal deterioration in American history—a sorry legacy considering his predecessor left him a healthy budget surplus projected to be $5 trillion over 10 years.

The budget surplus drained the savings of net financial assets of the non-government sectors, and thereby ended the recovery triggered by the large deficits of the early 1990s.

The Bush fiscal reversal helped restore aggregate demand, growth, and employment.

Austan Goolsbee is a senior economist for PPI and the Democratic Leadership Council. This did not happen by accident. White
House officials have repudiated the Clinton administration’s view that fiscal responsibility lays the groundwork for sustained economic growth.

And rightly so.

Government deficit = Non-government ‘surplus’ (savings of financial assets) as a matter of accounting, not theory.

Often identified with former Treasury Secretary Robert Rubin, this view held that by running massive deficits

Adding to aggregate demand.

and borrowing heavily,

‘Borrowing’ only ‘offsets operating factors’ to give non-interest bearing deposits created by deficit spending and ‘borrowing’ only ‘offsets operating factors’ to give non-interest bearing deposits created by deficit spending as interest bearing alternative in order to keep the Fed Funds rate at the FOMC’s target level.

the federal government drove up the cost of capital.

The Fed votes on the interest rate, and the cost of capital includes a risk adjustment as well.

NOTE: A few years ago, Japan had a debt of 150% of GDP, annual deficits of 7%, and 10-year interest rates under 1%.

By cutting the deficit, it could bring interest rates down

Only if it causes a slowdown that causes the Fed to cut rates.

and thereby stimulate new waves of private investment.

No, a slowdown does not encourage private investment.

The economic boom of the 1990s seemed to prove Rubinomics right.

No. The high deficits of the early 1990s triggered the expansion, and the surplus of the late 1990s ended it.

But Republicans have nonetheless rejected that approach. Glenn Hubbard, formerly President Bush’s top economic adviser, said in a December 2002 speech: “One can hope that the discussion will move away from the current fixation with linking budget deficits with interest rates.” When pressed on the point, he responded: “That’s Rubinomics, and we think it’s completely wrong.”

Hubbard is right on that point, but he still favors lower deficits; so, he’s ultimately wrong as well.

2
More recently, in an editorial marking the 25th anniversary of Ronald Reagan’s inauguration, the conservative Wall Street Journal opined that Rubinomics was a failure, and argued that history had vindicated the supply-side line that tax cuts are the most important policy that government can undertake.

They think tax cuts are good because through growth they ‘raise more revenue than they cost’ and bring down the deficit that way.

Their goal is the same: to bring down deficits.

3
Meanwhile, the Bush White House has pointed to higher-than-expected tax revenues in the last two years as further proof that we do not need to worry about fiscal responsibility in the near future.

Right, both believe lower deficits are ‘better’; both miss the point.

Times have changed since 1992, and the economic case for fiscal discipline has changed, too. But it remains strong.

Wrong.

It is true that the globalization of capital markets in the last 15 years means that America no longer displaces an inordinate percentage of the world’s capital when it borrows heavily from abroad.

We have no imperative to borrow from abroad. He has it all backwards, as does most everyone else. In fact, US domestic credit funds foreign savings.

Therefore, the interest rates that the U.S. government has to pay for its massive borrowing are not as high as they might be

The Fed sets the rates by voting on them.

The left and the right have gone far astray from the economic fundamentals.

otherwise. In addition, governments and central banks have helped our situation. Lending countries such as China and the world’s oil exporting nations seemingly have been willing to hold U.S. debt even though higher returns might be available elsewhere.

Yes, to support their exports. But now that Paulson and Bush have ‘successfully’ caused them to change policy by calling them currency manipulators and outlaws, they no longer are accumulating USD financial assets at previous rates.

This has caused the USD to begin falling to the levels that coincide with rising US exports and falling imports.

It won’t stop until the US trade gap gets to levels that equate it with desired USD accumulation levels of foreigners. Could be near zero.

Of course, it is nice to be able to borrow money without having to worry much about the impact on interest rates.

That’s what all governments with non-convertible currency and floating fx do in the normal course of business.

But if globalization has made borrowing from abroad easier, it also exacts new penalties for fiscal profligacy. In fact, there are three big reasons why Americans should still be concerned with big budget deficits: (1) they have unfair distributional consequences between generations;

No, this is inapplicable.

When our children build twenty million cars in 2030, will they have to send them back to 2008 to pay off their debt?

Are we sending goods and services back to 1945 to pay for WWII?

No, each generation gets to consume whatever it produces, and it also can decide the distribution of its consumption.

(2) they make it harder for our government to respond to fiscal crises;

No, government can buy whatever is offered for sale to it. Government spending is not constrained by revenue.

and (3) they subject America’s economic well-being to the potential whims of foreign governments and central banks.

Only to the extent that we might lose the benefits of high real imports.

Imports are real benefits; exports are real costs.

Before looking at each of these, however, it is important to address the administration’s claim that our current fiscal position is basically healthy.

‘Healthy’ is undefined and inapplicable.

The recently released budgets of the Congressional Budget Office (CBO) and of the president show the government going back into surplus by 2012, which makes it sound as though the problem has been solved.

No, sounds like a recession would quickly follow if they press those results.

4
A closer look at the numbers, however, reveals that the positive news is overstated.

Thank goodness – might continue to muddle through and avoid recession after all!

The CBO’s projections, for example, assume that all the Bush tax cuts will expire; that the Alternative Minimum Tax (AMT) will affect a growing fraction of people earning between $75,000 and $100,000 over the next five years; that federal spending will grow only with inflation, rather than with population or GDP growth; and, most importantly, that the federal government will go on raiding the Social Security trust fund “lock-box.” The president, by requesting hundreds of billions of dollars in further tax cuts, has painted himself into such a tight corner that he cannot produce a fiscally responsible budget without leaning heavily on such dubious assumptions.

Hoping he doesn’t succeed!

A more realistic analysis shows very significant deficits for at least the next several years, after which the baby boomers’ exploding health and retirement costs will make the fiscal picture dramatically worse.

He means ‘better’ but doesn’t realize yet.

Make no mistake: Deficits still matter. A balanced budget may be less central to economic growth today than in the 1990s. But deficit reduction now functions as a crucial insurance policy against global financial shocks and over-reliance on foreign lenders,

There is no reliance on foreign lenders. Government is best thought of as spending first, then borrowing to support interest rates.

as well as national emergencies such as Hurricane Katrina’s devastation of the Gulf Coast.

Government can spend however much it wants at any time it wants, unconstrained by revenues.

The constraint is inflation, not revenues, but the author never even mentions inflation.

It should not be a goal in and of itself—pain for pain’s sake. Fiscal responsibility should be our goal because it remains an important foundation of economic justice and growth.

Justice???

Here is a closer look at the adverse social and economic consequences of the Bush administration’s irresponsible fiscal policies.

Who Will Pay for the Bush Deficits?
Although fiscal policy is seldom viewed through the lens of economic fairness, the first and biggest problem with fiscal irresponsibility is distributional. When we borrow money without paying it back, we are leaving our children and grandchildren a legacy of much higher tax rates and much lower public benefits than we enjoy, because they will have to foot our bill.

As above, they will get to consume whatever they produce, debt or no debt.

Real wealth is not the issue.

And government can distribute current year output any way it wants.

Economists use what is known as “generational accounting” to calculate how much of the nation’s debt burden will need to be borne by later generations compared to ours and previous generations as a function of today’s large fiscal imbalances. The results are stark:

And totally inapplicable.

As a share of their income, future generations will have to pay about twice the taxes as today’s workers have paid or else they will receive around one-half the public spending.

The living will still get all the output, no matter what tax rate they elect to charge themselves.

The money we spend beyond our means today takes away the money our children will have for Social Security benefits, Medicare, Medicaid, and every other spending priority.

And who gets the money that is ‘taken away’ – dead people of the past???

Is he that dense or is this blatant propaganda? Both???

The interest payments on the country’s growing debt—already accounting for approximately 10 percent of the federal budget, pushing $300 billion dollars—will ultimately become the government’s biggest budget item. The payments for the spending of the past will increasingly crowd out the spending priorities of the present.

Crowd out – figured he’d slip that in our of left field.

The country is in for a double disappointment because all these new deficits have not been used for investments. It is one thing to run deficits to invest in activities that might improve productivity or standards of living for future generations. This, after all, is what FDR did to pull America out of the Great Depression and win World War II. A bigger economy would allow us to soften the distributional blow of deficit financing. But that is not what the Bush administration has done. It borrowed to finance huge tax cuts for a fortunate few, and most of the money went straight into consumer spending with little lasting impact on the kids who will one day have to pay the bills for this splurge.

Savings is the accounting record of investment.

In general, investment is a function of demand – nothing like a backlog of orders to spur expansion of output.

Also, technology and cost savings drives investment.

And the point of investment is future output and future consumption.

The whole point of economics is to maximize consumption in the general sense.

How Deficits Handcuff U.S. Policymakers
The second major problem with running big deficits is that it diminishes the government’s ability to respond to crises.

Not. As above.

It eats up the rainy day fund, if you will.

No such thing. Inapplicable. Government spends by crediting accounts.

This is not constrained by revenues.

To that point, if you pay your taxes in cash, the government tosses the cash into a shredder. Clearly it has no use for revenue per se.

When the government operates without the fiscal cushion that budget surpluses provided in the late 1990s, it is hard-pressed to respond to emergencies, such as Hurricane Katrina, or even fulfill more basic commitments.

Only if it’s ignorant of monetary operations and the working of the payment system. (So, maybe he’s right???)

It is especially troubling today that despite an economy in full-blown recovery, record-smashing corporate profits, low interest rates, and strong productivity growth, the country’s budget deficits have still been in the $250 to $400 billion range.

The rising deficit is what’s supporting GDP above recession levels currently.

On top of that, the true size of the fiscal mess is masked by the fact that we are dipping into the Social Security surplus to finance current consumption. Since 2001, we have effectively borrowed almost $1 trillion from the trust fund, and the CBO forecasts another $200 billion or so every year for the foreseeable future. Our true annual deficits have been in the $400 billion to $600 billion range and are forecast to continue in that range for the rest of the Bush term.

Point? Social Security payments are operationally not revenue constrained, just like the rest of government spending.

It’s about inflation, not solvency, but he never mentions that.

What are we going to do in the event of another recession, a decrease in corporate profits, another Hurricane Katrina, a collapse of the Pension Benefit Guarantee Corporation, or another major war? And how will we finance future Social Security and Medicare benefits? The probable answer is, we’ll borrow more—but this will only postpone the day of reckoning and make it more severe.

The government can always ‘write the check’ with any size deficit or surplus. Doesn’t matter, apart from inflationary consequences.

The United States has a strategic petroleum reserve to guard against unforeseen disruptions in our oil supply. It is not a long-term solution. It is crisis insurance. Similarly, cutting the deficit would give us a strategic fiscal reserve.

Inapplicable concept with a non-convertible currency and floating fx.

Should bowling allies carry a reserve of ‘score’ to make sure you get your score if you knock the pins down???

Without it, the country must either raise taxes to deal with a crisis or else significantly increase the federal debt burden, which already totals almost $80,000 for every household in America.

So???

Foreign Leverage Over the U.S. Economy
The third risk of today’s fiscal irresponsibility is the negative impact it has on our international position—both economic and, potentially, geopolitical. Our economic position is seriously undermined by a low savings rate—and the deficit is like an anchor that drags our national savings rate down.

Not the ‘national savings’ rhetoric again!!!

That’s a gold standard construct. Back then, when the US went into debt, it was obligated to repay in gold certificates and ultimately gold itself.

Borrowing was getting short gold and/or depleting our gold reserves.

Our national savings was defined as our gold reserves.

This is ALL no longer applicable and no longer presents a fiscal constraint.

We need to get our low savings rate up.

Inapplicable.

One of the stated goals of the big tax cuts the president pushed through a compliant GOP Congress—including dividend tax cuts, capital gains tax cuts, estate tax cuts, and top-bracket income tax cuts—was to increase incentives for high-income people to save. On the most practical level imaginable, this policy—call it Supply Side 101—has failed. The savings of high-income people have not increased dramatically, certainly not enough to offset the plunge in the national savings rate that the big Bush deficits represent (because a nation’s savings rate combines personal, corporate, and government savings). For a country to maintain investment by entrepreneurs and companies when there is not enough domestic capital to be had,

Savings is not ‘domestic capital to be had’

He is shamelessly mixing metaphors.

Loans create deposits. Capital grows endogenously. He should know that.

it must by necessity borrow from abroad.

Wrong. Loans create deposits. Not the reverse as he implies.

It is a good sign for the economy that our investment rate—the part of GDP spent on machinery, capital, buildings, factories, and the like—has finally recovered from the recession of the early 2000s.

Due to the $700 billion fiscal shift from surplus to deficit.

But because that investment has been coupled with low national savings, the United States has had to borrow an astounding amount of money from foreign countries.

He has the causation backwards.

Domestic credit creation funds foreign savings, not vice versa.

Foreign ownership of U.S.
Treasuries alone increased $1.2 trillion dollars in the first five years of the Bush administration, after falling more than $200 billion in the last two and a half years of the Clinton administration. Most often it is foreign governments and central banks that own our debt. That is what raises the potential threat to America’s geopolitical position.

How??? The risk is theirs, not ours!

It is certainly less concrete than the impact on the savings rate, but the impact of borrowing on America’s geopolitical posture might be important in the event of a crisis. Because America has had to borrow from abroad,

It doesn’t ‘have to’ at all. There is no such thing, as above.

it has ended up owing a great deal of money to governments whose interests do not always mesh with our own. Our government owes China some $350 billion, for example, and we owe oil exporting countries such as Saudi Arabia, Libya, Algeria, Venezuela, and Qatar a combined $100 billion more.

That’s their problem, not ours. We already got the real goods and services from them. They are holding undefined ‘paper’.

Most of the time, it does not matter who holds a country’s debt. Investors around the world, no matter who they are, simply respond to market forces. But in times of crisis, if investors happen to be the governments and central banks of other countries—as is predominantly the case today with U.S. debt—then lenders can have inordinate influence over a borrower’s international policies.

Hard pressed to find an example if he uses this one:

Take one example from our own history: the Suez crisis of 1956. Britain—which was heavily indebted to the United States—joined with France and Israel in an invasion of Egypt after Egypt’s president, Gamel Abdel Nasser, nationalized the Suez canal. The Eisenhower administration, which had lambasted the Soviet Union’s invasion of Hungary that same year, was determined to keep its anti-colonial credentials intact by opposing the British-French venture. The United States refused to float its World War II ally further loans to
support their currency—and even threatened to dump its holdings to precipitate a currency crisis. The British, desperate to avoid a devaluation of the pound,

There’s the rub – they had a fixed exchange rate they wanted to support.

With floating fx, this isn’t the case.

caved in, and the Suez misadventure heralded the end of European colonialism in the Arab world. Could other countries exercise the same kind of economic leverage over the United States? Hopefully, we are a long way from having that sort of situation in reverse—where
our foreign policy goals are stymied because of financial pressures from our debt holders—but it is not inconceivable that we would be forced to choose between our geopolitical goals and financing the debt we owe foreign countries.

It should be inconceivable because it is inapplicable with floating fx.

This debt is primarily owned by governments with political motives, not just economic ones. If these governments decided to dump U.S. treasuries, we could plunge into crisis mode. Since there is not enough domestic savings to cover our investment, either our investment rate would need to fall, or interest rates might need to shoot up in order to attract capital from somewhere else.

There is no imperative to ‘attract foreign capital’.

This is just plain wrong.

Either way, it would be bad news for the U.S. economy.

Maybe for inflation, but he never goes there.

Further, as the risks associated with our accumulating debt grow, oil exporting countries will be tempted to sign their contracts in euros or yen rather than dollars, as they do now.

Doesn’t matter; it’s just a numeraire.

If that happens, then anything that devalues the dollar—including policy initiatives designed to reduce the trade deficit—will directly increase the price of energy rather markedly.

Saudis are price setters in crude for other reasons – that’s the source of crude price hikes.

A Legacy for Future Generations
Given the hazards of continuing down the current path of fiscal excess, Congress should act soon to get things under control. That does not mean immediately balancing the budget by draconian cuts to necessary investments. Small deficits—say on the order of 1 percent of GDP—will not run the economy into the ground and occasional big expenses on emergencies like Hurricane Katrina are a fact of modern life.

Too small to sustain aggregate demand. Probably need around 5% deficits from the evidence of the last twenty years.

But we know that entitlement spending will grow dramatically in the next 20 years and we need to make space in the trunk for a few very large suitcases, as it were. We should not be filling up the space before those bags even arrive.

Inapplicable.

The debt our generation accumulates becomes part of the legacy we leave to the next generation. The “greatest generation” that fought WWII sacrificed a great deal for the next generation—for us, their children and grandchildren. Not only did some give their lives, but over the next 20 years they largely paid off all of the massive debt they had to accumulate during the war.

We’ve averaged 3-5% deficits for a long time which have supported growth and employment, and avoided a depression.

At the end of the war, America’s debt exceeded its entire GDP. By the Kennedy administration, the ratio was back down to the same level it was before the war.

But the nominal amount continued to grow, and when it didn’t, the economy suffered.

Opportunity, not debt, was the legacy our grandparents wanted to leave behind.


Endnotes
1
“Budget of the United States Government, Fiscal Year 2008,” Office of Management and Budget, http://
www.whitehouse.gov/omb/budget/fy2008/budget.html.
2
Chait, Jonathan,”Deficit Reduction,” The New Republic, January 13, 2003.
3
“Still Morning in America: Reaganomics 25 Years Later,” Wall Street Journal Editorial, January 20, 2006, http://
www.opinionjournal.com/editorial/feature.html?id=110007843.
4
See:”Budget of the United States Government, Fiscal Year 2008,” op cit., and “The Budget and Economic Outlook:
Fiscal Years 2008 to 2017,” Congressional Budget Office, http://www.cbo.gov/ftpdocs/77xx/doc7731/01-24-
BudgetOutlook.pdf.


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