ER skeptics were right on Debt Ceiling

[MichaelB]

Or, dare I say it, Healthcare.

Fun fact: We spend about 33% spending on healthcare (24% medicare+9% other) compared to 27% on SS.
https://www.crfb.org/blogs/81-perce...come-health-care-social-security-and-interest

PS: I miss-quoted the article. The percentages in this blog are for the "growth" in spending. The spending on health care is "only" 25% of total and SS spending is 21% of total.
https://www.cbpp.org/research/federal-budget/where-do-our-federal-tax-dollars-go

The total federal budget spent on healthcare is greater than the deficit. It would be fair to say the problem is not general spending, it’s the cost of healthcare. Virtually no one pays the whole cost of their own health care.

 

[MichaelB]

To stop overspending may not be realistic, but it is essential.

Spending $1.30 for every $1.00 you take in is not sustainable for any enterprise . But it was sufficient to cause the government to pat itself on the back for cutting the deficit to just $1.4T.

The problem is a reduction in gov’t spending will lead to an increase in unemployment, with a self-reinforcing spiral leading to a recession. The end result will be the same deficit but less economic activity. The US economy would not be better off.

The US economy needs structural reform. Reducing the trade deficit will have a much more positive impact, as would shifting the tax burden from labor to capital.

 

[Gumby]

Just because I don't feel like typing it all again, let me link this 12 year old thread where we discussed this exact point - reducing the trade deficit will reduce the budget deficit.

https://www.early-retirement.org/fo...ts-and-budget-deficits-55045.html#post1043968

 

[Koolau]

The problem is a reduction in gov’t spending will lead to an increase in unemployment, with a self-reinforcing spiral leading to a recession. The end result will be the same deficit but less economic activity. The US economy would not be better off.

The US economy needs structural reform. Reducing the trade deficit will have a much more positive impact, as would shifting the tax burden from labor to capital.

I'm not smart enough to know if you are correct about this, but it sounds right.

The problem is that the folks truly in charge of the economy don't know any more than I do. They're politicians. Even those with best motives (you know, a couple of them) don't have a clue how to fix things (and also stay in their elected positions.)

My guess: The economy will fix itself (with much travail) OR it will eventually collapse. Not too cheery, but I'm a glass half empty kind of guy so YMMV.

 

[Koolau]

Just because I don't feel like typing it all again, let me link this 12 year old thread where we discussed this exact point - reducing the trade deficit will reduce the budget deficit.

https://www.early-retirement.org/fo...ts-and-budget-deficits-55045.html#post1043968

Bottom line: How do you do that (reduce the trade deficit.) Consumers want cheap TVs and EV companies want battery materials. All of which come from trading "partners" that don't need anything from us but dollars.

Many other things are like that as well. I don't see anyone making the first move or standing up and saying "We're gonna reduce the trade deficit." and MEAN it.

Or am I just being a glass-half-empty guy again?

 

[OldShooter]

... The problem is that the folks truly in charge of the economy don't know any more than I do. ...

Exactly. It is far too complex and vulnerable to random events for anyone to ever figure it out. From my clip file:

The D-Day weather problem: ... a story possibly apocryphal but worthwhile anyway: One day well prior to D-day, the army Met (meteorological) office received a request from SHEAF for a weather forecast on a specific day a couple of months in the future. "Impossible," they said and this was relayed up the chain of command. Back down came the order: "A forecast is required for planning purposes."

"The only function of economic forecasting is to make astrology look respectable.” Often attributed to John Kenneth Galbraith but apparently actually from Ezra Solomon, a member of the Council of Economic Advisors during the Nixon administration.
​

For those who are interested in these things, Nate Sliver's book "The Signal and the Noise" has a great chapter on the consistent failures of economist's forecasts: "How to Drown in Three Feet of Water."

 

[MichaelB]

Exactly. It is far too complex and vulnerable to random events for anyone to ever figure it out. From my clip file:

The D-Day weather problem: ... a story possibly apocryphal but worthwhile anyway: One day well prior to D-day, the army Met (meteorological) office received a request from SHEAF for a weather forecast on a specific day a couple of months in the future. "Impossible," they said and this was relayed up the chain of command. Back down came the order: "A forecast is required for planning purposes."

"The only function of economic forecasting is to make astrology look respectable.” Often attributed to John Kenneth Galbraith but apparently actually from Ezra Solomon, a member of the Council of Economic Advisors during the Nixon administration.
​

For those who are interested in these things, Nate Sliver's book "The Signal and the Noise" has a great chapter on the consistent failures of economist's forecasts: "How to Drown in Three Feet of Water."

OldShooter, this is not about forecasts or predictions, randomness and Nate Silver’s book don’t apply. This is about economic policy, the issue is very well understood.

 

[Koolau]

OldShooter, this is not about forecasts or predictions, randomness and Nate Silver’s book don’t apply. This is about economic policy, the issue is very well understood.

Heh, heh, coulda fooled me.

 

[MichaelB]

I'm not smart enough to know if you are correct about this, but it sounds right.

The problem is that the folks truly in charge of the economy don't know any more than I do. They're politicians. Even those with best motives (you know, a couple of them) don't have a clue how to fix things (and also stay in their elected positions.)

My guess: The economy will fix itself (with much travail) OR it will eventually collapse. Not too cheery, but I'm a glass half empty kind of guy so YMMV.

Bottom line: How do you do that (reduce the trade deficit.) Consumers want cheap TVs and EV companies want battery materials. All of which come from trading "partners" that don't need anything from us but dollars.

Many other things are like that as well. I don't see anyone making the first move or standing up and saying "We're gonna reduce the trade deficit." and MEAN it.

Or am I just being a glass-half-empty guy again?

I think it’s a mistake to assume policymakers aren’t well informed or don’t understand. They’re smart and they do understand. This is a very difficult problem to address, and it’s not at all clear “we the people” are willing to do what is necessary to correct it. It’s also not an ideological or deeply partisan problem.

A handful of surplus countries, led by Japan, Germany, China, Netherlands, Taiwan, S Korea, Singapore, all actively suppress their own domestic consumption. This generates domestic savings for which they have no use, so those Central Banks take the surplus and invest it in US Treasuries. This impedes their currencies from appreciating, which would otherwise happen, and this perpetuates the trade imbalance.

If the US (and UK) were to not allow those surplus funds to be reinvested in US assets their currencies would appreciate, making their products more expensive and lowering the relative cost of labor in the US. This wouldn’t solve the US debt problem but it would reduce it substantially and create the framework needed for other policy measures.

 

[Koolau]

I think it’s a mistake to assume policymakers aren’t well informed or don’t understand. They’re smart and they do understand. This is a very difficult problem to address, and it’s not at all clear “we the people” are willing to do what is necessary to correct it. It’s also not an ideological or deeply partisan problem.

I think you're probably right that "We the people" have to be on board and be willing to suffer some economic effects because of "belt tightening" or whatever it's called. BUT I don't see a lot of economic acumen being "revealed" by policy makers. Maybe they actually do have it. Maybe they haven't been allowed to show it by "we the people." Still, because policy makers are usually more interested in getting reelected, it probably will not happen until it has to. Just like the debt ceiling deal. That could have happened 3 months ago. When it had to happen, they finally did it.

 

[OldShooter]

OldShooter, this is not about forecasts or predictions, randomness and Nate Silver’s book don’t apply. This is about economic policy, the issue is very well understood.

I think we must agree to differ on this. To propose a policy is to be forecasting both the economy prior to the effect of the policy and then the effect of the policy. So, not one but two forecasts. We have only to look at fed policy prior to the big inflation surprise to see that they didn't have a clue that policy action was needed or what the policy should be. And now we have the interest-rate-of-the-month as they grope for effects.

 

[MichaelB]

Two very good books on this topic are “The Great Rebalancing” by Michael Pettis and “Trade Wars are Class Wars” by Michael Pettis and Matthew Klein. Both are well know economists experts in global trade.

Brad Setser of the Council of Foreign Relations” has also written a number of papers on global capital flows. He is also an economist, expert in global capital flows and sovereign debt.

 

[Montecfo]

The problem is a reduction in gov’t spending will lead to an increase in unemployment, with a self-reinforcing spiral leading to a recession. The end result will be the same deficit but less economic activity. The US economy would not be better off.



The US economy needs structural reform. Reducing the trade deficit will have a much more positive impact, as would shifting the tax burden from labor to capital.

Recession is a natural and essential part of any economic system. And interestingly, when we did not have massive annual budget deficits (not that long ago) we also did not have massive unemployment. In fact we had an economy which grew faster than the one we have now. This is a rather well understood potential result of deficit spending.

Also, if you are correct that reducing government spending would result in recession, we should do so and get to work on structural problems which are causing a sluggish economy.

Alternatively, we can continue to overspend and trigger a much worse result: default, dollar devaluation, dramatic long-term reduction of standard of living.

Fixing the budget and enduring some pain seems the better choice in my view.

 

[Koolau]

Recession is a natural and essential part of any economic system. And interestingly, when we did not have massive annual budget deficits (not that long ago) we also did not have massive unemployment. In fact we had an economy which grew faster than the one we have now.

Also, if you are correct that reducing government spending would result in recession, we should do so and get to work on structural problems which are causing a sluggish economy.

Alternatively, we can continue to overspend and trigger a much worse result: default, dollar devaluation, dramatic long-term reduction of standard of living.

Fixing the budget and enduring some pain seems the better choice in my view.

Agree completely. Policy makers seem to just throw up their hands, pass bloated budget legislation and pray that any fall out of their actions will happen after they retire.

 

[pjigar]

I really like Warren Buffet's article on trade deficit (which is the major source of our debt). This article has appeared in various outlets. This one is from 2003: https://www.berkshirehathaway.com/letters/growing.pdf

PS: Article describes the problem and a proposed solution.

 

[pjigar]

Fixing the budget and enduring some pain seems the better choice in my view.

The thread mentioned earlier (https://www.early-retirement.org/fo...ts-and-budget-deficits-55045.html#post1043968) argues that the fiscal policies can't address the budget deficits. The trade balance can cure budget deficits. And that is why I posted the article in my previous post.

 

[MichaelB]

I really like Warren Buffet's article on trade deficit (which is the major source of our debt). This article has appeared in various outlets. This one is from 2003: https://www.berkshirehathaway.com/letters/growing.pdf

PS: Article describes the problem and a proposed solution.

That’s a very interesting article and proposal by Buffet. Thanks for the link.

 

[Koolau]

That’s a very interesting article and proposal by Buffet. Thanks for the link.

Yeah, kinda interesting, but what if other countries don't like the idea of taking ICs instead of dollars?

Either lowering demand for foreign goods and/or manufacturing our own stuff seems the only things that would be more or less guaranteed to w*rk. But YMMV.

 

[pjigar]

Yeah, kinda interesting, but what if other countries don't like the idea of taking ICs instead of dollars?

As I understand, we don't give ICs to other countries but rather to every US exporter: 1 IC for $1 exported goods/services. But the flip side is that the importers are also required to present/"pay" 1 IC for every $1 imported goods/services. (The actual import/export transactions of good/services still conducted in dollars). So the importers have to "buy" ICs from exporters presumably on some trading platform. The idea is to let the open market decide which import is "valuable" and how much. ICs are essentially tariffs but these tariffs are imposed by market players dynamically minute-to-minute: which product and how much?

Either lowering demand for foreign goods and/or manufacturing our own stuff seems the only things that would be more or less guaranteed to w*rk. But YMMV.

Moreover the demand for foreign goods will reduce gradually based on the consumer preferences (vote with your note) based on the IC market price. And conversely local manufacturing and service industries will increase in tandem.

ICs are very akin to carbon credits.

 

[Koolau]

As I understand, we don't give ICs to other countries but rather to every US exporter: 1 IC for $1 exported goods/services. But the flip side is that the importers are also required to present/"pay" 1 IC for every $1 imported goods/services. (The actual import/export transactions of good/services still conducted in dollars). So the importers have to "buy" ICs from exporters presumably on some trading platform. The idea is to let the open market decide which import is "valuable" and how much. ICs are essentially tariffs but these tariffs are imposed by market players dynamically minute-to-minute: which product and how much?



Moreover the demand for foreign goods will reduce gradually based on the consumer preferences (vote with your note) based on the IC market price. And conversely local manufacturing and service industries will increase in tandem.

ICs are very akin to carbon credits.

It's a truly interesting concept. I'm gonna have to study it more. Thanks for the explanations.

 

[MichaelB]

As I understand, we don't give ICs to other countries but rather to every US exporter: 1 IC for $1 exported goods/services. But the flip side is that the importers are also required to present/"pay" 1 IC for every $1 imported goods/services. (The actual import/export transactions of good/services still conducted in dollars). So the importers have to "buy" ICs from exporters presumably on some trading platform. The idea is to let the open market decide which import is "valuable" and how much. ICs are essentially tariffs but these tariffs are imposed by market players dynamically minute-to-minute: which product and how much?



Moreover the demand for foreign goods will reduce gradually based on the consumer preferences (vote with your note) based on the IC market price. And conversely local manufacturing and service industries will increase in tandem.

ICs are very akin to carbon credits.

Great explanation, especially the similarity to carbon credits.

 

[zippy2020]

Insects.

Hornets. Lanternflies.

Specifically, murder hornets!!!

Coming soon to a theatre near you....[LOL]

 

[Alan]

Thanks for the interesting discussion.