More Debt Hysteria

I have often wondered how easy it would be to write a completely silly article and still get it published. Now I know. Emund Andrews did it this morning. You can read his foolery on the front page of the New York Times.

Yet more debt hysteria I am afraid.

This is getting a little monotonous, but as in any epidemic, we must not let our guard down. We must confront this hysteria front on wherever we come across it. I just didn’t expect to find it on the NYT front page.

What really annoys me most is the amazing lack of analytical thought going into these articles. They simply seem to be a re-hashing of the same tired, and by now thoroughly debunked story. This is, of course, familiar territory: there is a school of thought out there supporting the notion that repetition can convert a falsehood into a truth. So we are bombarded with ever increasing frequency about the impending perils of America’s debt crisis.

It would nice were there some facts to document this crisis. Apparently I am asking too much.

But a crisis is assuredly is because Mr. Andrews breezily asserts so. Or more to the point he simply wonders aloud about the consequences of said crisis, presumably taking its existence as a given.

So allow me to be boring. Let me talk facts. I realize it’s less inflammatory and makes for a dull headline, but, given the enormous consequences of incorrect policy actions, I think we need to be quite sober when we discuss our national debt.

So without the hyperbole here goes.

Taking a look at the way in which our budget has fallen afoul of the recession we need to pick apart the causes of the rising Federal deficit. That is to say we need to know why we are in debt. To do this we should compare budgets, one put together before the crisis, and one that includes all the actions and expenses of the crisis. Given that we are supposed to be facing a tsunami of debt we need to look out a few years so we can identify when we get swamped. So lets look at our forecast budget out ten years. The ‘before crisis’ budget was about $8.3 trillion better off than the ‘after crisis’ budget. So the hysteria is over that addition of $8.3 trillion to the debt. As a proportion of GDP this addition drives the US debt ratio from about 40% up to around 70% over the ten years – a significant jump. Significant enough to cause all this panic.

Now let’s look at the books:

1. First we see that projected discretionary spending does indeed increase. Somewhere in the region of $1.3 trillion over that period. This is the category that covers stuff like bail outs and stimulus packages. So this is where Obama’s fiscal folly would be accounted for.
2. Second we see that debt servicing – the cost of paying interest on all that debt – also goes up. In this case by about $1.5 trillion also. Now let’s be clear here: much of this cost is baked into the numbers because the debt already exists. The Treasury has been active in extending maturities lately to take advantage of low interest rates. But there is also a huge amount of short term debt that needs constant refinancing and so could be re-priced at higher rates. Given that short term rate are practically zero currently any move would be up. But the budget allows for that. So let’s go with the budget figure.
3. Next comes mandatory spending on things the law says the government has to do. That goes up about $0.8 trillion.
4. So, thus far we have accounted for a big chunk of the deterioration between the ‘before’ and ‘after’ crisis deficits: $1.3 + $1.5 + $0.8 = $3.6. Hmmmm. The total dent in our finances is $8.3. We have not accounted for over half the problem, and yet we have accounted for all the changes in spending. I wonder what could create that other chunk? We need to find another $4.7 trillion.
5. Well its the recession stupid. By far the biggest reason our budget appears in the hole right now is because there’s a recession going on. Whoops we forgot about that. Revenues have imploded. Tax intake has dropped like a stone. That’s the big issue here. Revenue decline accounts for over 50% of the debt bulge everyone is getting panicked about. Sorry everyone but we don’t have a spending issue we have an income issue. And a temporary one at that.
6. Even more: the after crisis budget has a much reduced number for GDP in 2018. That means any ratio of that figure is going to be higher than it would have been had GDP not been reduced. This phenomenon is called arithmetic. So naturally the debt looks a lot worse – that 70% number – when the debt is expressed as a ration of a recession hit and therefore shrunken GDP.

This is why I get annoyed. The tsunami becomes a normal wave when you look at it clearly.

Obama’s reckless budgets are not our problem. The recession is. I thought we knew that by now.

Apparently not.

Once the economy starts to grow much of the deficit melts away of its own accord because Federal revenues will recover. This is not including any tax increases, or even the elimination of the infamous Bush tax cuts that created a far larger deficit issue than all the bail outs and stimulus added together.

This is what we call a ‘cyclical’ debt problem. Bush created a ‘structural’ debt problem by cutting revenues and getting no increases in GDP or cuts in expenditure to offset that loss. The Bush deficits are the permanent bit of our problem.

In contrast the bail outs and stimulus spending is temporary. Yes they added to our debt. But the deficit won’t stay that way. It will shrink as soon as we get going. Leaving us the Bush debacle to fix. If we have a debt problem it’s that one, not the one caused by recession.

I hate having to belabor all this, but it is vital we separate the issues so we can deal with them sensibly.

The US has long term fiscal problems. It has Social Security and Health care costs that need controlling. More importantly, ever since Reagan began to use the Social Security surplus to offset the regular budget deficit we have managed to avoid looking at the true gap in our everyday spending. Reagan was the first president to use a combined budget. Up until then we saw two budgets: one for the everyday stuff, and one for Social Security. So for thirty years we have been bamboozled into thinking our budget was in better shape than it is. That way we could avoid having to cut or control costs. This was vital to Reagan because he wanted to inflate defense costs and hide the impact – basically he used debt and Social Security income to fund defense. The key he wanted to get around was having to raise taxes to pay for that defense build up. His great twin legacies were the loss of truthful accounting and the illusion that borrowing could go on interminably.

The irony now is that it is his ideological successors who are raising the panic about deficits and debt – these are the very folks who looked away during the Reagan and Bush debt frenzies.

So there you have it.

Yes our debt ratio will get worse. We’ve just been hit by a horrendous recession. Duh. And, yes we can pay for it – it is all very manageable – as long as we get our economy humming again. It will take a few years for the debt levels to fall back to more ‘normal’ levels, but frankly we haven’t had ‘normal’ levels for three decades anyway, and we might not get back there for three more decades.

The key is to remember why the debt ballooned, and to keep our focus on the really big job at hand. That is to get the economy growing sustainably. That means jobs. It might even require more debt. The number one task right now is still recession fighting. We can begin the switch to fiscal rectitude afterwards.

Let them eat cake is not a particularly palatable economic policy, but it is the logical outcome of this bout of debt hysteria. If we get our priorities backwards and look to balance budgets and reduce debt loads before the economy is safely back on track then we run the risk of repeating the 1930’s. Allowing the bond market – or rather the supposed bond market since the actual one doesn’t seem too worried at the moment – to take priority over things like jobs programs is dooming us to a decade of horrendous human cost. That road is known to us. It is an ugly one.

Which is why we need to defang this hysteria before it sweeps us in the wrong direction.