Brad DeLong's Semi-Daily Journal (2004)

Greenspan finally starts to say something about the deficit and it's totally in Greenspeak. What happened to the simple statements he made back in 1993 when he repeatedly told Congress that the Fed would not have to raise rates if it enacted a "credible" deficit reduction plan?

After Greenspan's cheerleading for the tax cuts these really should be called Greenspan's deficits.

Greenspan should spend some time with Ms. English and her dog training methods.

If Greenspan is going to issue statements worrying about the deficit, he ought to start by apologizing for his support of the Bush tax cuts. There's a story in the Suskind/O'Neill book about him talking to Kent Conrad, ranking Democrat on the Budget Committee, about Greenspan's support for the first round of tax cuts. Greenspan was worried about the surplus, that the government would have to invest it in the market and "politicize the economy." Conrad says "Well. you have a lot of debt to pay down before you get there." Greenspan says "The numbers show we'll be virtually out of debt . . . by the year 2008." Conrad says: "Let's worry about that, Mr. Chairman, when we get close to that point. We have plenty of time if that develops." (The Price of Loyalty, pp. 61-62.)

Greenspan ought to have started this recent statement by saying "I was wrong. The Democrats were right."

Greenspan likes to accompany these warnings by noting the imminent retirement of Baby Boomers. It is all too clear that he is revealing the Republican game plan for Social Security-cut the benefits of the Boomers to fund the upper bracket tax cuts and the costs of gratuitous imperialism. Why isn't Kerry making hay out of this?

My impression is that Greenspan has deliberately distinguished between the relative virtues of tax cuts versus a higher spending burden. He is clearly uncomfortable with the growth in Federal spending we are seeing (most of it for defense, where Bush has added to the totals rather than recompose the structure of defense spending to favor homeland security at the expense of other program, i.e., no budget constraint). Don't blame him for the deficits that prevail just because he thinks taxes impose a drag on long-term growth.

Does one have to pay $79/year to read the WSJ? Or just be part of an institution that gets a mass subscription?

It seems to me (no Surprise)that most of you lefties (brad and a few others excepted)are economically illiterate.

Deficits are meaningless by themselves and out of context. From the point of view of an accountant and a financial planner our nation's finances are doing just fine.

Our total Federal debt is about half the value of Federal assets - all those nice buildings, satelites, aircraft carriers, roads, etc. A 50% equity in your hard assets is not good for someone approaching retirement but it's quite fine for a young family in their prime earning years.

As far as carrying costs, annual debt payments are only about 15% of our budget. Per Capita debt payments of $1,300 per capita is a rather small portion of the American GDP per capita in the misd to high Thirty thousands of dollars.

Given that defending our existence should be our highest priority it's quite acceptable to me to incur a deficit in wartime and prudent to move to surplus in peacetime.

Given the economic shot of 911 and the difficulties of the War on Terrorism I would say our nation has been rather well economically managed under both Clinton and Bush.

Adrian the commonsense economist

I think if we reduce revenues than our revenues will increase. If we lower our revenues to zero then we will be rolling in dough. That's what Kennedy and Reagan did. Besides, deficits are only bad if they are accrued trying help people. They are an absolute blessing if we use them to try to kill people. Oh darn! I think my head just exploded.

"I think if we reduce revenues than our revenues will increase. If we lower our revenues to zero then we will be rolling in dough. That's what Kennedy and Reagan did. Besides, deficits are only bad if they are accrued trying help people. They are an absolute blessing if we use them to try to kill people. Oh darn! I think my head just exploded.

Posted by LowLife"

A perfect example of the no-nothing idiots who support the left. He's not smart enough to understand complex systems so he insultsd those who are smart enough.

How did so many High School debate team English majors get attracted to this serious economics blog.

SHEEESH

Adrian TSPAWTB

Adrian: As a rightie, I have a few bones to pick with your description of the debt. In short, in a world of lump-sum taxes I'd mostly agree with you but there are some other issues to consider.

You probably know this, but unless the gov't were to default over time, the present value of all spending has to equal the present value of all tax revenues. The debt doesn't have to get paid off as time goes to infinity, but it can't grow explosively either. Keeping this in mind, we've had huge growth in spending and smallish cuts in taxes over the past three years. The growth rates in spending are still pretty high.

If this budget constraint were to hold, we either have to see big cuts in spending or a tax increase over the next few years. There's no way around it. I personally dislike stochastic fiscal policy; the distortionary costs of taxes seem to be convex (40% rates are more than twice as bad as 20% for instance, and 30% is better than each of these half the time--Jensen's Inequality for you math folks) and it makes planning for the future difficult.

So that's the sense in which government debt matters--it isn't the debt; it's the taxes that are used to manage it. There may be some partial Ricardian equivalence, which you're undoubtedly thinking of. I'm more concerned here with volatile fiscal policy. If this were a one-shot increase in spending like for the war, I'd mostly agree with you. But we're talking about huge expansions of Medicare and, whoever wins in November, undoubtedly more dubious spending increases. I'd personally support rolling back most of this spending but I think that it's unlikely to happen politically. I don't think that a serious fiscal crisis is likely to happen either, since there's a precedent for what happens next. 1986. The question is, is Bush more of a Reaganite or a Nixonian? Sigh.

Has anyone else noticed that Amazon is pushing Kotlikoff's new book?

I have not seen it. Apparently it looks at the long term US fiscal picture. The conclusions are supposedly SS and Medic/are/aid reform. Ammo against the budget deficits is needed now. I wonder what he proposes?

Dean Baker has already blasted it out of the water for paying too much attention to demographics and too little attention to health care cost containment.

Adrian Spidle wrote, "Our total Federal debt is about half the value of Federal assets - all those nice buildings, satelites, aircraft carriers, roads, etc. A 50% equity in your hard assets is not good for someone approaching retirement but it's quite fine for a young family in their prime earning years."

Funny that you wrote that, apparently not tongue in cheek---in many ways, the nation *is* approaching its retirement years, as the baby boomers age.

Second, the deficit is much worse if you omit the Social Security *surplus* from the books.

Third, how do you compute the return on an aircraft carrier?

"As far as carrying costs, annual debt payments are only about 15% of our budget."

Where'd you get that number? I get 6.7%:
http://www.truthandpolitics.org/2004-outlays-summary.php
As does the Historical Tables of the Budget of the Government of the US:
http://www.whitehouse.gov/omb/budget/fy2005/pdf/hist.pdf
(see Table 6.1)

"Per Capita debt payments of $1,300 per capita is a rather small portion of the American GDP per capita in the misd to high Thirty thousands of dollars."

Related to Chris's point, the real question is whether, after factoring out business cycles, the debt-to-GDP ratio is increasing or (roughly) constant.

"Given that defending our existence should be our highest priority it's quite acceptable to me to incur a deficit in wartime and prudent to move to surplus in peacetime."

Except for the inconvenient fact that invading Iraq had nothing to do with "defending our existence," and in fact may have made it more difficult.

"Given the economic shot of 911 and the difficulties of the War on Terrorism I would say our nation has been rather well economically managed under both Clinton and Bush."

LOL! What about the long-term drain on the budget caused by Bush's tax cuts? This is in the context of *averaging over* business cycles.

Chris,
In 2000, we collected $2.02 Trillion in revenue. In 2003 that dropped to $1.78 Trillion. That is a drop of 12 %. I do not consider that to be a small decrease in taxes.

Meanwhile, spending has gone from $1.79 Trillion in 2000 to $2.16 Trillion in 2003. This is a 17% increase in spending. I agree it is excessive and unsustainable.

Chris,

Inflate, inflate, inflate and watch the value of current government commitments drop away like leaves from a tree in the autumn.

Inflate, inflate, inflate and watch the cost of debt servicing go through the roof!

bakho wrote, "Inflate, inflate, inflate and watch the cost of debt servicing go through the roof!"

Are you referring to the cost to Uncle Sam? But that only applies to *new* debt. Though God knows there'll be plenty of new debt...

Bigtime inflation would mean government spending would greatly increase because COLA is inflation based. Interest rates would skyrocket. Initially only new debt would be financed at the higher rate but much of the current debt is financed at very low rates and only for short term. So 2 years into rapid inflation, the average interest percentage on the debt skyrockets as well.

Interest payments on the debt have dropped from a high of $244 Billion in 97 to only $153 Billion in 2003, due to refinancing despite the deficit being about $2 Trillion higher. Even if interest rates only climb back to 97 levels, $300 Billion per year in debt service, double the 2003 level is not a high figure.

What would you do with $150 Billion?

BTW- The national debt increased by a greater amount last year alone (2002-2003) than in the entire second term of Bill Clinton, from 1997 to 2001. Just goes to show how out whack our revenue / outlay balance can go when Republicans are given free reign to do whatever they want. Fiscal irresponsibility.

"The question is, is Bush more of a Reaganite or a Nixonian? Sigh.

Posted by Chris"

I agree with all of your post.

BTW, I think Nixon and Clinton are political soul brothers except Clinton was more skillful as well as more conservatve.

Adrian

bakho wrote, "Bigtime inflation would mean government spending would greatly increase because COLA is inflation based."

Right, though presumably the collections going to pay for those programs would also increase (though not as much...?).

"Interest rates would skyrocket. Initially only new debt would be financed at the higher rate but much of the current debt is financed at very low rates and only for short term."

I seem to recall that in the 1990s the government started using shorter maturities. Is there data on the average weighted maturity of the public debt?

"Interest payments on the debt have dropped from a high of $244 Billion in 97 to only $153 Billion in 2003, due to refinancing despite the deficit being about $2 Trillion higher."

How is federal debt refinanced? IIRC it's not callable.

"What would you do with $150 Billion?"

Geez, I don't know...pour it down the military rathole?

Inflation, at 1 or 2%, is just not that big of an issue right now, and based on what I know about today's Fed, it isn't likely to let it get out of control should it rise. The 1970s are still fresh in our memory. Anyway, inflation increases nominal interest rates, but it actually seems to be empirically related to low real interest rates. There are a couple of reasons why this may be the case that I won't get into now.

It's the real interest rate (and budget deficit) that is interesting when we talk about real gov't debt increasing. As I said, the Fed is phobic about inflation in the medium term so I'd find other things to worry about. Stupid fiscal policy, maybe.

Liberal- look on the US treasury site. They probably have the info you want.

http://www.publicdebt.treas.gov/

ftp://ftp.publicdebt.treas.gov/opd/opdie042004.pdf

Remember that 40% of the debt is owed to "intragovernmental" meaning mostly to SS and other pension trust funds. The interest payments on these holdings fluctuates with the going rate.

Actually, inflation would increase revenues rapidly by accelerating the rate the middle class gets hit with the AMT (and loses their tax breaks) and by bumping people into higher tax brackets.

On the interest on the debt, I posted the "net interest". Net interest excludes interest paid to trust funds and includes interest owed to the government. Since interest paid to the trust funds is really money that will have to be made up by revenue elsewhere, it really should be counted as an expense. If government accounting were similar to a business, SS would be off budget and the interest would be shown.

So, if one measures the "true cost" of interest on the national debt, we see that it peaked at $361 Billion in 1998 and dropped $43 Billion to $318 Billion in 2003. Of course, about $120 Billion of the 2003 interest, the government pays to itself, but most of that money is then earmarked to go to SS, military pensions, etc.

In 2003, the average intererst rate was about 4.9%.
In 1998, the average interest rate was about 6.5%.
We will be about $8 Trillion in debt in 2 years from now. If average interest is back up to 6.5%, then total interest payments will be $440 Billion / year, a $120 Trillion more per year than today.

Greenspan,78, worries about the long term.
And at that age, the short term too (with his plug for ARMs not too long ago).
It's natural to worry when you get old. (Those lines on his forehead are the real thing.)
And interest rate hikes (ahead of, or behind inflation) won't erase them.
It seems like a luxury to worry about the balance sheet a decade from now. And awfully thoughtful of AG to have this worry on our behalf as his age ( the actuaries have him dead as a door nail) and financial condition preclude all but altruistic interest.
So it must be the short term worry he has and the reference to the long term debt is just another item he can put on the stove to keep the interest rate low. So it looks like inflation is going to have a little tear first. Some call this debasing the currency rather than inflation:
http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=32395

bakho, thanks for your response.

"Remember that 40% of the debt is owed to 'intragovernmental' meaning mostly to SS and other pension trust funds."

Right, I know. I was following the "unified budget" concept (which I don't totally agree with, for the reason you mention).

"Actually, inflation would increase revenues rapidly by accelerating the rate the middle class gets hit with the AMT ..." Don't you love it how the Republicans are willing to consider one year AMT fixes?

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