Musings of a GVChamp

Not going to lie: I think that spending money we don't have shouldn't really be considered an option at this point. Decades of irresponsibility fiscal policy have removed that option. Certainly it would be great to be able to have such an option to buffer our way out of our recession but we are now staring a debt crisis in the face.

Currently (this last year) I believe approximately 200 billion of the federal budget was eaten up by interest on our debt. As you well know we have started spending at an unprecedented rate (with this coming year being less than this previous year but the previous year being completely unprecedented and this next year still unfathomable). At current predicted rates by 2020 interest on debt is predicted to become the largest item in the federal budget unless we stop: NOW.

Hiking tax and cutting spending will undoubtedly be a strain on our economy so it shouldn't be done too rapidly and there will certainly still be some hard years but we need to begin reform asap. Of course the recession cost us huge sums of money in the form of opportunity but we also need to consider the opportunity costs of carrying high debt. According to predictions based on current levels we are looking at having to double taxes to pay intrest (much less sustain our policies!) within a generation.

Many of our systems are pitifully broken. Social Security is working on a pay in pay out basis where workers today pay for the retired of today. Of course the hope was that the money the now retired contributed would have been invested and would have grown but instead it has been loaned inside the government and is effectively gone. That places a huge, unfunded liability on our government's shoulders. How does this relate to why we can't concern ourselves with a capacity gap too much? We will probably be looking to barrow money to make good on our promises short term (hopefully long term reform can create a sustainable system) and so we are already over extended. Health care is only looking to expand and we are what: 13th? in the world for efficiency while spending (I think) the most per capita. So that budget item is also placing a weight on our system. We simply do not have the credit to tackle every problem we currently face.

To try and bring a conclusion to this and show why I would bother writing it: Your saying that we face a potentially huge loss in potential growth. You admit that regardless of what we do we are going to lose trillions in potential GDP growth. I completely agree. You go on to say that the logical option is to expand (well, sustain expanded spending) spending and minimize the damage by getting as close to previous potential line as possible as soon as possible. This would make sense however when you do this you are trading opportunities. Your spending your resources on this one recession now and encouraging levels of spending which are preposterous (theoretically, short term). In the process (even just short term) you are creating a massive bill on which interest must be paid. The debt we carry forward as a result of the spending limits what we can do in the future. That debt will make a balanced budget even more painful because of associated tax hikes and spending cuts. (I guess I am assuming you do not mean to maintain emergency spending indefinitely.) It will also limit the amount of credit the US will have to deal with future problems because the world will not continue to give us everything we want. (Just look at what is happening now! Who would ever have thought that people would seriously be speculating that the US dollar will cease to be the reserve currency of the world! Who would have thought the Chinese would actually be proposing their currency become a strong contender in the world markets!!) Furthermore we will need to pay off out debts if we want to ever have our credit restored. Simultaneously the more we owe and the longer it takes to pay our debts the more we are funding other nations with our hard earned value! So while it might seem obvious that we need to spend now to mitigate the loss of potential GDP we suffer there is a similar loss in capacity which is incurred through more spending. Really if we were only one or two trillion in debt I would be behind the spend to recover faster theory 100% but we have had decades of generally poor fiscal policy which has removed our options. We are also, of course, carrying unheard of liabilities most of which are unfunded so we will need what credit we do have short term to cover preexisting promises until we can make them more sustainable.

P.S Don't think I'm saying we should balanced the budget this year. (Personally that would thrill me but I know that is way to fast and would have massive repercussions.) I am saying that we need to start curtailing that deficit this year (harsher than the graphs I have seen for projected curtailing) so that we can get to a balanced budget within 5-10 years and a surplus budget soon after.

P.S.S Please point out my mistakes. I'm in no way an economist but I have been reading a lot and have decided that Keynes basically has failed to meet my expectations and that the laughing curve has failed completely. If you want to know where I got my info I can re-look up most of it in a decent amount of time but this week is finals so expect delays....

You are almost absolutely right and very well-read for someone who isn't an economist (and I don't even claim to be one myself). Running up the debt during this crisis brings us closer to insolvency and a serious debt crisis, hampers our ability to respond to future crises, and we will have to make deeper cuts than we would have had to do otherwise. There's an opportunity cost to all this.

Our biggest disagreement, I would think, is how close we are to this fiscal crisis. The United States is not Greece, it is not Spain, it is not Iceland, it is not Ireland. So far, the actual serious debt problems are in nations that do not determine their own monetary policy (they are stuck with the Euro) and do not have much credibility in keeping debt under control (Italy and Belgium are notorious spend-thrifts). In respected nations that DO determine their own monetary policy, higher debts and deficits can be sustained for longer periods of time. Like Britain, or Japan, the latter of which has the largest public debt in the world. The United States is more similar to the latter two, and we are still the gold standard in terms of low-level risk.

So, yeah, I'd agree we need to start thinking about solvency very soon, because S&P and Moody's have both talked about downgrading us. And one estimate I've seen for that happening is as soon as 2020. But it's still not today, and we can still head it off. The US has room to raise taxes and cut down spending, it's more a question of political will.

And the cuts will have to be more drastic. But a lot of the current deficit is caused by expanded unemployment insurance and revenue falls that will solve themselves when the recession ends. After that, we still have to shave hundreds of billions off the government budget to put us in a better spot, but that DOESN'T mean that money is disappearing. Only some of it will represent flows to China and Japan or whatever. A lot of that old GDP will simply be redirected back into private hands. So the losses we're talking about aren't really comparable to trillions of dollars in GDP losses, IMO.

So I'd say our best policy position is boosting government spending. But even if you don't walk the debt costs, there's still room to print more money, too. Monetary policy does not have to leave the government in debt.