Summerstime

by Don Boudreaux on August 3, 2011

in Budget Issues, Current Affairs, Debt and Deficits, Social Security

Russ, James Pethokoukis, and I were each asked by Reuters to contribute short responses to Larry Summers’s reflection on the debt-ceiling resolution.

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{ 33 comments }

Greg Webb August 3, 2011 at 6:53 pm

I definitely would like to read the comments that Russ, James, and you submit to Reuters. It should be fun reading!

Don Boudreaux August 3, 2011 at 7:42 pm

Click on our names (or pronouns); you’ll be directed to our comments.

Greg Webb August 4, 2011 at 11:08 am

I really liked Russ’s use of World War II spending as evidence of the ineffectiveness of government spending to create wealth and prosperity for people. And, Secretary Morgenthau’s testimony before Congress in the late 1930s reveals that government officials responsible for implementing the government’s spending policies during the 1930s knew that it simply did not work and left the country with a huge debt.

I’ve listened to Russ so much on EconTalk that now I can hear his voice in my head when I am reading his writing.

Greg Webb August 4, 2011 at 11:51 am

James Pethokoukis also wrote a good response. I agree with him in saying that the administration should “come clean” about its views and “have an upfront debate . . . about where the country needs to go.” The administration won’t, however, because politicians don’t want to debate the issues or clearly express their views. They know that they would likely lose their next election if they did so.

And, I, too, suffer from economic anxiety because of the pigheaded and shortsighted views of the current administration. Is “economic anxiety” the same as the “confidence fairy’?

Greg Webb August 4, 2011 at 11:57 am

Don, you said, “I regret the raising of the debt-ceiling because I regret relieving Congress and the President of a serious obligation to actually make tough choices on how they spend what is, let us never forget, other people’s money.” Exactly right! All the politicians did was defer the day when they will have to go into rehab for their excessive spending habits.

Economic Freedom August 3, 2011 at 7:25 pm

[Sung to the tune of Gerswhin's "Summertime" from Porgy & Bess. You can imagine Paul Robeson singing, if you wish.]

Summerstime,
And the borrowin’s easy,
Debt is jumpin’
And the deficit’s high

Oh, we’ll tax them rich
Subsidies be good lookin’
So hush you Tea Party
Don’t you cry.

Methinks1776 August 3, 2011 at 8:02 pm

Nice!

Don Boudreaux August 3, 2011 at 8:08 pm

*Like*

rbd August 3, 2011 at 8:04 pm

One thing is quite evident: Russ needs to update his profile picture! He looks like he’s 37, or so.

Don Boudreaux August 3, 2011 at 8:10 pm

Serving on the GMU Econ faculty is rather like swimming in the Fountain of Youth….

gregworrel August 3, 2011 at 10:09 pm

I think Russ and I are the same age. (I just tried to confirm that, but Russ’s wikipedia entry is lacking.) I know that I feel younger than 37 and I like to think that I still look 37. Since Russ and I so often think alike, I can imagine that he feels the same. So what is the problem?

Methinks1776 August 3, 2011 at 8:17 pm

Very nice responses. Here’s Walter Williams on that “gnawing problem” of not taxing the rich enough that Larry boldly states as a big problem on which The One should not budge:

http://www.investors.com/NewsAndAnalysis/Article.aspx?id=568737&p=1

summed up: Not bloody likely.

Truth is, government has already raised taxes. In particular, it has raised the tax of regulation. Costs more to do business, so less business is done. On the bright side, more regs created more employment for regulators. How’s that working out then?

Don Boudreaux August 3, 2011 at 8:19 pm

Thanks.
Walter is great…. and, of course, spot-on correct, right, and wise here.

vikingvista August 4, 2011 at 12:14 am

I see the usual tripe in critical response–the people who got us into this mess are rich, therefore let’s tax the rich. Nice thing about leftists, in addition to their amusing if-then fallacies, their collectivist thinking permits them to throw out the grossly inefficient notion of due process.

Methinks1776 August 4, 2011 at 7:11 am

The people who “got us into this” are politicians. Let’s tax the politicians.

vikingvista August 4, 2011 at 11:06 am

Let’s storm the Bastille.

Methinks1776 August 4, 2011 at 5:54 pm

um….you know I’m always up for that :)

Greg Webb August 4, 2011 at 2:23 pm

Methinks1776, thanks for posting the link to Walter Williams’s article on taxing the rich. I had not seen it before, thought I try to read all of his columns. And, you are right about the cost of regulation being a tax that has already been raised just to give the appearance that politicians care and are actually protecting the public…well, they will next time…they really will!

Methinks1776 August 4, 2011 at 6:02 pm

Oh, Greg, they ARE protecting the public….from lower transactions costs, efficiency and getting what people want and need. Bless them.

The public is so horribly ignorant that it demands the politicians “do something”. Since too many people are either allergic to or are too ignorant of the facts to think beyond step one (yet maintain an inflated opinion of their own understanding), I don’t expect people begging pols to make changes to things they know nothing about to change. As long as the headlines read “the random regulatory body (or congress) just passed a rule (a law) today AIMED AT…..”, the sheeple feel like they’re being protected from things they don’t understand, but are terrified of.

The vortex of stupid that is Muirdiot is a constant reminder that there are just so many fools like that around that libertarians will never win.

nailheadtom August 3, 2011 at 10:26 pm

One of the comments on Russ’s article mentions the high cost of college tuition. As an example, the University of Minnesota gets over 35,000 applications for 5,200 freshman openings. As long as this is the case, tuition will always increase. If you own a professional sports team and every home game is a sell-out, wouldn’t you be inclined to raise tickets prices from time to time? You would only lower the price if attendance fell off. Such is the case with college tuition as well.

vikingvista August 4, 2011 at 3:07 pm

And yet it is still subsidized by tax payers. Remove the subsidies and let prices adjust. Then you will see applications decline.

Chucklehead August 3, 2011 at 11:07 pm

The best line of all:
“I regret the raising of the debt-ceiling because I regret relieving Congress and the President of a serious obligation to actually make tough choices on how they spend what is, let us never forget, other people’s money.” -DB

Josh August 3, 2011 at 11:52 pm

Prof Boudreaux thinks that not raising the debt limit would not have been a calamity? The government is borrowing 40 cents of every dollar it spends (a problem) and accounts for 25 percent of the economy. So, if the government slams the brakes on about 10% of GDP that wouldn’t be a big problem? Who do you think the treasury would delay payments to, SS recipients, states, soldiers, or US bond holders? How many percent would the stock markets fall on Aug 3 Donald? How high would the unemplyment rate climb and how fast? You are the economist, do you have models for that? What is your honest ballpark guess?

Ben Hughes August 4, 2011 at 12:42 am

To your first question: Is the optimization problem for US government fiscal policy to maximize GDP in any given year? Does your company maximize (insert temporal term) profits, or maximize shareholder equity?

Every less dollar the government spends tomorrow is one less dollar (deadweight loss notwithstanding) the government has to tax *at some point in the future*. You can’t just wish away future liabilities. Maybe it will dent GDP in 2011, but that’s not the only relevant question when analyzing the prosperity effects of policy.

Unless of course you believe in the efficacy of Keynesian stimulus in which case at least saying such things is internally consistent.

To your other questions: Is it the optimization of the US government to maximize the Dow Jones index at any given point in time? Is the optimization problem of US government fiscal policy to maximize employment? At the expense of *what*?

vikingvista August 4, 2011 at 12:55 am

“So, if the government slams the brakes on about 10% of GDP that wouldn’t be a big problem?”

First of all, not all GDP is created equal. A significant part of it, usually called “G”, is an economic albatross. Getting rid of it would be the best thing the non-G (i.e. free) part of the economy has ever seen.

Second, not raising the debt ceiling does not mean that the government stops all spending. It doesn’t even mean that it stops all borrowing. It doesn’t even necessarily mean that it cuts total spending. You are grossly uninformed.

The over-hyped “economic calamity” referred to has to do with the fact that government revenues are $2T, but that the government outlays are not $3T, but closer to $7T. About $4T in debt principle has to be paid THIS YEAR, because of all the short term debt that was issued. Since $2T isn’t enough to pay the $7T, it is necessary to borrow $5T. That $4T majority of federal government spending is given the playful off-budget rarely-mentioned name “rollover”.

That will be $5T this year, and about the same, possibly more, each year going out. At 2.5%, the interest on the debt each year is $125B. But if the rates have to go up to 5% (which they have been in the past), that is $250B. If there is record uncertainty about Treasury repayment, then perhaps the government would have to pay record interest rates–10% ($500B)? 20% ($1T)? In a few short years, the federal government could theoretically reach a point where there isn’t enough tax revenue + borrowing capacity to pay the principle + interest debt obligations. This is what happens when you pay off one credit card bill with another credit card, every month, in perpetuity.

That is the Harry Reid “economic calamity”. But it’s hogwash. It is only a calamity if the politicians decide that is what they want. Roll back spending levels to the also over-bloated 2005 levels, and interest rates will drop, while the debt ceiling can be lowered.

You see, the long term strategy of the Democrats is simple: if you want to increase taxes by $500B, don’t offer it straight up. Instead, increase deficit spending by $1T, and then save the country from economic calamity by compromising to increase $500B in taxes now and cutting $500B in future projected spending growth. Then don’t do the cuts.

Ameet August 4, 2011 at 9:32 am

Josh,

Raising the debt limit was certainly a calamity, because we’ve committed to increasing government spending, which does not necessarily result in less unemployment.

There are a few points to consider:

1) Reinhart and Rogoff state that Debt to GDP of 90% or higher slows economic growth, which would mean a slower recovery, which affects unemployment. Since the debt levels of the government are around $14T or so, which is about where GDP is (I include the portion the government owes itself because the only way that does not become private sector held debt owed by the government is if the government actually runs surpluses long enough to pay those bonds, which is unlikely with today’s habits), we are already over that threshold. Increasing the debt ceiling, therefore, increases that debt numerator for the ratio, and further impedes our economic growth.

So if you want a model, that model alone from “This Time is Different” is enough to suggest that raising the debt ceiling is a calamity. Since it seems you care about unemployment, which means you care about economic growth.

2) While Russ does not provide the specific numbers in his Reuters piece, he also suggests that raising the debt ceiling was not good for growth, whereas historical data in the US shows that government spending cuts on a massive scale would have been good. Remember the end of WWII, where Truman significantly cut government spending since the military spending was no longer as necessary, and the private sector finally took off, sixteen years after the start of the Great Depression.

3) I’m sorry about those SS and Medicare recipients, but as they continue to perpetuate the inter-generational borrowing from my generation to fund their profligacy, I’m not really sure they have a moral claim to those confiscated funds from my generation.

-Ameet

vikingvista August 4, 2011 at 3:10 pm

They DON’T have a moral claim. Their victimization does not justify they or anyone else demanding the victimization of others.

Josh August 4, 2011 at 9:14 am

The national debt is on the order of 14T. Lets say 15 for my back of the napkin here. We increased the debt to gdp ratio by 10% last time around from about 80% to 90%. To me that means we had a short fall of around 1.5T anually. Where do you get this 5T number please?

vikingvista August 4, 2011 at 3:30 pm

Josh,

I’m not sure who you are responding to. If to me, the $5T I mentioned is the amount of Federal government borrowing this year. Since $4T of that is borrowed to pay down principle on the debt, the debt only increases by $1T. The point is that $5T is set to this year’s interest rates.

Josh August 4, 2011 at 9:20 am

The national debt is on the order of 14T. We increased the debt to gdp ratio by 10% last time around from about 80% to 90%. To me that means we had a short fall of around 1.4T anually. Where do you get this 5T number please?

Ocaine August 4, 2011 at 4:21 pm

I have to say, Robert Frank’s argument to spend government money now because it is cheaper today, sounds very similar to one a husband might make to his wife in an attempt to get that new boat he’s had his eye on.

Dr. T August 4, 2011 at 6:42 pm

Here’s the biggest lie in Summer’s piece: “The deal confirms the very low levels of spending already negotiated for 2011 and 2012…”

Spending 38% more in FY 2011 than we did in FY 2007 is a “very low” level? This qualifies as a present-day example of Hitler’s Big Lie propaganda technique.

tdp August 6, 2011 at 11:31 pm

Prof. Boudreaux,

I regret to inform you that the last commenter on your article is so uninformed as to call you an authoritarian and enemy of democracy. His knowledge of all things economic and of current events is also severely deficient.

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