In the NYT, David Stockman (former OMB Director under Reagan) warns, using two pages filled with words like ‘jabberwocky’, that the bond vigilantes are coming and that when they do our days of endlessly issuing debt will be over.
Which we’ve heard before and it’s always been wrong, not because our spending and borrow isn’t harmful, but because of the dynamics of the fixed income market which can best be summed up by this ancient business proverb:
When you owe the bank $5 million, the bank owns you. When you owe the bank $5 billion, you own the bank.
In effect, we owe the rest of the world so much money they honestly have little choice but to keep lending to us and the money is there (by some estimates, almost as much is sitting in cash on the sidelines as the entire value of the US economy). Frankly, it’s a good bet since we always pay. Further, our lack of fiscal discipline is having one very significant positive effect, it’s raising the value of currencies around the world making American goods relatively cheaper, driving our exports. Well, except for countries with currency controls (like China) which are experiencing inflation that will eventually force them to adjust upward WRT the dollar. Further, the supply and demand dynamics are such that US Treasuries are the only place to go… individual bond funds could effectively purchase all the debt securities issued by, say, the UK. Or Russia. Investment dollars have to go somewhere and there’s no where else to go but US Treasuries since the market can’t be manipulated by individual firms and it’s liquid enough to get in and out quickly. Not to mention the fact that some return is better than the nothing that’s usually earned by cash.
Stockman’s main point is that both Republican and Democratic plans to address the deficit, which he calls a ‘desperate fiscal condition’ in his hyperventilating style, are worthless. I agree. However, his point regarding middle class tax increases is largely crap since most of the deficit stems from the one two punch of lower tax revenues from 20,000,000 under-or un-employed Americans combined with increased spending for public assistance, unemployment, etc. In short, fix employment and spending fixes itself. GIVEN that, here’s the part that makes me want to punch Stockman in the face so goddamn hard his grandchildren feel it…
Nevertheless, the Democrats are immobilized because Keynesians insist on kicking the budgetary can down the road until cyclical “demand” has in their estimation fully recovered, while Republicans sit on their hands because supply-siders insist on letting the deficit fester until tax cuts work their alleged revenue magic.
David’s too dumb to understand that the Keynesians are right and that until the demand gap (the gap between what the economy is producing compared to what it could produce with low inflation) is filled, we can effectively run deficits into infinity because there’s no where else for money to go and inflation isn’t problematic because there is no chance of a wage price spiral which would lead to inflation. Fill the demand gap and tax revenue shoots up as the economy returns to full employment. Seriously, this isn’t complex stuff and it’s what you do when confronted with a heavy recession resulting from a private debt bubble in a low tax environment. It’s not opinion, it’s what fucking works.
In effect, by leveraging the government and increasing demand (construction workers can build freeways and schools just like they build houses, for example) the private sector is given the chance to deleverage, maintaining price stability (avoiding deflation which sucks because debt remains the same while income falls) and tax revenues which effectively alleviate the deficits and the economy can actually grow in real terms. If this path had been followed from a large enough stimulus package that was spent on real employment in the real economy, we’d be close to full employment right now, the private sector deleveraging would be close to complete and the economy would have grown so much that the deficits would be far less in percentage terms of the overall economy.
Instead, we mostly gave into Republican demands and put more of the stimulus into tax cuts which did fuckall to stimulate the economy and put us in the position where we still have high levels of private debt, higher levels of government debt, less spending and demand, low economic growth and high unemployment which causes lower tax revenues and increased spending. This is why you have to know what the fuck to do or you end up doing the wrong thing. This is why it was, you know, kind of fucking important that the stimulus had the necessary size and composition. So much for our post partisan President who managed to fuck himself, his party and the whole country by listening to morons who got us into this mess in the first place. And to you folks who voted for Republicans in 2010, well, you make the President look like the smartest guy in the fucking world. What surprises me is not that y’all are finally calling out Paul Ryan and the rest on their bullshit, it’s that you haven’t yet reached the point where you’re ready to literally tear his Eddie Haskell looking ass apart.
But back to Stockman. What he doesn’t get is that the real solution to all this is economic growth, especially in terms of wages and employment. Spending cuts are absolutely necessary (I’m looking at you, Dept. of Defense) and tax increases (hello there, top 2% of incomes) are essential. However, absent economic growth, none of it matters. We’ll continue to run deficits until the end of time.
On the subject of entitlements, the problem can be fixed in part by removing the caps on the taxes, means testing for full and partial benefits and setting retirement ages by occupation (lawyers work to 70, steel workers to 60 to get full benefits, for example). Throw in actually negotiating for the best prices for devices and medicine and you fix the entitlement problem completely.
In the end, the problem isn’t intractable or even difficult really. You just have to understand the economics and the policy effects which no one in a position of power in DC apparently comprehends, which is why we keep doing the same stupid shit expecting a different result.