We’ve Been Eating Our Seed Corn

I have frequently admitted to being simple minded. While the world's economic and financial systems are enormously complicated, it seems to me that the bottom line is not complicated at all. Governments, like private corporations and individuals, have assets and liabilities. When the first is larger than the second, the question is what to do with the surplus. When the second is larger than the first, one must do one or more than one of three things: somehow increase assets and/or diminish liabilities, or default (or declare bankruptcy), or borrow the difference.

The last is the least painful in the short run, though it means increasing liabilities over the long run. That requires that there is someone you can borrow from right now. That in turn means that someone has to be running a big enough surplus to cover your shortfall. The current world crisis seems to be the result of a simple mathematical fact: there is simply not enough surplus in the world economy to cover all of the world's debts.

The only argument on the table right now is the austerity v. stimulus argument. Those favoring the former argue that the world's debtor governments (which is pretty much all of the world's governments) must reduce their liabilities by reducing spending and, in most cases, increase their assets by increasing taxes. The partisans of stimulus argue that this is self-defeating. Reducing spending retards economic growth, which further reduces revenues. Instead, governments should borrow even more and spend even more in order to generate economic growth. Growth will result in assets that can be used to pay down the debt. The obvious question then is whom to borrow from? Germany can't bail out the world.

It is not at all obvious, however, that borrowing heavily and spending heavily can really generate economic growth. Here is a note from Walter Russell Mead's superb blog Via Meadia:

For years, Japan has been the poster child for Keynesianism—and not in a good way. Its "lost decade" of economic stagnation is well known (at this point, it's closer to two decades than one), and this is only the beginning of its problems. Japan has been running a large budget deficit for more than twenty years now, and its debt to GDP ratio is close to 200 percent. But despite these gloriously Krugmanesque accomplishments, the economy isn't really growing, and it hasn't been for a very long time.

If heavy borrowing and spending really generates economic growth, wouldn't it be working for Japan by now?

The other question is whether the borrow now, pay later strategy has ever worked before. Here's Neil Reynolds at the Globe and Mail:

The British government has run a budget surplus in only six of the 37 years since 1975. The American government has run a budget surplus in only five of the 52 years since 1960. The Canadian government has run a budget surplus in only 10 of the 46 years since 1966. As Hudson Institute scholar Christopher DeMuth asserts in a prescient paper, Debt and Democracy, Keynesian doctrine – surpluses in the good years, deficits in the bad – has morphed in the advanced democracies into perpetual stimulus. As a result, the exponential accumulation of debt means that the next generation, people still unborn, could theoretically be required to pay all of their lifetime incomes in taxes merely to make the interest payments on an enormous debt.

I heard Paul Krugman, the high priest of the stimulus cult, saying on NPR that he'd be all for paying down debt when the economy is moving again. I would like to see an example of Krugman calling for real deficit reductions during past recoveries. I don't believe a word of this. It is obvious from the above that this is not what really happens. The governments of the UK and Canada and the US didn't borrow in bad times and pay back in the good ones. They borrowed and spent even more when times were flush.

The real problem we face is one of profligate spending. Democracy means that we the people get what we want and sooner or later that means we get what we deserve. To see how difficult the problem is, consider this story by Paul Geitner writing in the New York Times:

BRUSSELS — For most Europeans, almost nothing is more prized than their four to six weeks of guaranteed annual vacation leave. But it was not clear just how sacrosanct that time off was until Thursday, when Europe's highest court ruled that workers who happened to get sick on vacation were legally entitled to take another vacation.

Did you get that? Employers in Europe are not only legally required to pay for four to six weeks of vacation, but for another four to six weeks if you get sick while on the beach in Italy. This has consequences.

With much of Europe mired in recession, governments struggling to reduce budget deficits and officials trying to combat high unemployment, the ruling is a reminder of just how hard it is to shake up long-established and legally protected labor practices that make it hard to put more people to work and revive sinking economies.

Allow me once again to be simple minded. There are two things you can do with wealth once you generate it. One is to invest it in generating future wealth. The other is to consume it. The latter is the whole point of having an economy. The former is necessary in order to sustain an economy. When you can't put some folks to work because other folks are taking a second vacation, that means you are eating your seed corn. That is really the root of our problem.

Comments

[larry kurtz]

My dad used to say, "we'll always need ditch diggers:" so, are looking for a job, Ken?

[A.I.]

From Wikipedia: "In September 2003, Krugman published a collection of his columns under the title, The Great Unraveling, about the Bush administration's economic and foreign policies and the US economy in the early 2000s. His columns argued that the large deficits during that time were generated by the Bush administration as a result of decreasing taxes on the rich, increasing public spending, and fighting the Iraq war. Krugman wrote that these policies were unsustainable in the long run and would eventually generate a major economic crisis. The book was a best-seller."

Don't be blaming Krugman for politician's inability to understand or practice even the most rudimentary economics. Keynes argued nations should practice austerity during good economic times. Bush did exactly the opposite and as Krugman foresaw the economy crashed.

[Eli Blake]

You are correct about the roots of the problem, though I would suggest that Stimulus can work (unlike very likely yourself, I believe it worked three years ago when we were losing more than two thirds of a million jobs per month and looked to be headed into a second Great Depression.)

Many economists instead have argued that the Stimulus wasn't big enough to do more than prevent a full blown depression (sort of like giving a sick patient enough medicine to prevent death, but then cutting the dose back so that the patient remains sick, just not on the verge of death.) Proof of that is the fact that we've actually lost 600,000 public sector jobs at the federal, statee and local levels since President Obama took office. This is hardly 'stimulus.' It is instead the kind of shrinking government that advocates of austerity push for. Throw in the fact that overall tax rates are the lowest they've been since the 1950's and it's pretty clear that we are borrowing mostly to replace money that we aren't taking in, not to spend it.

[teapartydoc]

In reply to A.I.--The crisis had nothing to do with the tax cuts or deficits, but a banking crisis brought about by government policy on housing loans.
In reply to Eli Blake--By definition any deficit spending during a recession is a Keynesian stimulus. Governments the world over have spent more than they have taken in during down-turns, and none of these have been shown to improve business conditions. With the dearth of empirical support out there for Keynesian stimulus, I think it is safe to say that any instance of improvement one can point to as a successful stimulus is nothing more than a post-hoc ergo propter-hoc argument: causation can't be proved.

[TexasDude]

It was predicted that without the stimulus, the economy would be out of recession in the middle of 2009.

By the summer of 2009, most of the stimulus had not been spent. I don't think even half of it was. Yet, the official end of the recession was as predicted.

The stimulus had marginal, if any, impact on the recession. It was used for pet Democrat projects that would have been better spend just giving the workers the money directly. Most of the stimulus money did not go to "shovel ready" jobs, it went to prop up state governments, of which the majority were states that did not the propping up as much as others and were more Democrat than Republican.

In other words, the stimulus was a very successful Democrat slush-fund.

[greybeard]

"Many economists instead have argued that the Stimulus wasn't big enough to do more than prevent a full blown depression..."

Except that the "stimulus" ended up being deliberately steered away from the types of public-works and physical-infrastructure investments that this country has needed to emphasize for at least the last thirty years. Don't forget that the Democrats controlled both houses of Congress for the first two years of Obama's presidency. They succeeded in turning the stimulus from an actual investment in our economic future into a combination grab-bag for Democratic client/victim groups and slush fund for the public-sector unions. Don't believe me? Here's Robert Reich telling Congress to steer the stimulus away from "white male construction workers" and instead funnel it to groups most likely to reward the Democratic Party with votes and political contributions:

http://www.youtube.com/watch?v=duQDVTczGbA

Imagine what might have been if Obama & Co. had refused to listen to the army of pressure groups whining about the "macho stimulus plan." If, say $600B or so of the stimulus had been directed toward construction and repair of roads, bridges, public buildings, the power grid and the like, by now projects all over the country would have passed their design and EIS phases and actual work would be in full swing - most of it at good union wages. These projects would have created an employment multiplier, from the architects and materials suppliers down to the guy who owns the taco truck across from the construction site. The unemployment rate would probably have crested and started gradually but unmistakably downward - because of real employment gains, not statistical hocus-pocus. The Federal deficit would still be far too high, but with more people working and paying taxes, it too would be leveling off with a downward path in clear sight. All these developments would have enabled Obama to legitimately say that his policies have turned the corner on the Great Recession, and he'd be a prohibitive favorite for reelection.

[John]

During fiscal year 2010, the IRS collected $2.3 trillion in revenue
State government collected $1.6 trillion.
GDP was $14.5 trillion

per capita tax rate 27%, just on that, just to fund government. How much should the taxes be raised?

"Krugman wrote that these policies were unsustainable in the long run and would eventually generate a major economic crisis."

Strange that none of the things Krugman listed actually lead to the crisis.

[tom swift]

After the First World War, major governments rushed to cut their expenses and begin paying off their loans. The haste to do this might strike us today as unseemly. It led to serious complications in some areas, such as the Middle East, where Ottoman suzerainty was replaced by French and British, though definitely on the cheap. The pattern after the Second World Was was distinctly different. The mania for paying off national debts, which would leave countries in decent position to borrow again to meet the next crisis (such as another war), had gone out of fashion. Continual spending became the style almost everywhere. In some cases, such as England's, this seems to have been a deliberate adoption of basically socialist policies. But that doesn't explain why everyone else was also in such a rush to accumulate perpetual debt. Since the early 1950s, the US federal government has had only TWO YEARS in which federal revenues exceeded, even if only by miniscule amounts, federal spending. (Those years were 1956 and 1957 - just one reason why "I Like Ike".) In other words, the last time the US government had a genuine cash federal surplus was over half a century ago. Modern talk about "budget surpluses" is prattle. Budgets aren't real money - they're an account of what one admits to planning to spend vs. revenues one hopes will come in. Actual, as opposed to budget, spending has been disastrously excessive for many decades.

[Ameryx]

May I suggest that part of the problem is that there are (at least) two economies we should be considering? There is, of course, The Economy: GDP, investments, consumption, production, and so on. This is what we trend to think of when economic discussions take place. There is, however, another economy, which we might designate as the Political Economy. One may safety treat the two as congruent, until there emerges a professional political class.

At that point, the two economies diverge.

The citizenry continues to labor, produce, consume and save. The political class, meanwhile, strives for the acquisition and retention of power. In a democracy, or a democratic republic, power can be acquired by offering short term benefits to voters. Power may be retained for awhile by providing short term benefits to as many voters as possible, given the existing accumulation of capital from prior generations. As long as that patrimony has not been fully depleted, the politicians can avoid the fundamental problem addressed by The Economy, which is the requirement to make choices. Low taxes and high spending make for lots of contented voters.

Once the patrimony is squandered, the politicians can maintain the illusion that choices do not have to be made, by borrowing to fund the level of spending for which they dare not set a commensurate level of taxation. This involves squandering the resources of other nations. Once that source of fund dries up, through depletion either of the others' resources or patience, the politicians must begin to divide the nation against itself. Their decisions on taxing and spending are disconnected from any considerations of how The Economy is affected, our what is required for proper governance of the nation. All decisions are driven solely by consideration of the next election: will this action cause a net increase in votes for the incumbents? Will this action improve The Economy in time for the election, disregarding whether the improvements are temporary or permanent?

The end result, which is perfectly in accord with the Political Economy, is to make subjects of all citizens. Those being taxed must deal constantly with the politicians, bribing them to induce them to ease the burden of taxation. Those receiving benefits must genuflect, to protect themselves from a reduction or suspension of benefits.

The final stage is when the producing class has been sufficiently burdened that it collapses, leaving no source of funding for the benefits received by the rest of society. Even in this final stage, the Political Economy will continue to function as before, though the politicians will now have to resort to inciting class warfare among the subjects.

The progression from stage to stage is not inexorable. At most points, the voters can reassert themselves as citizens. Of course, this requires a population that has a moral core. One may, perhaps, find hope in the recent Greek elections, won by those advocating austerity; that is, by those telling the voters that choices must be made. One hours the Greek citizens will stay the course.

One hopes the citizens of other countries will learn from Greece, and take the necessary steps towards austerity sooner rather than later.

[Ken Blanchard]

Welcome to all the new visitors. I hope some of you stick around. A.I. needs help!

For the second time in the history of this history of this blog, I have enjoyed an "Instalanche". Glenn Reynolds' Instapundit, my second most valuable bookmark after RealClearPolitics, linked to this post. To give you an idea of the effect this has, I ordinarily get between four hundred and eight hundred page views per day. Not bad for a blog called South Dakota Politics.

Today I got four thousand, three hundred and ninety one page views. It won't last, of course, but I dare say that nothing I have ever published in more ordinary venues will ever get that big a notice. My profound gratitude to Mr. Reynolds. I enthusiastically recommend his site. Now he can wait for the blanchalanche.

[Ken Blanchard]

A.I.: in other words, when Bush was president deficit spending was bad. When Obama is president, we're not running nearly a large enough deficit. Thanks for clearing up Krugman's thought.

[Alain Jean-Mairet]

Here in Switzerland we have been able to modify the constitution (popular vote in 2001, effective since 2003) in order to forbid and prevent excessive public debts. And we are doing well, even right now (around 3pc unemployment), in the middle of Europe. And that is saying something.

But the most interesting point is that the project has been massively accepted (some 85% said yes, eighty-five percent) by... the Swiss People.

In the US, you have had several similar proposals in the House (1982, 1990, 1992, 1994, 1995, last one: Balanced Budget Constitutional Amendment) and all failed to obtain the necessary majority of two-third. So I think you should involve the people at large, not just politicians. It may sound like a long shot, but if the Republican candidate made it a Nr.1 priority right now...

[Lorenz Gude]

Excellent article, excellent comment thread on at least this post (I haven't read any more yet.) I think about these economic issues a lot and this article certainly helped clarify my understanding. Thanks.

[Lorenz Gude]

OK I have to ask, what is the origin of that truly wondrous picture at the top of the post?

[TexasDude]

National Lampoon's Vacation movie poster spoofing Conan Barbarian movie.

[Ritchie The Riveter]

"His columns argued that the large deficits during that time were generated by the Bush administration as a result of decreasing taxes on the rich ..."

Which led to increased government revenues, not the decrease Krugman implies.

"... increasing public spending ..."

Spending like Medicare Part D and more for education ... in line with Progressive social policies that Krugman would support if they came from a Democrat. Incidentally, Medicare Part D has a history of operating under-budget ... unlike most government programs.

" ... and fighting the Iraq war ..."

To avoid seeing Iraq turned into a highly-enriched Afghanistan 2.0 when it came to the support of terrorism ... so that it would not create more $1T hits on our economy the way 9/11 did. Krugman calls that excessive spending ... I call it prudent insurance, in line with the legitimate mission of the Federal government, as opposed to the socio-economic tinkering that Krugman et. al. want it to keep doing.

"Krugman wrote that these policies were unsustainable in the long run and would eventually generate a major economic crisis."

And yet he supports many other similar programs, in perpetuity.

Methinks Krugman's definition of "paying back when times are good" is: continue the spending from the bad times; just tax the rich guys more. And the numbers just don't add up in that paradigm.

AI, you are defending the indefensible.

[A.I.]

That is exactly correct KB: "...when Bush was president deficit spending was bad. When Obama is president, we're not running nearly a large enough deficit."

Sometimes your thought processes remind me of the ditz that sits between the two dopes on Fox & Friends as she registers incredulity at relatively simple concepts. For most of the time Bush was president, the economy was reasonably good. There was no need for deficit spending as business and consumer spending were adequate to drive the economy, unemployment was low meaning modest safety-net expenditures and the federal government could have has and most state governments did have enough revenue to balance their budgets. Then came the crash. Business and consumer spending tanked. That meant more federal (consumer-of-last-resort)spending was needed to maintain the economy until the other sectors recovered and since revenues were lower in the stalled economy, that meant bigger deficits.

The consumer and business sectors remain sluggish. Because of that, revenues remain relatively low while safety net spending remains high. Krugman advocates greater federal outlays--and deficits--in the short run to boost the overall economy by stimulating activity in the other two sectors. In the longer term, that will increase revenues and reduce social program spending and thus reduce deficits.

I'm not saying or even trying to imply you or what's-her-name on Fox & F's are stupid; if memory serves, she too has a PHD. What is frustrating in your case is your insistence on taking Krugman's relatively simple economic concept and twisting it into something ludicrous--I can only assume for political ends. Or perhaps you really do buy into the notion that household budgets and federal budgets are alike.

[TexasDude]

Really, we had no or little deficit spending during George W. Bush's term? Didn't Obama criticize Bush for spending way too much?

The stimulus didn't work. It helped fund state governments and fund failed Democrat pet projects like Solyndra.

Japan is the perfect example of what we might be in store for if this continues. Japan has crony capitalism coupled with extremely high deficit spending (well over 200% of GDP). What has it gotten them?

'nuff said.

[etororeviewed.com]

How much is 1 pip worth in forex trading?

[Neil Ferguson]

I don't argue the point of your article, but with greatest respect I must say your first paragraph is financial gibberish. I recommend you take a short course in accounting so you can sort out the distinctions between assets and liabilities, income and expenses. You don't want to offer metaphors that undermine your own theses, true?

[A.I.]

You should check your facts Texas Dude. If there was "no or little deficit spending" during W's term, how did the national debt go from a bit (these bits are billions) under $6 trillion when he entered office to about $10.6 trillion at the end of his term? Here' a link to compare recent presidents: http://www.skymachines.com/US-National-Debt-Per-Capita-Percent-of-GDP-and-by-Presidental-Term.htm

[LDG]

In response to Eli: You obviously are an Obama Kool-Aid drinker, so I had to go back and re-read Glenn Beck's book "Arguing with Idiots" prior to responding to your posting. Number one: The unemployment rate in January 2009 was 7.2%. The unemployment rate today is 11% - I know, I know, the Obama regime reports 8+; however, Obama's reporting is not reflecting the huge loss of workforce participation rate since he took office. The latter skews the unemployment rate to look much better than it really is. In a nutshell, if the workforce population participation rate were the same today as it currently is under the Community Organizer, the unemployment rate would be 11%. If you factor in the people who have given up looking for work and those who are grossly underemployed, the unemployment rate is close to 20% - that figure comes directly from the U.S. Bureau of Labor Statistics. You seem to have forgotten the campaign promise that Obama made where he said the unemployment rate would never get above 8%. It has been above 8% for 40 straight months. Oops! And he hasn't passed a budget for over 1,000 days! It is by law that a budget be passed. Obama should be tried for being an "accessory to murder" in the deaths of the ATF agent and over 150 Mexicans in the botched "Fast and Furious" scheme to discredit gun store operators -it was to further the cause of gun control. At least no one died in Watergate. Obama also committed yet another impeachable offense - that of bypassing Congress in the illegal immigrant amnesty. He also violated the law when he made appointments when Congress was still in session. He sent troops into Egypt without Congressional approval. If the Constitution were upheld, Obama would be impeached. The stimulus was completely and totally a waste of taxpayer (and China's) money. Your Mombasan has the distinction via his maniacal and unproductive spending of $5 Trillion - more than all Presidents before him - of being the first President to have a downgrade in the U.S. credit rating. He has effected the debt to be greater than our GNP. He has doubled the number of people on Food Stamps (SNAP) since he took office. One in six Americans depend upon the Fed Govt for their very food. If they weren't on Food Stamps they wouldn't be able to afford food prices anyway. We are witnessing rampant inflation of food, energy, and clothing. Cotton prices are up by over 200%. Obama has grown Government (unproductive to the economy) by monumental proportions - for example, under Bush the Dept of Transportation had one employee making over $150,000 per year, currently under Obama the Dept has 1,500 people earning over $150,000. Obama's "Cash for Clunkers" was an embarrassing costly flop (discussion avoided by Dems). He now has the distinction of borrowing 43 cents of every dollar he wastefully spends. To fiscally responsible people it is clear that he is doing the polar opposite of what he should be doing. Everything he does is detrimental to corporate hiring - from his Obamacare to his job-killing regulations imposed by his Czars - most notably, his self-proclaimed communist, Cass Sunstein. The hypocrisy of the left regarding gas prices was most evidenced by the youtube video which totally exposes Obama, Hillary, etc. for the hypocrites they are - google "gas price hypocrisy" and be prepared for jaw-dropping hypocrisy. The President claims he has no "silver bullet" to bring down gas prices; however, when gas prices spiked under Bush in 2006 - to less than they are now - the Dems went crazy yelling "failed energy policy" - Bush got out his "silver bullet" which was ramping up domestic drilling and the price dropped to $1.87 which is where it was when Mr. Ineptitude took over. Maybe George could lend his silver bullet to Barack Hussein. Obama has waged a war on coal which will put our energy grid at severe risk - he has closed over 30 coal-fired power plants. He refuses to issue new oil drilling permits or renew existing permits. We are dependent upon Islamic oil. Obama has appointed two devout Muslims to - of all places - the Dept of Homeland Security. Talk about the fox guarding the henhouse! We now have two Muslim Congressmen and Obama has opened the floodgates for Muslim infiltration into this country. Obama's education was paid for by a Saudi Muslim. Obama cancels Christian Christmas ceremonies in the White House, but allows hundreds of Muslims to pray on the White House grounds. Obama gives $1.5 Billion of our taxpayer money to The Muslim Brotherhood. This is tantamount to treason - aiding and abetting the enemy. All of the latter leads us to the question: What is Obama's true faith. On his childhood school papers his religion was listed as "Islam." Muslims consider him a Muslim by birthright and the fact that they do not allow any Muslim to convert from Islam - however, it is permissible for a Muslim to lie to infidels about his religion - or anything - if it furthers the cause of jihad. Obama's agenda is in keeping with the Cloward-Piven strategy developed at Columbia University which he attended. google "Cloward-Piven Obama and the new world order" Obama has made a happy man out of Jimmy Carter - Carter is no longer the worst President in the Nation's history.

"Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy, its inherent virtue is the equal sharing of misery.." - Winston Churchill

[TexasDude]

A.I wrote ...

"You should check your facts Texas Dude."

earlier ....

"For most of the time Bush was president, the economy was reasonably good. There was no need for deficit spending as business and consumer spending were adequate to drive the economy, unemployment was low meaning modest safety-net expenditures and the federal government could have has and most state governments did have enough revenue to balance their budgets. "

My question was in response to the above quote.

At first A.I. used Krugman to bash Bush for massively overspending. However, to justify Obama's spending, he also states there was no need for Bush to spend and intimates that there was no deficit spending under Bush. He then, flip-flops and puts the Bush deficit spending at approximately $10 trillion.

What's is even more ironic is that A.I. justifies Bush's deficit spending by noting the economic situation at the end of Bush's 2nd term.

So, it appears, depending on what he is trying to defend ...

Bush is a big spender ...

Obama is a big spender because Bush didn't have to be one ...

Yet ...

Bush is big spender because of the economic crisis.

What is even worse, though, is that A.I. is attempting use 8 years of Bush versus about a little over 3 years now of Obama.

What is the debt today? About $15 trillion. So, in less than 4 years, Obama has put more than Bush did in 8 years! By the way, the years did the worse in adding debt was during the economic crisis and Democrat controlled Congress ... just sayin'.

[TexasDude]

Oh, by the way, A.I., your own skymachines link jumps Obama's debt in the 1st year of Obama's term by $2 trillion alone!

Also, please note that the same website shows that at the end of Bush's term, debt/gdp is at 74%. At the end of last year, under Obama it is almost 100% (99.7%)!!!!!!!!!!!!

[TexasDude]

Lastly, A.I., using your shymachines link, what caused this massive amount of debt/gdp under Obama?

It clearly shows spending! GDP is almost static from the end of 2009 to the end of 2011. It doesn't even go up one full trillion while debt goes up almost $5 trillion!

And ... drum roll please ...

ALL THIS HAPPENED UNDER OBAMA!!!!!