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25 August 2011
01 August 2011
I am not an expert in economics. I have an undergraduate degree in it, but I'm not an expert. None the less the basic tenants of economics are being violated wholesale by our elected officials. This is part one of a basic overview of what is happening in the US right now. This is the simple stuff that if you don't understand you really shouldn't open your mouth about anything economics related. Sounds harsh? So are the consequences for saying stupid things. No one walks into a hospital and requests blood letting just as no one walks into congress and votes for reduced spending during a recession... oh wait.
What is disturbing is that our federal government is literally doing everything wrong that it can. I expect my friends and family who have never looked at an IS/LM curve or Keynesian multipliers to say ignorant things like "oh just let them default or whatever, we need to stop all this deficit spending," but for our government to act in a populist manner in this scenario is nothing short of insanity. It is wrong. It will hurt people. This is not an ethical debate. There are thousands of research papers, billions of data points, and hundreds of relevant historical examples to garner experience and guidance from. If you have a different opinion post the data because your slogan (big government is bad!) does not hold water.
Where to begin? Let's keep it basic. How much money does the US produce every year - or thought of as personal income - what is the US's salary? This is called GDP or GNP. Please read about it. It is important. Well the number is $14.1 trillion per year currently. That's 14,100 billions or 14.1 million millions.
How much is the federal government's revenue? That is, how much money does it collect in taxes? According to the CBO data (congressional budget office) it was about $2.2 trillion in 2010. That's $2,162 billion or 15% of all the money generated during a year in the US. Let's look at some data.
So how much is the deficit? It's there on the far right of 2010 above: $9 trillion. That's a lot of money and it's been growing, but why? Look at revenue on the far left in 1971 and then look at the next year and the next. See that? It goes up every year as the economy grows. Then look at 2001; it dips. Why? In 2001 and 2003 we had the Bush tax cuts. Revenue fell, nothing shocking here. After 2003 revenue continues to go up as usual until 2008 when Bush was still in office and our current mess started. Straight forward right? It usually is...
Aside: if our debt is $9 trillion and we produce over $14 trillion a year that's like the typical American who makes $32,000 (as of 2006) a year having a debt of $20,500 - sounds like a car loan (in 2006 the average cost of a car was $28,400 according the the government). Does having a car loan make you reckless, irresponsible, and broke?
Now let's look at how much the government is spending (outlays), that's the next column over. I made an Excel spreadsheet using the CBO data starting in 1990 because I'm lazy. You can see the formula I use and all the numbers. Look at the percentage change.
In the 90's federal government spending increases at about the rate of inflation. Then in 2000 spending ticks up and in 2002 it surges. Why? Well, wars are expensive. See how it's high in 1991 and 1992 when we blew up Iraq for the first time? Anyways, it jumps in 2008 and 2009 greatly because Obama is a socialist. Oh wait, no. The recession begins in Q2 2008 and lots of people are unemployed and now collect unemployment and depend on other social welfare programs. Which is what they are designed to do. That and there's the stimulus and bank bailouts in there. Then the stimulus mostly goes away in 2010 and outlays actually drops slightly.
So why is debt bad? Well, there is only so much money out there so whenever the government borrows it "crowds out" private investors and raises the cost of borrowing to some degree. Well, that does not matter right now because we are in a liquidity trap. What the hell is that? Basically, everyone is trying to pay down debt, save, and invest money. If everyone is saving then who is borrowing that saved money? When you put money in a bank or pay down a mortgage that money is lent back out again. If more people are saving than spending it makes it cheaper to borrow money because there's less demand for it. A liquidity trap is when common monetary policy (changing the federal funds rate) no longer has an effect. That is, lowering the interest rate does not spur more borrowing/growth. Well, the federal funds rate has been zero for a while.
So why else is debt bad? Because you have to pay interest on debt. What does the government pay in interest? They pay whatever investors are willing to lend them money at. That is, Treasury Bills. So what are the current rates?
Inflation adjusted rates - that is, the money investors receive after inflation, is currently negative on both 5 and 7 year treasury bills. At 10 years the government pays a "real" rate of 0.38% interest. This is not magic. There is almost nothing to invest in right now because there is so little demand and everything is so uncertain, and up until recently it was unthinkable that the US Federal Government would default on its debt. Hence, we are the safest debtors in the world and get the lowest interest rates. Let's see some data...
Look at the second to last column. Every year we pay more and more in interest until 2009. Then it drops and stays pretty low. Why? Because the federal government can pay almost nothing to acquire long term debt as explained above. Hell, people will pay them to acquire short and medium term debt (up to 7 years!).
Do we need to do something about the debt? Absolutely, but not in a depressed and now stagnant economy. So why do we need to reduce the deficit in a depressed economy? We don't. Borrowing is cheap. If I told you that you could take out a 10-year loan for 0.38% above inflation, try to make money with it, and then pay it back do you think you could? If your answer is no then keep your 9 to 5, otherwise welcome to America. Let's borrow more money so investors have something to do with all their cash that's sitting on the sidelines or in gold bars doing nothing. Let's build some bridges, fix some national parks, upgrade our research facilities, double NASA's funding, fix our schools, invest in cleaner energy, help the poor, and provide basic healthcare to all. It's an investment in our basic infrastructure and I bet the returns will be more than 0.38% over inflation.