Worried that the global financial crisis combined with the Great Recession in the United States has bankrupted not just ourselves but our kids and their kids?
Good. You should be worried. Maybe then we’ll do something about the problem before it’s too late.
First, here’s the good news for those of us who live in the United States. (If you live in some other den of fiscal iniquity, just remember that the names of the characters may be different but the story is pretty much the same.)
The Federal budget deficit for fiscal 2010 (including a proposed $100 billion for new spending to create jobs) will be a record $1.6 trillion. This new record will beat the old post-World War II record (set in the distant past of fiscal 2009) by $150 billion. The 2010 budget deficit is equal to 11% of U.S. GDP. (For reference the budget deficit that has pushed Green into crisis is equal to 12.7% of Greek GDP.)
How can this possibly be good news? Because the new budget proposed by the Obama administration for fiscal 2011 (that’s the fiscal year that starts in October 2010) says the annual deficit will shrink to 4% of GDP by fiscal 2014.
And now for the bad news.
Ain’t gonna happen. At least not if we follow the spending and taxing policies laid out in the Obama administration’s budget.
That budget assumes 2.7% GDP growth in fiscal 2010. That’s reasonable. It’s certain close to the consensus among economists for this year.
But looking out toward fiscal 2014 the budget quickly arrives in fantasy land. The budget projections assume GDP growth of 3.2% to 4.3% for six consecutive years.
And this at a time when most economists—even the optimists at the Federal Reserve—are worried that this recovery will be weaker than most recoveries after a recession and that the long-term speed limit for growth in the U.S. economy is headed lower. From 1975 to 1995 full trend economic growth in the United States was about 3%. The Fed now estimates the speed limit to growth at 2.5%. Other economists, including those at the Congressional Budget Office, think it’s even lower at 2.3% annually or so.
In other words the U.S. can’t grow itself out of this hole nearly as easily as the Obama administration wishes.
Slower growth after the recession is one thing arguing against an easy solution—but it’s by no means the only problem.
The interest rate the U.S. pays on its debt is rising—just when the amount of debt has soared.
Cutting the budget looks—how shall I put it—impossible because our government, especially our wonderful Senate, is locked in gridlock. I find it hard to imagine how the Senate will even pass any kind of budget this year.
And even in the best of all political worlds, cutting the budget is hard. Only 40% or so of the Federal budget is what’s called discretionary (and that 40% includes the military budget.) the rest consists of entitlements such as Social Security, Medicare, and Medicaid. These entitlements are the hardest part of the budget to cut—and the fastest growing.
And we don’t have a huge window in which to act.
In my January 8, 2009 post https://jubakpicks.com/2010/01/08/the-u-s-and-the-rest-of-the-developed-world-is-near-the-point-where-debt-takes-a-big-bite-out-of-growth/ I wrote about research that argues that when a country’s accumulated gross debt rises above 90% of GDP it starts to reduce a country’s economic growth rate by a median of 1 percentage point and an average of 4 percentage points. On current trend the United States will show a debt to GDP ratio above 100% by 2012.
A slower economic growth rate caused by high debt levels makes it even harder to grow your way out of the hole.
And then, of course, there’s the long-term demographic trend. The United States is an aging country. We’re not aging as quickly as most of the developed world such as Japan and France and we’re not even aging as fast as some part of the developing world such as China. (For more on how the world is aging see my post https://jubakpicks.com/2010/02/05/how-to-build-a-global-portfolio-what-countries-do-you-want-to-own/ ) but aging relatively slowly doesn’t help in this situation. A country that is aging in absolute terms is getting older and can look forward to a slower rate of economic growth.
If all this makes the situation sound depressingly grave, I’m afraid I’ve got even worse news. The traditional solution the world has developed for fixing this kind of debt problem when it’s the result of a few years of financial mismanagement doesn’t work very well when we’re looking at a deeper and chronic problem shared by many of the world’s countries.
You can see the traditional solution—I’ll call it the IMF (International Monetary Fund) solution since the formula is one that the IMF has applied to developing countries for decades—in the plan proposed by the Greek government to end its financial crisis. To get the annual deficit down from 12.7% of GDP to 3% by 2012, the government has proposed cutting wages for all public sector jobs, cutting public sector jobs, cutting wages in the private sector to restore the economy’s global competitiveness, and raising taxes and cutting entitlement payments.
Aside for the high level of pain in such a “solution,” it’s not clear to me that the IMF formula can work when applied across the entire global economy. The plan really boils down to cutting wages so that the economy can export its way out of debt (while at the same time reducing the growth rate of that debt by cutting spending.
The entire globe growing its way out of debt by cutting wages and export more runs into a major problem: Where are the buyers if wages are down across the world? (For more on whether the Chinese consumer can save the global economy see my post https://jubakpicks.com/2010/02/02/can-the-chinese-consumer-save-the-global-economy/ )
According to some number crunching from Barclay Capital the IMF formula wouldn’t have to be that painful in the United States. The U.S. is comparatively lightly taxed (Shh! Don’t tell anyone in Washington) compared to its peers. Taxes in the United States come to just 27% of GDP on average over the last 20 years. In 2008 the figure for other developed countries in the Organization for Economic Cooperation and Development was 41%.
All then U.S. would have to do to start down the path toward reducing its deficits and the debt to GDP burden would be to raise taxes to 35% of GDP, freeze Social Security payments at current levels, and cut spending on everything else across the board.
That might be less painful in the short run, but 1) it’s hard to see how that big a tax hike wouldn’t reduce economic growth—you’re talking about taking money out of the economy to pay down debt, remember—and 2) if cutting spending in the United States was that easy we wouldn’t be in the hole that we’re in.
The traditional solution isn’t the only way out. If we could find some way to increase productivity, then we’d get more economic growth and have to raise taxes and cut spending less.
It’s not out of the question. Productivity in the United States has fluctuated widely in recent decades. From 1979-1990 U.S. productivity grew by a slow 1.4% annually. From 2000-2008 productivity grew at a 2.5% annual rate. And from 1995-2000 productivity grew an annual 2.8% rate.
Unfortunately, even if we’re measuring productivity accurately—and it’s not clear that we are—it’s hard to come up with solutions that raise productivity in the short run. Improved education, better in-career retraining so that workers stay unemployed for less time, more access to life-long education and training, and credits that improve the quality of the tools and equipment that workers use all work in the long run, although the research differs on exactly how much they contribute to raising productivity and over what period of time.
There’s no reason not to try these long-run solutions. They might help in the short-run too and the problem is certainly big enough and long-lasting enough that help that arrives in 2020 is still likely to be desperately needed.
In the short-run, though, probably the biggest help would be credible fiscal leadership. International investors and the bond markets need to be convinced that the U.S. is serious about fixing this problem and that it has a credible plan for a solution.
A big part of the crisis in Greece results from the bond markets not believing in either the government’s plan or its ability to deliver it.
The U.S. could easily wind up in crisis over the same lack of credibility.
I’m not hopeful that enough politicians in Washington will put aside their short-term goals for the 2010 elections long enough to come up with a budget plan. After all the Senate couldn’t even pass a proposal to set up a commission to recommend cuts that couldn’t take effect until fiscal 2012.
So I’ve started scouting around for a T-shirt I can give to my kids. It would read “My parents bankrupted the global economy and all I got was this lousy T-shirt.”
It’s not as good as a secure financial future, but, hey, it may be the best my generation can deliver.
Well at least we’re all on the same page as to how to fix our “problem”!
Southof8 , thanks for the back up a few weeks ago on the “racist” post.
XY,
I’ve lost you. Are you talking about a cabinet nominee, or are you talking about ‘all’ the do-gooders? I think you just painted us all with a broad brush by saying what we all are, based on this one rich guy. Was Bernie Madoff a ‘do gooder’ or on of you guys? Because you’ll have to add a couple of more zeros to the bill that he owes.
My objective wasn’t to lecture you, I’m not even speaking, you are in no way obligated to read my post. I was trying to point out ways that we could improve our economy and country, and make money. You did the same in your original post. In your rebuttles you didn’t lay out one thing that could do anything to fix anything. You called me a bad guy, and said I wanted to keep more money for myself, yet I said I was for raising taxes, including my own. I feel like this is what the right wings ideas have boiled down to, where are your ideas besides cut taxes and call the do-gooders bad names or socialists? Is that the reason that our country is headed down this path?
spcialcraig:
I just simply want to show the true color of those “do gooders”. You people have no trouble to lecture people of this country to pay more for the “greater good of a civil society”, but you can not stand a little rebuttle! Too bad, I have little more here:
The biggest problem with the “tax for the greater good” crowd is that they often do NOT pay “their part”. Their tax cheats only exposed in daylight when they wanted to be on the cabinet or something! Further examine their so-called tax “errors”, it’s hard any “error”. One former cabinet nominee who has never met a tax hike he doesn’t like left about $500K lobbying income and goodies unreported! The unpaid tax alone on that income was over $100K. That’s how you people operate! Tell the rest country to pay more for the “greater good of a civil society” while you keep more for your own good!
I have a couple of friends. Both of them are conservative, right wing type of views on everything.
Both of them for whatever reasons were ruined by theirl medical bills. Interstingly enough one of them changed his mind and realized that he would have rather had higher taxes and health/job/income safety. Another one has become even more conservastive and started to blaim liberals and similar for the system they created. Basically he is saying I would rather die than give up my freedom to choose a doctor, insurance coverage, or pay higher taxes to have peace of mind.
What I am trying to say is that for many people in America their economic and social views are a kind of religion they believe or want to believe in. They deny any arguments or logic, even their personal experience.
When I said many people I am afraid to say that they are a majority, a silent majority and they are not loud or outspoken but they vote. The silent majority rules!
IN terms of investing, I invest in real values- commmodities and growth- emerging markets with a time horizon of 3-5 years. I will revisit my views then
I know of one senator who has been arguing to reduce spending since his first induction: Judd Greg (R-NH). Can you guys help me with a list?
It is essential that we know who to vote for so why not add a few delegates names to your blogs and give us a chance to sshape the next elections landscape?
Sigli,
I’m not even sure what points you are against besides the WHO, maybe they are biased, I don’t know, do you have any other studies that show different? Other leaders may come to this country, but they have lots of money. Tell the uninsured people in this country that they have the best health care, because they get no health care, unless they go to the emergency room, and we the tax payers or insurance buyers foot the bill. Maybe that is why the WHO is biased, because they take into account the amount we spend on health care. It’s amazing other gov’ts can control costs better than a free market system.
XY,
Why are you going on the attack, I and others just laid out valid points. All you have to come back is to say that we are blood suckers and we are afraid to have people have FREEDOM to spend their own money. I don’t think any of us said that anywhere in any of our posts. Although the saying does sound familiar…….
Oh well…
Well said YX.
specialcraig:
The problem with you “do gooders” is that they are like blood sucking vamprie that never can get enough of sucking people’s hard earned money for your own gain. You acted like people in this country have not been paying enough!
“Do gooders” often live large at tax payers dime (like those we see these days) and leave their constituents in dust. 50+ years went by, it’s the same. “For the greater good” is simply a cover for you people to empower yourselves over the people. You are afraid of people having more of their money on hands. You are afraid of people having the freedom to spend their own money. That’s your true nature.
So back to investing…
Jim, in your “how the world is aging post” you said Brazil and India had young populations. (and Brazil met your other two criteria for long term investing).
Are they any other countries to consider that would meet those three criteria. Much has been said about Brazil lately, just looking to find a research target for future goals for myself and my kids.
Thanks for all you do, I really do appreciate it!
It’s one thing to quote silly tag lines like “Bush tax cuts for the rich” and completely biased WHO “research” (read propaganda) papers. It’s a completely different thing to demonstrate actual knowledge and the ability to form coherent, concise thought.
Passing thoughts:
Cutting government spending will lower inflation expectations, thus lowering long term interest rates (we currently have widest margin and yield curve ever), thus spurring a housing recovery. Government is hurting, not helping interest rates.
WHO studies automatically downgrade US health because IT IS NOT SOCIALIZED. That’s a bias, and biased studies are useless.
What do you think about individuals in a country with the highest standard of living who think the grass is greener elsewhere?
Anyone who quotes Bush tax cuts and tries to link them to the REAL ESTATE BUBBLE aftermath is an ideologue with zero credibility.
Class mobility is high. I love the US opportunity to achieve through my own hard work. That’s dignity.
The vast majority of “the rich” got rich because they gave to society, innovated, and RAISED EVERYONE’S STANDARD OF LIVING. How is this a bad thing again?
Jim answered the question of why everyone cannot inflate (devalue) currency. Read Barry Eichengreen and Peter Temin’s “The Gold Standard and the Great Depression” and you’ll see why this causes great depressions.
So, the growth based on tax cuts was just smoke and mirrors. It was a scheme to make rich richer.
It was not based harder on working double-shift. It was not based on newly discovered natural resources. It was not based on productivity.
It was based on debt. It was mortgaging our children’s future. Thank you Jim Jubak for bringing our children into the big picture.
—
“During Reagan’s tenure, income tax rates of the top personal tax bracket dropped from 70% to 28% in 7 years,[10] while social security and medicare taxes increased.[11][12] Real Gross Domestic Product (GDP) growth recovered strongly after the 1982 recession and produced five straight quarters of growth averaging 8.5%. The GDP grew during Reagan’s administration at an annual rate of 9.4% per year, the Real GDP (adjusted for inflation) increased 3.96% per year on average [13] higher than the post-World War II average of 3.6%.[14]
Unemployment peaked at 10.8% in 1982 then dropped during the rest of Reagan’s terms, averaging 7.5%, and inflation significantly decreased.[15][16] A net job increase of about 16 million also occurred (about the rate of population growth). Reagan’s administration is the only one not to have raised the minimum wage.[17]
The policies were derided by some as “Trickle-down economics,”[18] due to the significant cuts in the upper tax brackets. There was a massive increase in Cold War related defense spending that caused large budget deficits,[19] the U.S. trade deficit expansion,[19] and contributed to the Savings and Loan crisis,[20] In order to cover new federal budget deficits, the United States borrowed heavily both domestically and abroad, raising the national debt from $700 billion to $3 trillion,[21] and the United States moved from being the world’s largest international creditor to the world’s largest debtor nation.[22] Reagan described the new debt as the “greatest disappointment” of his presidency.[21]”
http://en.wikipedia.org/wiki/Reaganomics
Wow, well put gorbouno
Everything is a matter of degree and change over time.
If you increase or decrease taxes, spending, rate by a certain amount/percentage you have to compare it with the base amount and take into considerations other factors.
Taxes, growth and debt are all tied together. Don’t forget we live in a finite world and real money and resourses are limited. If you give to someone you have to take from somewhere particularly in a short run
About taxes
You say cut taxes. That means that you have to either cut social programs or increase debt. Assume nobody wants or can have more debt that mean to cut social spending.
The “best solution” would be to “reduce” the number of sick, old, unemployed, public schools, road, services etc. Are we ready to do this?
As Gebbels used to say “no people no problems”.
Another problem with cutting taxes is what to do next. Assume you cut it and you have an economic boost. Then cut them again, another boost, but you can not cut them to zero.
Another fact people like to refer to is Reagnomics and JFK tax cuts. This is stupid. During those times total American debt as a percentage of GDP was 120-150% vs 350% now and marginal tax rates were much much higher.
Actually the expotential increase started during the Reagan second term. The tax cuts did not trigger as much growth as intended whatever the way you argue about the net effect
Ask your self if you want to live tax free or worry free?
About growth
In order to companies to hire people they need to sell more. Everybody agrees with that
To sell more means Americans need to buy it or foreigners in the case of export.
The key is the there is no sufficient demand for almost any goods or services. Average majority just don’t have money to spend and can not borrow because of the high debt level.
It is that simple! We don’t need new businesses who can not sell their products. We have overcapacity in private sector. At most we need reallocation of capital not new capital in the private sector
How to fix it? To increase demand. How to increase demand?
Here Obama comes. First through public/taxpayers spending.
Don’t forget that most of the taxes are paid by the richest. Why? Because there are too many people who are are poor compared to the richest and the gap is huge and growing
Then, hold your breath, through redistribution/taxation.
Simple example. You have a factory and make shoes.
Let assume that a person needs three pairs. If 90% of people can afford only one pair and 10% can afford 1000 pairs you can sell only 90×1+10X3=120 pairs. But if you redistribute income through taxes, wages, etc. and now 90 people can buy 2 pairs your total sales will be 90×2+10×3=210. Wow, almost double.
That is simplistic but this explains why more balanced ( I don’t say equal) society is beneficial to overall growth.
Americans are bought on one stupid idea that everybody can be rich. But don’t forget that for one winner there are thousand of losers and the winner takes it all what others are supposed to do
It sounds to me that the best solutions for “radical thinkers” would be to balance demand and supply and unleash the free market forces again.
To balance means: to destroy 20-30% of industrial output: get rid of old, sick, unions and all others who can not work for a dime, eliminate all debts and declare war on everyone who does not agree with it.
The government role? Just police, army and judges. Let the new life begin. Welcome back to 18th century
PS I have naive questions for the free market proponents.
How these guys or banks can make such huge profit/bonuses? Where is competition that is supposed to drive the prices down they charge for their services? If this field is so lucrative why don’t we have more people getting in?
The second question is about losers. I understand that it should be both sides on any trade. It is a zero sum game. Who are losers.
If they all win by the market tide moving up why they deserve bonuses?
It is anticapitalistic and a kind of entitlement. I know many say I wish I were them. Is not this a root cause?
XY,
I don’t agree, I think part of being in a society, is to pay your part, in keeping it a society. Common interests need to be paid for. Social safety nets are needed, in case you lose a job, have a medical emergency, etc… Taxes are needed to pay for these things. I understand your thinking, that if taxes are cut it can increase economic growth, but because it can doesn’t mean that it will. Since the Bush tax cuts were passed, how much has the economy grown? Also, how low should we take tax cuts? At what point does it become detrimental to our society, that we can no longer fund common interests? Would you agree that if there were no taxes that would be a bad thing?
> Only those who want to control people’s life hate tax cut. Period.
Control people’s life?… Whose life is being controlled? The ones who flip burgers, attend tables, man assembly lines, type letters, sweep streets, die in plant explosions, mine implosions or the ones who decide who to lay off, how much to pay and those who take “risks” by being Too Big To Fail?…
Special Craig:
Here is the 101. ALL tax cuts regardless “purpose” increase economic activities, thus growth. Only those who want to control people’s life hate tax cut. Period.
bobisgreen,
We are #1 in medical care if you have unlimited money and resources. But for the rest of us, our quality of care as a population is not the top in the world. This is despite us spending 50% more per person than any other country.
Re: Medicare, it does have much too many issues but it at least spends 95% of its money on medical care while the private health insurer you or I might have spends 80% of the money it brings in, keeping the other 20% to pay CEO’s, people to deny necessary medical care, and other important jobs to our society, along with billions in profit that could provide health care.
this is a “guns” (Unjust War) or “butter” choice. By default most here want to keep the guns and strangle the poor and middle classes. It is not the only option.