Government budgets versus family budgets

[NW-Bound]

I think the existence of the debt ceiling at all is idiotic. Remember, Congress is the branch of government that makes spending decisions. So if they don't raise the debt ceiling, they are essentially sending the Executive branch two conflicting sets of instructions.

1. Spend all of this money that we told you to spend
2. Don't borrow money to do it.

Also do not forget that the US President has veto power, and can reject a budget approved by Congress if he does not like it. And the balance of power in Congress is such that it never has the majority to overcome that veto, no matter which party is in control.

 

[Hamlet]

I'm waiting for the Executive to explain that SS checks will be going out only to people living in zip codes with Congressmen that voted to raise the debt ceiling. If your Congressmen voted no, the checks stop.

I suspect that that would get us past the debt ceiling issue pretty quickly.

Who get's to decide Again, according to the interviews that I have seen, it is the Executive branch.... so they can say that SS checks will not go out, or that we will not pay our soldiers..... or whatever else they decide to pay...

 

[MichaelB]

I'm waiting for the Executive to explain that SS checks will be going out only to people living in zip codes with Congressmen that voted to raise the debt ceiling. If your Congressmen voted no, the checks stop.

I suspect that that would get us past the debt ceiling issue pretty quickly.

Getting into detail would probably have the same effect on this thread.

 

[Independent]

The common phrase in economic journalism "kick start the economy" might suggest that Keynes at least had a motorcycle.

Ha

 

[samclem]

With a balanced budget required, normal recessions would almost surely become depressions.

Imagine having a recession, and suddenly having to cut $500 billion from the budget. That's going to turn a run-of-the-mill downturn into a disaster.

If any reduction in government spending threatens to spin us into a depression, then maybe we should decrease the risk by not putting so many eggs in that basket.
Let's remember that government spending does not directly increase US GDP by a single cent. From a productivity perspective, it is all overhead--a drag on growth. Every dime of government spending comes out of the productive economy. Avoiding depressions is a poor excuse for relegating ourselves to continued high govt spending and the miniscule annual growth rates that will result. There are certainly government expenditures that are necessary (defense, public infrastructure, courts and law enforcement, etc), but we're >>way<< beyond that today.

Are there any important trends shown here that might be germane to our present discussion and the ability of our private sector to create wealth? Does the term "tooth-to-tail ratio" come to mind?*

* (Disregard the flattening out in the "future years" below--that's a fiction we all know ain't gonna happen. No doc fix for Medicare? C'mon).

 

[Independent]

I'll be curious what you think of that book. I recently read another by Krugman (well, skimmed it after ~ 1/3 of the way through), and my impression of Krugman was:

I am an award winning economist.
I have certain 'beliefs'.
When I talk economics, I make connections to my 'beliefs', and infer cause/effect.
I expect you to accept my inference of cause/effect w/o any attempt at proof, because I am an award winning economist.
​

At least that was my take on it, curious what others may think.

-ERD50

Krugman writes a daily blog at Economics and Politics by Paul Krugman - The Conscience of a Liberal - NYTimes.com

He's easy to read, I'd suggest it. Krugman, of course, says that his "beliefs" are grounded in facts.

He will point out that his economic model (one that many of us saw in college) predicted that the Fed could increase the money supply dramatically in a crisis without setting off either hyper-inflation or dramatic increases in interest rates. He claims this wasn't a guess or religious belief, but simply the application of a model that roughly reflects real economies. He will claim (often) that the facts verified his model.

He's well aware that there are award winning economists on the other side. Sometimes his tone is too partisan for my taste. He's both an academic economist and a cheerleader for one half of the political spectrum. I find one role more interesting than the other.

I'd like to find someone who takes the other side in these debates and writes as well and as frequently as Krugman, but I haven't so far.

 

[RISP]

With my very limited knowledge of economics, It seems to me that the main difference between the government and family budgets is that I know of no family that can (legally) print its own money and have it accepted by everyone else...

This is really all you need to know. The only difference is that the government can borrow money, and then (partly) default on the loan by either declaring bankruptcy, going the Zimbabwe route, or by quietly inflating the debt away. All three options essentially mean stealing from the creditors (people who save money, either directly by purchasing government debt, or indirectly through pension funds etc).

I, like many people, thought that the Fed printing massive amounts of money would trigger lots of inflation. The thing is, it didn't.

Not in consumer goods, that's true, because wages are not increasing at the moment. All this money is just hoarded, and looking for profitable investments. Or where did you think the great stock market returns we saw recently are coming from? This is an inflation in material assets. In my German hometown, real estate prices went up 11% last year because investors are losing trust in the Euro and flock into anything considered "safe".

 

[eytonxav]

Krugman writes a daily blog at Economics and Politics by Paul Krugman - The Conscience of a Liberal - NYTimes.com

He's easy to read, I'd suggest it. Krugman, of course, says that his "beliefs" are grounded in facts.

He will point out that his economic model (one that many of us saw in college) predicted that the Fed could increase the money supply dramatically in a crisis without setting off either hyper-inflation or dramatic increases in interest rates. He claims this wasn't a guess or religious belief, but simply the application of a model that roughly reflects real economies. He will claim (often) that the facts verified his model.

He's well aware that there are award winning economists on the other side. Sometimes his tone is too partisan for my taste. He's both an academic economist and a cheerleader for one half of the political spectrum. I find one role more interesting than the other.

I'd like to find someone who takes the other side in these debates and writes as well and as frequently as Krugman, but I haven't so far.

While he may not have quite the notoriety of Krugman, I have always enjoyed listening to Ken Rogoff Kenneth Rogoff - Harvard Economics Professor Author Website . At least to my ears, he doesn't come across as politically biased as Krugman, but heck I am probably biased.

 

[RISP]

So if they don't raise the debt ceiling, they are essentially sending the Executive branch two conflicting sets of instructions.

1. Spend all of this money that we told you to spend
2. Don't borrow money to do it.

If they don't raise the debt ceiling, they force the Executive branch into breaking one of those instructions, since they are in contradiction to each other.

You are completely ignoring another option: Raising revenues (i.e., taxes). But of course, they also don't want that.

 

[Hamlet]

I'm not saying that any reduction in government spending is bad. I'm saying that large reductions during a recession are bad.

If you want to decrease the size of government relative to GDP, you need to do it during good times. The 1996-2000 years are a good example.

Ultimately, though, the biggest impediment to reducing the size of government is that the large things that the government spends money on are wildly popular, and that the public, while interested in smaller government in the abstract, is never on board when the details are put in place.

Even in good times, in order to shrink the size of government meaningfully, you are going to have to convince most Americans that we should spend less on SS, Medicare, Medicaid, and national defense. When politicians are honest about that fact, they tend to lose elections.

FYI, I disagree with your premise that government spending is always a greater drag on growth than private spending. Would you recommend replacing schools with greater production of Axe body spray? The private sector is not exactly a beacon of efficency and the wise allocation of capital.

If any reduction in government spending threatens to spin us into a depression, then maybe we should decrease the risk by not putting so many eggs in that basket.
Let's remember that government spending does not directly increase US GDP by a single cent. From a productivity perspective, it is all overhead--a drag on growth. Every dime of government spending comes out of the productive economy. Avoiding depressions is a poor excuse for relegating ourselves to continued high govt spending and the miniscule annual growth rates that will result. There are certainly government expenditures that are necessary (defense, public infrastructure, courts and law enforcement, etc), but we're >>way<< beyond that today.

Are there any important trends shown here that might be germane to our present discussion and the ability of our private sector to create wealth? Does the term "tooth-to-tail ratio" come to mind?*

* (Disregard the flattening out in the "future years" below--that's a fiction we all know ain't gonna happen. No doc fix for Medicare? C'mon).

 

[Hamlet]

The Executive branch can't raise revenues. Congress has to do that.

You are completely ignoring another option: Raising revenues (i.e., taxes). But of course, they also don't want that.

 

[MichaelB]

I'd like to find someone who takes the other side in these debates and writes as well and as frequently as Krugman, but I haven't so far.

Agree it’s hard to read PK because of his partisanship. I enjoy Bruce Bartlett and David Frum and think they do a good job of representing other views. Although neither is an economist, Bartlett has economic policy experience Naill Ferguson has written some good stuff but is also committed to one view. In these debates two things really irritate me; they all look for disagreement and not where they share common views, and they move back and forth between general policy commentary and policy specific to recession and recovery, and I think these two areas are not the same.

ETA IMHO Rogoff and Reinhart, already linked by Lsbcal and DFW_M5 have done the best job explaining what has happened and what we can expect regarding our economy and the EU as well.

 

[samclem]

Ultimately, though, the biggest impediment to reducing the size of government is that the large things that the government spends money on are wildly popular, and that the public, while interested in smaller government in the abstract, is never on board when the details are put in place.

This is true. But why? Because the people want services but don't want to pay for them. And they don't have to pay for them if 1) they can get someone in the future to pay for them (borrowing) or 2) get some other American to pay for them now (ref our present tax system for how that works). That's why people vote as they do, why their representatives vote as they do, and why we are in the present mess. The problem would fix itself if we reformed the system. No one should be surprised by government overspending, voters are simply responding to the present incentives provided in our system. If we want to know if a person really values a thing, just see if he'll pay for it. With his own money.

FYI, I disagree with your premise that government spending is always a greater drag on growth than private spending. Would you recommend replacing schools with greater production of Axe body spray? The private sector is not exactly a beacon of efficency and the wise allocation of capital.

Says you. With every expenditure in the free marketplace we are assured of one thing: Both the seller and the buyer thought they were getting a good deal. The buyer believed that Axe body spray was the best use of that $6 in his hand. We've got no such direct assurances for government expenditures--way too many layers and cutouts between the person providing the resources and those spending them.

It amuses me when people decry the amount of money spent to influence elections, but simultaneously argue that a greater share of our wealth should be doled out by politicians. The special interests (on all sides) pour big money into influencing politicians because they get a good return on their investment. If we want less "big money" in our elections then lower the stakes of the game (maybe to the historic levels--see previous chart).

 

[donheff]

This is true. But why? Because the people want services but don't want to pay for them. And they don't have to pay for them if 1) they can get someone in the future to pay for them (borrowing) or 2) get some other American to pay for them now (ref our present tax system for how that works).

I think this is true in a situation like today's in which entitlements are high relative to revenues and people are hurting. No one wants to lose the benefits but they also don't want their their taxes to go up to pay for them. On the other hand, I don't remember much in the way of taxpayer revolt about the tax situation in 2000 and 2001. The long term revenue vs outlay picture was in fair shape then (albeit, still needing work). There was no public clamor for Congress to cut taxes back then. But the proposal got aired by politicians, some looking to shrink the Federal government and others looking to curry electoral favor. Once the prospect for tax cuts was afoot, they became popular on both sides of the aisle. I don't blame an unwilling public for that, just the people we elected.

 

[Hamlet]

The problem with this thinking is that the seller often has access to much better information about the transaction than the buyer.

How does the purchase of Axe body spray benefit the 13-year-old boy who buys it because he's been subconsciously convinced by a barrage of advertising that women will flock to him because he wears it?

How much of our financial services industry actually benefits the customer, and how much of it is actually just a deception that feeds off of the customer's ignorance?

How much of our recent financial collapse was caused by the simple fact that free markets often fails when debt is involved, because lenders and borrowers are generally a lot less rational with borrowed money?

Free markets are a great thing, but it's also important to understand their limitations, and that they often break down in predictable ways because people are not the rational actors that the economic textbooks write about.

A transaction in which one party gains and the other loses is a fraud, and an awful lot of our modern economy is built around transactions where one side is getting a very short end of a stick.

Says you. With every expenditure in the free marketplace we are assured of one thing: Both the seller and the buyer thought they were getting a good deal. The buyer believed that Axe body spray was the best use of that $6 in his hand. We've got no such direct assurances for government expenditures--way too many layers and cutouts between the person providing the resources and those spending them.

 

[NW-Bound]

How does the purchase of Axe body spray benefit the 13-year-old boy who buys it because he's been subconsciously convinced by a barrage of advertising that women will flock to him because he wears it?

Yes, the free market is a funny place that I will never understand.

For example, even as an electronic engineer (but working in aerospace and not the consumer sector), I do not believe in expensive electronic toys.

The populace does not agree with me, however, and propels a prominent electronic company to a huge market cap. This company has a net profit margin of 27% because all its products are built overseas, and is regarded as a hero by the younger generation who likes "green stuff". Compare that to a big energy company with a net profit margin of 10%, and who gets vilified by the people who use products by both companies.

I dunno what's right or wrong, or whether we should let the "free market" decides, or intervene and dictate what should be done. It's tough.

 

[Hamlet]

I thnk its usually best to let the free market do its thing, but also that its worth putting in a few guard rails in the parts of the road where we have frequent crashes.

A free market in banking and financial products has been a constant source of disaster for the entire economy. We went 40 years without a serious financial crisis after we regulated the banking system after the Depression. We can't seem to go more than 5-10 years without one since we de-regulated it in the 1980s.

Yes, the free market is a funny place that I will never understand.

For example, even as an electronic engineer (but working in aerospace and not the consumer sector), I do not believe in expensive electronic toys.

The populace does not agree with me, however, and propels a prominent electronic company to a huge market cap. This company has a net profit margin of 27%, and is regarded as a hero by the younger generation who likes "green stuff". Compared that to a big energy company with a net profit margin of 10%, and who gets vilified by the people who use products by the first company, who builds them all overseas for better profits.

I dunno what's right or wrong, or either we should let the "free market" decides, or intervene and dictate what should be done. It's tough.

 

[samclem]

The problem with this thinking is that the seller often has access to much better information about the transaction than the buyer.

How does the purchase of Axe body spray benefit the 13-year-old boy who buys it because he's been subconsciously convinced by a barrage of advertising that women will flock to him because he wears it?

It's his money. I'm 100% in favor of letting him learn whether his investment paid off. Maybe it will! I'm sure there are folks who think everyone should wear only "sensible" shoes, unisex coveralls, and take buses rather than drive cars and that the rest of their income thereby freed up should be impounded for "higher uses" by folks much smarter than the idiotic common man, but I hope it doesn't come to that.

A transaction in which one party gains and the other loses is a fraud . . .

Not true at all. Disregarding the problems in objectively determining "gains" (that Axe might just pay off! Regardless, what's the value to Jr Hunk of his >perception< that he's now more attractive? Let's talk about purses and ladies shoes next), it's not fraud unless there is deliberate misrepresentation.

 

[Hamlet]

I'm not suggesting that we should prevent him from buying Axe body spray. I'm just saying that automatically assuming that private expenditures are always going to be more productive than public ones is not correct.

My job and millions of others depend on the invention of the internet, which was started by the government. The return on that money has been amazing. My water is provided by my city government. I went to public schools. I drive on public road. My grandmother gets SS and Medicare. My wife's nephews get Medicaid. The government is a mess, but it still provides a lot of value to the people of this country.

The the invention of CDO's and other derivatives has been disasterous to this country. Freely allowing pure gambling with borrowed money using massive leverage is bad, and does us serious harm as a country.

It's his money. I'm 100% in favor of letting him learn whether his investment paid off. Maybe it will! I'm sure there are folks who think everyone should wear only "sensible" shoes, unisex coveralls, and take buses rather than drive cars and that the rest of their income thereby freed up should be impounded for "higher uses" by folks much smarter than the idiotic common man, but I hope it doesn't come to that.
No true at all. Disregarding the problems in objectively determining "gains" (that Axe might just pay off! Regardless, what's the value to Jr Hunk of his >perception< that he's now more attractive. Let's talk about purses and ladies shoes next), it's not fraud unless there is deliberate misrepresentation.

 

[Texas Proud]

I think this is true in a situation like today's in which entitlements are high relative to revenues and people are hurting. No one wants to lose the benefits but they also don't want their their taxes to go up to pay for them. On the other hand, I don't remember much in the way of taxpayer revolt about the tax situation in 2000 and 2001. The long term revenue vs outlay picture was in fair shape then (albeit, still needing work). There was no public clamor for Congress to cut taxes back then. But the proposal got aired by politicians, some looking to shrink the Federal government and others looking to curry electoral favor. Once the prospect for tax cuts was afoot, they became popular on both sides of the aisle. I don't blame an unwilling public for that, just the people we elected.

The debt of the country was WAY different in 2000.... remember that when Clinton was leaving office they were worried that they would actually pay off ALL US debt if something did not change...

 

[Texas Proud]

/snip/

The the invention of CDO's and other derivatives has been disasterous to this country. Freely allowing pure gambling with borrowed money using massive leverage is bad, and does us serious harm as a country.

This is false... the invention of the CDO and derivatives is not the problem.... it is that people started to cheat with mortgages and other assets...

I was a trust officer for many CDOs in the late 90s.... all paid out what they were supposed to pay out... all had solid assets that produced the income they were expected to produce.... it was not the instrument that was the problem....


Also, there are many derivatives that help reduce risk for many companies and individuals... farming would not be what it is without the futures markets where a farmer will know what to expect he can sell his crop for before he plants... again, it is not the instrument that is the problem, but how some used it in the wrong way....

 

[M Paquette]

The debt of the country was WAY different in 2000.... remember that when Clinton was leaving office they were worried that they would actually pay off ALL US debt if something did not change...

Thank goodness that Congress and the Executive branch recognized that threat and acted swiftly to prevent it, eh?

I was a bit disappointed that we didn't go off the fiscal cliff. I would have traded a short, sharp 2 quarter recession for the budget becoming balanced around 2018, and the total debt moving below 60% of GDP around 2023. Ideally we could phase in the same 'shrinkage' over several years, avoiding a recession and hitting balance a few years later, but that would require the Distinguished Gentlemen to actually, you know, work together and cooperate. Given that the various Congresscritters are concerned about losing their jobs in a primary challenge in gerrymandered districts back home, or have sold their souls to special interests, or have so wrapped themselves in ideology that they can't even wiggle a bit, I fear that there are insufficient Distinguished Gentlemen who can cooperate to reach any sort of real solution.

Welcome to the Permanent Floating Crisis and Can-Kicking Competition.

 

[Hamlet]

I actually meant CDS, not CDO.

Do you think it made sense to allow AIG to essentially insure a trillion dollars of mortgages with no reserve requirements?

There are derivatives that have real economic value, but they are a tiny fraction of the market. Most of them are just pure gambling.

They need to be regulated, or there is no way to enforce insurance reserve requirements or bank leverage limits. Anytime one financial institution gets into trouble, all of its trading partners are going to be in trouble.

If we don't get a handle on derivatives, we'll just have another disaster 5-10 years from now.

This is false... the invention of the CDO and derivatives is not the problem.... it is that people started to cheat with mortgages and other assets...

I was a trust officer for many CDOs in the late 90s.... all paid out what they were supposed to pay out... all had solid assets that produced the income they were expected to produce.... it was not the instrument that was the problem....


Also, there are many derivatives that help reduce risk for many companies and individuals... farming would not be what it is without the futures markets where a farmer will know what to expect he can sell his crop for before he plants... again, it is not the instrument that is the problem, but how some used it in the wrong way....

 

[Texas Proud]

I actually meant CDS, not CDO.

Do you think it made sense to allow AIG to essentially insure a trillion dollars of mortgages with no reserve requirements?

There are derivatives that have real economic value, but they are a tiny fraction of the market. Most of them are just pure gambling.

They need to be regulated, or there is no way to enforce insurance reserve requirements or bank leverage limits. Anytime one financial institution gets into trouble, all of its trading partners are going to be in trouble.

If we don't get a handle on derivatives, we'll just have another disaster 5-10 years from now.

To answer the question.... no, I do not think AIG should insure that much without reserves....

But, it was not the CDS that was the problem.... there are many CDS that work just great... work as intended and protects the people who buy them...

I have no problem in regulation on these instruments... with the potential for them to do a lot of harm if someone else decides to get outside prudent bounds... regulation might help....

But, be aware that these big banks were already heavily regulated... even AIG... it was a very small part of AIG that brought it down... without getting to far off this thread.... they should have let it go and protected the rest of AIG... just my opinion...

 

[samclem]

I was a bit disappointed that we didn't go off the fiscal cliff. I would have traded a short, sharp 2 quarter recession for the budget becoming balanced around 2018, and the total debt moving below 60% of GDP around 2023.

Agreed. Kinda ironic that the "punishment" Congress dreamed up to assure they'd deal with the issue--is actually preferable to what they did.
For a single solitary day we had in place a plan to tax ourselves $3.7 trillion more to pay for all the goodies we'd charged. Even those who >favor< more taxes (to say nothing of the others) couldn't stand this, so we agreed to cut that by $3.1 trillion. And sighs of relief now predominate.
Cutting the spending has to be the majority of the fix (ref previous chart--we've built in lots of new fat over the past 50 years).