“Nightmare” Budget Scenario From NY Times: The Sum of Liberals’ Fears
BY Glen Tschirgi
13 years, 8 months ago
Professor N. Gregory Mankiw (Harvard) has a piece in The New York Times‘ business section that is intended to impress upon us all the frightful prospects that await the U.S. in the future if immediate action is not taken on the federal debt now. (Hat Tip to PowerLine)
As a disclaimer I must say that I do consider immediate action to rein in federal spending a critical piece of saving America’s future and the consequences for not doing so truly are fearful, but reading Professor Mankiw’s list of horrors brings to mind commonsense policies rather than doomsday.
Mankiw writes the column from the perspective of a U.S. president in the year 2026. The article is the text of the president’s speech to the nation. So let’s have a little fun and put ourselves in the audience for this 2026 presidential address.
Here is the calamitous news that the president is forced to give to the nation:
Yesterday, I returned from a meeting at the International Monetary Fund in its new headquarters in Beijing. I am pleased to report some good news. I have managed to secure from the I.M.F. a temporary line of credit to help us through this crisis.
(I like this bit about the HQ being moved to Beijing. It fits the Times’ recurrent fantasy that China is the paragon of economic and political progress, notwithstanding that China has more and deeper challenges to its future than America ever will).
This loan comes with some conditions. As your president, I have to be frank: I don’t like them, and neither will you. But, under the circumstances, accepting these conditions is our only choice.
OK, here it comes. The terrible, awfable, excruciating cuts…. wait for it….
We have to cut Social Security immediately, especially for higher-income beneficiaries. Social Security will still keep the elderly out of poverty, but just barely. [Emphasis added].
Nooooooooo! High-income beneficiaries may see a “cut” in their social security benefits??? How will they live without that unneeded income? How will they cope with the thought of having paid into what they knew was a rotten system with negative returns on their investment that had no, real prospect of ever paying them back what was paid in? The system that they chose to keep in place all those years by voting for Democrats that continually denied that there was even a problem with the system and obstructed and demagogued every attempt to reform it??? I hope it doesn’t get worse than this.
We have to limit Medicare and Medicaid. These programs will still provide basic health care, but they will no longer cover many expensive treatments. Individuals will have to pay for these treatments on their own or, sadly, do without.
Arghhhhhhh! The pain! “Limit” Medicare and Medicaid??? They will only provide “basic health care” and “no longer cover many expensive treatments” ??? Cruel world! We will be expected to actually pay for something ourselves or do without? This sounds agonizingly like personal responsibility! I can’t expect my family and friends to help with something like my health care when it is clearly the responsibility of the federal government to provide me with every treatment and drug into eternity! What about healthcare being my right?
We have to cut health insurance subsidies to middle-income families. Health insurance will be less a right of citizenship and more a personal responsibility.
Curses!!! There’s that word, “personal responsibility” ! No subsidies for the middle class? What’s next? Are they going to stop handing out free bread and eliminate the circuses at the Coliseum??
We have to eliminate inessential government functions, like subsidies for farming, ethanol production, public broadcasting, energy conservation and trade promotion.
The world is truly ending! Eliminate farming subsidies? Doesn’t the gubbmint know that farmers can’t survive on the record-high prices being paid for corn, soybean and other crops? Don’t they know that the world food shortage means that farmers need those subsidies more than ever?? And ethanol…we can’t live without that! Even if it does reduce the world food supply and costs far more in energy to produce than the energy released, it is so…GREEN and earth-friendly and makes us feel good that we’re doing the responsible thing rather than sending that corn to the starving people in Africa. And no more public broadcasting? Who will give me my liberal-biased news (besides ABC, NBC, CBS, MSNBC, CNN, the AP, Reuters, AFP, The Washington Post, The New York Times, The LA Times…). No more money for energy conservation? Really? How will Americans know how to conserve energy on their own without someone to tell them how? Those bills I get from the utility company are so complicated.
We will raise taxes on all but the poorest Americans. We will do this primarily by broadening the tax base, eliminating deductions for mortgage interest and state and local taxes. Employer-provided health insurance will hereafter be taxable compensation.
Horrors! It’s simply outrageous to think that more than 50% of U.S. citizens should pay anything in taxes. This almost sounds like the nutty ideas of the “Far Right” all those years ago who wanted to restructure the tax code so that everyone enjoyed a lower, simpler flat tax without needing a high-paid CPA to do their taxes. And those employer-sponsored health plans have been so vital to keeping down costs, too! Taxing these might actually force Americans to switch to a model for health care that would make sense and be affordable– the villainy!!
We will increase the gasoline tax by $2 a gallon. This will not only increase revenue, but will also address various social ills, from global climate change to local traffic congestion.
Thank God! Finally this president is talking sense. It is way past time to crank up the gasoline tax another $2 per gallon. I’ve always thought those tiny, little Smart cars were so cute. Now everyone will have to drive them. And I hear they have an optional drive train installed— pedals. So cute! And with that extra $2 per gallon, the federal government will know just how to spend that money curing the “various social ills.” Yes, like “global climate change.” Even though it is the year 2026 and none of the things the global warming scientists predicted have happened — massive crop failures, all the coastal cities flooded out and the polar bears drowned– we just know that one day global climate change is going to kill us all, so why not $3 or $4 per gallon tax?
AS I have said, these changes are repellant to me. When you elected me, I promised to preserve the social safety net. I assured you that the budget deficit could be fixed by eliminating waste, fraud and abuse, and by increasing taxes on only the richest Americans. But now we have little choice in the matter.
Wow! I just had an incredible feeling of de ja vu listening to you, Mr. President. Here it is 2026 but I am almost sure that I heard some, other presidential candidate promise that all our problems could be fixed simply by eliminating waste, fraud and abuse and by re-distributing the wealth of those greedy, evil, rich people– let’s not even call them “Americans”; real Americans don’t get rich unless they are the right kind of rich people who live in L.A. and donate small portions of their money to causes like saving the California Crested Booby-Hatch or promoting the rights of pedophiles.
It’s OK, Mr. President, I see now that you had no idea that being president of a big country like the U.S. would be so hard and I understand that you don’t have any choice but to make these terrible, awfable cuts.
But maybe, if you have the time, could you look into closing Guantanamo?
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On March 28, 2011 at 10:14 pm, Burk said:
Hi, CJ-
“I have managed to secure from the I.M.F. a temporary line of credit to help us through this crisis.”
This, unfortunately, tells us that Dr. Mankiw doesn’t know what he is talking about. We never need external credit, since we print our money. We may generate inflation.. that is a risk. But never insolvency.
It seems that Dr. M is trying to scare us, and incidentally is in denial about how his economic models have failed throughout the recent unpleasantness. His school of neo-Keynesianism or neo-Liberalism, or whatever it is, needs to be put out to pasture.
On March 29, 2011 at 7:50 am, Dave said:
Is Burk ever going to get it? The Federal Reserve prints money, not the government. Therefore, the debt is monetized only if it passes through the Fed, which means the Fed would have to be growing its balance sheet by $1.6 trillion per year to keep up with the current federal deficit run rate. If we ‘don’t need external credit’, then why are we selling federal bonds to foreign countries?
Also, ‘inflation’ is not the risk, hyperinflation is the risk. Think Weimar Republic.
On March 29, 2011 at 3:17 pm, Burk said:
Hi, Dave-
The Fed is part of the government too. More importantly, the money supply has been huge for a couple of years now … where is the inflation? Could you give us a time when your hyperinflation will hit? I don’t think so, since you don’t have a working theory of where it would come from. It is unpleasant, frankly, to have so many chickens running around telling us the sky is going to fall.
It is interesting that you would mention the Weimar republic. They had inflation for quite some time prior to their hyperinflation period. They also owed money in a currency they did not issue (gold, per their reparations). They also set up a central bank that was privately run and abetted currency speculation with excess currency issue. Once the central bank was put back under government control, the inflation was quickly squelched. It would be interesting to ask how you would usefully compare the two situations.
On March 29, 2011 at 3:28 pm, Herschel Smith said:
Thanks Glen for another good article. I really wish that we would simply terminate the whole ridiculous, wasteful SS program and allow me to invest my own money. I might actually have something by the time I retire. As it is, I’ll drop dead while working and paying more into a system that I’ll never see.
On March 29, 2011 at 9:07 pm, TS Alfabet said:
I notice, Burk, that you did not respond to Dave’s point about selling our debt to outside buyers.
There is no denying that we are in an inflationary period, with food prices increasing in the last month more than at any time in the last 30 years. Energy prices are also escalating quickly which will have a serious ripple effect on other segments of the economy if the price of oil stays where it is much longer (or God forbid gets higher still). The fact that the Fed claims that this isn’t “core” inflation makes it no less painful for us commoners who see their grocery, gas and utility bills spiraling upward.
The fact that we haven’t yet seen *hyperinflation* yet is no argument that it can’t or won’t happen, particularly if the government continues to buy up debt and keeps printing money.
If bond investors start demanding higher spreads for U.S. debt, we are in big trouble.
I believe Dave’s reference to the Weimar Republic was to their experience with hyperinflation, not necessarily to the manner in which it began or ended. It is quite possible that the dollar could experience a similar collapse in value and the Fed’s track record for taming inflation is not good.
On March 29, 2011 at 11:34 pm, scott s. said:
It would seem at the present time, the market for US Treasuries abroad is good, so the proposed scenario is not realistic. However, consider the case where a treasury auction fails. It’s difficult to see any scenario in which the Fed would not buy that debt and create offsetting liability in the form of member bank reserves. I mean the Fed is already buying $600b this year, so $1.6t is not outside the realm of possibility. Of course the question becomes at what point do banks draw down their reserves in the form of currency?
On March 30, 2011 at 10:11 am, Dave said:
The Federal Reserve is not part of the government. Hence decades-long discussion about the importance of Federal Reserve independence. Not sure where you get the idea that the Fed is part of the government, could you source that?
Regarding inflation, the money supply has not bloated, the monetary base has bloated. Monetary base is calculated as Federal Reserve liabilities plus coinage. Traditionally, FR liabilities have been dollars, but the Fed is paying for its QE programs with ‘excess reserves’, not dollars. If you don’t get the difference, try paying for your next purchase with excess reserves instead of dollars and you will see what I mean. The Fed is trying to fence in inflation by keeping the monetary base bloat within the banks, where it hopes that banks will tire of weak short-term yields and increasingly shift to lending.
The problem with this effort is that the banks are (1) healing from severe losses over the past 3 years, (2) dealing with new Dodd-Frank regulations, and (3) increasing capital due to Basel III requirements. The Fed’s effort to push the banks to increase lending are akin to ‘pushing on a string’, because banks are not in a position to be strong and resilient with all these forces pressing in the opposite direction.
So the Fed took it a step further by going into QE mode. The thinking was that the Fed could force ‘portfolio balance channel’ effects by artificially depressing yields on government-backed securities, thereby increasing the opportunity cost of holding risk-free assets and forcing non-Fed money out along the risk spectrum.
Nothing the Fed has done so far has encouraged inflation or hyperinflation, as far as I can tell. Commodity price increases are as much due to rebounds from excessive sell-offs in the liquidity crisis in Q4-2008 as they are to excess money. To the extent that there is too much currency afloat, it is as much or more the fault of the emerging market economies as it is the Fed’s problem.
The risk is that the Fed will keep trying to force a recovery in the markets that it cannot make happen. The next step is to run the printing presses and let dollars out into circulation so us regular folk can have a vote on inflation. Rest assured that the American people can do whatever is asked of them, including generating inflation.
My criticism of Burk’s argument is that he does not perceive an inflationary risk where it clearly exists (running printing presses). Further, his idea to monetize the debt would be ruinous – he presents no example of a country that has monetized its debt and presented a satisfactory economic outcome for its citizens. That is where the Weimar Republic comment was directed.
My argument is that the Fed is fighting a battle it cannot win. Fiscal policy sets the table, and the Fed can direct how fast we eat. The reason for the slow economic recovery is uncertainty about the fiscal budget, not lack of dollars in the system. Ricardo proposed that fiscal stimulus was ineffective because consumers and businesses would reduce spending & investment in expectation of higher future taxes to pay for the present fiscal imbalance. This is precisely the opposite of Keynes’s idea of balancing low (C + I) with higher (G), where consumers and businesses either don’t care about government spending or don’t expect higher future taxes to result from it and therefore don’t modify their behavior in response to budget deficits.
I contend that the large size of the current budget deficit, and more importantly, the heightened public awareness and concern over the budget deficit and debt outstanding, have tipped our economic habits from Keynesian to Ricardian. We are all certainly expecting higher future taxes (two year ‘patches’ notwithstanding) and are acting accordingly. Consumers are saving more and spending less. Businesses, unsure of either the size of the market (taxes shrink the economy) or the return on investment, hold off on spending. The net result is, Keynes fails to bring about a recovery because we respond in Ricardian fashion. The answer is not to double down on Keynesian ideas, it is to retreat and shrink federal spending.
For those who worry that reducing federal spending (note that I did not say raise taxes to close the deficit, I say reduce spending) will put us into a double dip or cause sluggish employment growth, I offer the ‘Dave theory of government spending’: government spending is less efficient than private spending. Consider this example: the government decides to support the economy by spending a trillion dollars installing solar panels in Alaska. Or hiring people to pick rocks up and throw them in the ocean. According to Keynes, the economy is one trillion dollars better off because of the money spent in the present period, even though the expense is clearly wasteful.
Central planning is inherently less efficient because the decision making is removed from the locus of control and therefore buffered by informational inefficiency. The more centralized the decision making and farther removed from the locus of control, the greater the informational inefficiency tendency. Therefore, federal spending is on average less efficient than state spending, which is in turn less efficient than county/parish spending, and then also less efficient than municipal/township spending, and then less efficient than library/streets/water/sewer district spending.
Sorry to put so much on the site here. If you read all that, thank you for your perseverence!
On April 4, 2011 at 8:38 am, Glen Tschirgi said:
That is some great commentary, Dave. Thank you.