Politics
The Washington Post's Steven Mufson explains that a) total government debt has hit WWII levels and b) the debt problem is much worse now. Mufson argues that we are unlikely to see the kind of economic growth and inflation that brought down the debt incurred in WWII .
The problem is actually even worse than that. We are not going to see the kind of sharp spending cuts we saw at the end of WWII. There are several reasons for this. First, some significant demobilization was very popular. We can argue about whether the defense budget was cut too much as a percent of GDP, but there were enormous and uncontroversial savings in cutting the military. The US military is now a much smaller percent of GDP, and while some cuts might be needed given our current situation, cuts to defense spending would have to be both gradual and prudent. Defense might be due for some cuts (though I want to see some details and some thoughts on how the cuts affect global stability), but we shall not be saved by defense cuts.
We also won't be saved by the higher (by our standards) inflation rates of 1946-1948. The key drivers of our debt at the federal level are Social Security and Medicare. The structures and political incentives built into those programs leave them both practically inflation-proof. Social Security benefits are indexed to wage increases and any inflation will eventually be reflected in higher nominal wages. The more we inflate, the more Social Security we will have to pay. Medicare looks more promising, but in reality is just as bad. The federal government sets reimbursements for Medicare. Now technically, if we had high inflation and if the federal government did not increase Medicare reimbursements (or just increased them more slowly than inflation), we could inflate our way out of some of our Medicare-create budget problems. The problem is that there is no reason to expect such a thing to happen. Medicare costs are already increasing faster than inflation for the simple reason that a) if Medicare reimbursements become too low, medical providers will stop providing services to Medicare clients b) Medicare clients want to receive services c) Medicare clients vote. If the political will existed to set reimbursements at a sustainable level (or to establish a more consumer-driven system), we wouldn't need inflation, and inflation will not remove the political incentives for ever increasing Medicare reimbursements. Inflation might do some good in eroding the real value (and therefore the costs) of some defined benefit government-employee pensions, but it would increase US borrowing costs, not deal with the main drivers of the federal deficit and bring other problems besides.
So are we screwed? Probably. There are worthwhile policies for dealing with the Red Menace, but there are huge problems in enacting them. Part of the problem is public opinion. A linked problem is that the institutions of the center-right are not well organized for advancing a policy-oriented agenda for dealing with the Red Menace.
Hopefully more later this week.
If someone had a high conviction bearish outlook that made more sense I might buy it. The world is both flat and spiky.
If someone had a high conviction bullish outlook that made more sense I might buy it.
This kind of bull crap reporting is I suppose fine. I suppose folks haven't figured out how to get to a point where they have no conviction, and make peace with Random Walk. Oh you believe the country is in a leftist-tilt? A center-right persuasion? You think it is the end of history and liberal democracy will win out? You don't think so?
Before we go any further we have to answer a question we really can't answer: Is that priced in?
I have no real conviction in the grand scheme of things, but whenever you are completly overwhelmed by a project I think you have to take it one bird at a time, so to speak.
"U.S. manufacturing often lags behind Asian and European rivals." That is because we rebuilt Europe? Also because Germany has some interesting laws that impose massive taxes on corporations that shut down manufacturing in Germany and move out of country.
So Germany and Japan have great exports...okay, still a real long ways from a one bird at a time approach.
"In addition, inflation is tame and government spending locked into entitlement programs and debt service that will be hard or impossible to alter."
First of all...inflation is not tame. But John! The CPI.
The CPI can pound salt for all I care, energy and food are inflating like mad. In fact oil rocked up $5 today(I am not providing a citation, if you think I am making it up and fact check me you will think I am pshychic.)
Another funny statement, I noticed last time..."we must be afraid, or else Moody or Fitch will lower our credit rating and it will be harder to borrow"
Oh my God, don't scare me.
Do you realize that just today Libya’s long-term foreign and local currency issuer default ratings were cut to BBB, two notches above non-investment grade, from BBB+ at Fitch Ratings.
Yep. Kadafi gets up to genocide and Fitch figures it will make financing Libya's debt a bit more difficult. Can anyone say "priced in" and backwards looking?
Also what exactly inflation does to our borrowing cost isn't really cut and dry. The truth as far as I can tell are that the inflation numbers are being gamed so as to make everything work out.
What will probably happen is that smart folks will go off and create their own numbers, but that certain numbers and official indices will exist for gov/legal purposes.
If there is one fear I don't share it is that government won't find a way to make the numbers work.
I know there are probably economists with tenure who hold that inflation drives up the borrowing costs, and depending on how they explain it I would probably agree...but here is why I think you are wrong:
1) You rely on Steven Mufson, he relies on CPI for the proposition there is no inflation.
I think taking energy and food out is intellectual suicide(or opportunistic government resolving the deficit quietly.)
I need the CPI for inflation about as much as I need Fitch to tell me that a loan to my pal Kadafi isn't wise. The numbers aren't ends in themselves but laden with a sort of institutional interest.
2) The assertion of the economic expert won't mean squat, until we agree on a benchmark for "inflation". So I am going to give in to mental retardation and accept the CPI.
3) Now we need a benchmark for borrowing costs. This should be easy enough. Either the 10 year treasury for rough and short term feel or the department of the Treasury expenditure for borrowing money(which in 2010 was at a multi-year low point).
4) Technically I think 2010 saw awesome inflation as borrowing cost plumeted, which means I am already more or less telling the tenured economist to pound salt, but to be polite I will pretend there was no inflation and that this was why borrowing costs were low.
5) Now once we see real inflation, borrowing costs should increase...(well sorta, but for me this is really complicated)
6) I will say that borrowing costs were low because Bernake bought treasuries in open market transactions. That is demand for treasuries was high and thus the cost of borrowing was low. Now does this money creation cause real inflation? (I think so) Does it also lower borrowing costs? (I think so).
7) The stock market is currently well priced for any growth that will occur in the next three years. (the stock market is one of the first things to inflate.)
What would happen if the CPI included a share of APPLE, or BAIDU?
8) If there is a natural cap on the stock market, or a point where everyone is bullish and news is interpreted to the bear side, then sell offs will drive up bond prices (as occured today). High oil scares future recovery, hurts market drives bond yields lower.
For the deficit to be a problem the stock market has to find a way to go higher. But the stock market may already be overpriced.
So I have no clue what happens next. Also not really so sure that military spending on world war 2 had a potential to do more good than health care and entitlement spending today. Not that we had much choice in world war 2, but the direction of limited resources torwards engaging in a war can't (due in part to the broken window falacy) by my admitedly naive perspective be better than spending which at the least props ups hospitals and medical care and retirement condos. At worst it simply stimulates different sectors.
I just don't get being screwed, because we aren't comming out of a war that destroyed most of europe.