So President Obama has proposed a $ 3.5 trillion budget with a projected $1.75 trillion deficit. This means the budget is about half borrowed. It's scary. Ross Perot went ape over $300 billion deficits 16 years ago. The projected $500 billion deficits for 2007 and 2008 were equally scary. The Obama proposal is scary, even to a dyed-in-the-wool liberal like me. Admittedly, the $1.75 trillion figure also includes some budget honesty we never had before. The $500 billion deficit projection was actually much higher, because it didn't include the Iraq war and the AMT fix, which Obama budgets for. It is also true that this 2010 budget is not $1.75 trillion of additional new spending, but represents more a steep large dropoff in revenue. Still we are talking unprecedented annual borrowing. These are the kinds of numbers that are so big - 12% of GDP - that we don't get do-overs if something goes really wrong, if there is no recovery in 2010-2011.
The other comment to make is that the Bush borrow-and-spend policies left us with massive structural debt increases, a permanent and growing gap between revenue and expenses. Most of the "tax increases" are just letting Bush's tax cuts expire as all of Bush's budget projections calculated. If they were re-enacted, deficits would soar naturally. Bush never budgeted for that. Medicare costs keep skyrocketing too, unless some cuts are made. Bush's one big spending plan, Medicare Part D, is also just a debt-bomb.
It really is amazing to me. Barack Obama promised that he would (propose to) deal with health care costs notwithstanding the depression we are in. That is, apparently, the idea behind this budget: do the spending now despite how scary it looks, cut the rate of health care spending growth, and wait for those savings and economic growth to gradually put the budget in balance. It may be just crazy enough to work. What it relies on, however, is weaning Congress off of trillion dollar deficits. They better get it right or the whole country's finances will look like California... or Argentina.
Thursday, February 26, 2009
1.75 Trillion Deficit? You better know what you're doing.
Posted by The Law Talking Guy at 8:36 PM
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Yeah, definitely playing with debt fire here. If they pull it off, great. If they spend the money on things that either lead to higher private sector profits in the future (health care reform) or improve infrastructure that leads to more investment and economic growth, all good. If the borrowed money gets spent on stuff that just gets consumed and doesn't generate any future self-sustaining economic activity (like wars), then we'll be in trouble.
Of course the US budget has some advantages over California and Argentina. First, the US can pass a budget more easily than the California legislature can. Even with the cloture rule, the distribution of votes in the Senate is such that a budget could pass relatively easily compared to California.
Second, I'm not a Latin Americanist but I'm pretty sure that Argentina's debt problem is largely due to moral hazard problems involving her states. I think it has something do with the federal government supplying money to the states more or less when they ask for it without any credible threat to force them to balance their budgets.
So yeah I agree that this is a risky move. But the US federal government is in a better position to take that risk than some of the really famously dysfunctional governments out there.
There is certainly a risk of financial disaster with this much borrowing. President Obama argues, however, that the risks of not reforming health care, not investing in energy independence, and not building up our educational system are more immediate and worse. At this point, he has been open and honest enough that I am willing to trust his judgment. I hope he gets his way.
Bush's profligate spending in times of plenty led to this disaster. Once again, after the Republican binge is finished, Democrats are left holding the bag. This time, Obama will not let the conservatives frustrate needed reforms, and he is willing to do what it takes. Besides, as LTG says, it's not nearly as big an increase as it appears to be.
Also, three cheers for his plan to lift (finally) some of the tax burden from the middle class and give it back to the upper class, where it should be--and where it used to be, before Bush really messed it up (with a "best supporting screw-up" nod to Reagan for starting the heist. This is what Obama meant when he said "spread the wealth around" and I have no doubt he won many votes from that line. The Republicans made a huge tactical blunder in advertising that line last year. The right-wingers muttered "socialism" but as the economy was going south, most Americans privately thought, "Hell, yeah!"
I don't normally recommend USA Today, but they did a great job visually representing what all this means.
Check this out. You run your mouse over the graphic,and you get a snapshot of Revenue vs. Spending and then the debut tally. We are looking at $15 tril. by 2010 in debt! That got my attention. Pretty scary.
It is interesting to me how suddenly a billion dollars in chump change. I remember being in France in 1991 and a Frenchman saying, "The US has a $4 trillion deficit. What does a trillion mean, anyway? It is a word we never use.Can you imagine that?" And now we use it, knowing exactly what it means and we do it so easily. Amazing how quickly things change.
And when I think about all of that, I have to ask what we have gotten for all the debt inflation. I don't feel like we've gotten very much. Just a bunch of cheap electronics from Asia. We are like the American Indians who traded their precious resources away for booze and slavery.
Oh, and to add insult to injury, rich Chinese are now taking "real-estate" tours to the coasts (note they aren't going to Detroit or Mobile) where they are prepared to slap down half a million in cash to buy houses that they will then rent back to Americans.
Talk about adding insult to injury. It's OUR money. But it is also OUR fault.
US West, your French friends can stop being self righteous about US debt levels. The reason we use numbers like "trillion" is because our economy is 7 times larger than Frances. In terms of percentage of GDP, our debt levels are very similar to the French debt levels. That in itself is alarming. But it's nothing that the French can gloat about. http://en.wikipedia.org/wiki/List_of_countries_by_public_debt
RE: The Chinese coming to the US to buy real estate...Hallelujah!!!!! Seriously! That is the best economic news I've heard in months!
In the early 1980s the Japanese "took advantage" of our recession by buying up US companies and real estate at bargain prices. Many economic nationalists were appalled. "We're selling the country to the damn Japanese!" I remember a conversation with my dad about it. He said, "Sure we are. That's who is buying." Japanese investments injected much needed capital into our system and now companies like Honda are important job creators here in the US.
Now the Chinese are buying up American stuff. Another way to put is that the Chinese are investing heavily in American businesses and real estate. Great! I welcome any foreign direct investment.
If you are a big picture person, this means that China doesn't think the US is about to collapse. On the contrary, they are betting that we are about to recover.
By the way, to any Republicans out there who think that welfare states automatically lead to debt problems...Denmark's debt as a percentage of GDP is between 26% and 29%.
http://en.wikipedia.org/wiki/List_of_countries_by_public_debt
It's also worth pointing out that of the G7, the American debt level is 6th highest.
By the way, to any Chinese real estate investors out there...There is a house down the street from mine (a little smaller than mine) that is asking about $10,000 more than I paid for my house 2 years ago. BUY IT! It's a bargain, I swear! Great neighborhood, good growth potential...oh, and fantastic school district!
Hey Bert Q Slushbrow, how do you say "come buy our houses" in Chinese?
I'm with RBR. Chinese Money Welcome Here. Isn't this the Year of the Realtor? Oh, year of the Ox. My mistake.
By the way, there is a terrific chart in the Economist for this week that eased my mind a little. It showed that projected deficits under Bush budgets would have been 9% of GDP this year, less than the projected deficit of 12% of GDP, but would remain in the 6% range even as the economy recovers, whereas the projected Obama budgets are to be in the 3% range. This is an different take, to use % of GDP rather than absolute dollars, but it makes good sense. So it seems that Obama's budget is not quite the budget-buster it sounds like: McCain would be looking at trillion+deficits also (unless he kept fudging on the war and the AMT, which he probably would do).
To put this in perspective, a deficit of 3% of GDP is the maximum allowed by the European Monetary Union's convergence criteria. A number of EU member states have had serious difficult getting their deficits that low both before and since joining the Euro.
Oh, also, the EMU convergence criteria set a debt target of 60% of GDP. The US is currently flirting with 70% so it's bad. But it's not OMFG bad.
There is an interesting thing too with the US deficit, in that the world will probably support the US having a higher deficit than other countries because it has the reserve currency. Or does it work the other way? Does the US have to be more careful? (I honestly don't know.)
How does this Federal Government debt compare with the states and with private debtors?
Our states are in better debt shape. 37/50 US states have laws that require that the budget be balanced at the end of the fiscal year. 39/50 states require that the budget passed by the legislature be balanced. 43/50 states require that the governor must submit a balanced draft budget.
http://www.ncsl.org/programs/fiscal/balreqs.htm
Regarding the private debt, I think we had a thread about that before. US private debt is very high and frankly, that's a big cause of the current financial crisis.
As for being the reserve currency, I suspect that if the US wishes the dollar to remain the reserve currency it will have to take steps to preserve its value - i.e. avoid serious inflation by printing too many greenbacks.
My point in mentioning France was not to do a comparison between them and us, nor was it the intention of my French friends back in 1993. The point was just the size. And yes, our economy is big.But it was unimaginable, the size.
Spotted Handfish, back in the Bush I administration everyone was pounding on the US to lower its debt. But the economic situation wasn't as bad then as it is now. I think the world will tolerate higher debt levels from the US, however that support will not be sustained if there isn't any sign of improvement as a result of elevated debt. For the moment, we have to elevate it to pump assistance into the economy. And if our economy improves, that only helps everyone else.
As for the Chinese buying real estate, I am ambivalent. I understand the long view on an intellectual level. I know that this is the economic cycle at work. But there is an economic nationalist in me who was uncomfortable when the Japanese did it and I am uncomfortable with it now. The Japanese bought up commercial real estate, like Pebble Beach Golf Course and they made a bit for concessions in Yosemite Valley and the like. People screamed and yelled and eventually, the Japanese sold it all back to us when their econpmy when bust. That was one thing.
The Chinese are going for residential property. Using real-estate as an investment is one of the ways we got into this mess. And when friends of mine who suddenly can afford a home in this area are being outbid by people showing up with cash from the outside, it stings. Our banks need to start lending to our people again so that we can take advantage of the lower prices. Now in fairness, I am not sure how widepread this is or if it will be a long term trend.
I live in a community where half the people are residents for only a few weeks of the year . . . non-residential owners and landlords. Those of us who do live here are all renting. And our community is suffering as a result. Rents are high and buildings are in poor condition because property management companies don't do proper maintenance. And since the landlords don't live in the area, who cares? The school district should be financially well-off here and it isn't because there isn't a proper tax base. I could go on, but you get the idea. This is a community living off of 10% hotel and restaurant taxes, which is then invested landscaping for tourists to enjoy.
The other way we got into this mess was our mad desire and enjoyment of cheap goods. I like my cheap stereos as much as the next guy. But we threw things out rather than fix them. We decided to toss away perfectly good things for the hit of something new . . . . and all of that feed a consumer gorging that benefited our trade partners more than us. We didn't really create wealth in this country. We elevated consumer debt to a value rather than leaving it as a vice. And now we are paying the piper.
And the idea of paying rent to an owner in Beijing who by the way is paying cash for the property, cash which we were dumb enough to send over to him makes me a little sad. It's like I said, we traded valuable resources for cheap junk. I don't blame the Chinese or the Koreans or anyone else. I blame us.
Well, at least whilst we all go to hell in a handbasket (see also my grumpy comments on lack of greenness from the Aus Fed Gov't), I can be comforted by the fact that my continued questioning of consumerism was right. :-(
The bit that upsets me most about all this is that the people who've gotten into massive debt (whether that be the US gov't, top level bankers, or ordinary folk - 'massive' varying slightly amongst the sets of course!) are all being bailed out, whereas those of us who didn't do the consumerist thing, didn't run up debt, and kept questioning those that did, seem to be ending up with nothing more than a nice bill for it all.
On the plus side, I like that Obama is actually counting all the costs such as Iraq etc - and openly stating them in his address. Still hopeful...
RBR, I understand there has been threads on private debt before. I'm just curious as to the comparison between the two. Sizewise the government debt in Australia is minimal compared to private debt (a previous Prime Minister called it the "elephant under the carpet").
Also don't some states in the US issue bonds? Are these taken into account in the balancing of the budget? I was under the possibly mistaken impression that California used bonds to balance budgets.
California had a bond issue once under Arnold Schwarzenegger - his first big deal - for $15 billion. He promised that this one bond deal would ensure fiscal solvency thereafter. We had a $42 billion deficit this year. But I don't believe bonds can be regularly issued to solve the budgetary deficits.
Yeah I guess it is a bit hard to issue many bonds without your own currency. Mind you there is a decent spread on Italian and German bonds at the moment...
FYI, I wish I had a spare $100K to invest (who doesn't wish this?) for a specific reason: California state tax-free bonds. They are currently priced with higher yields than other tax-free state bonds on the theory that there is a risk of default. I think the risk of default is massively overstated. No way, no how, does California default. So there's a bargain to be had because the market is, I think, seriously over-pricing default risks at the moment. We're looking at yields of 5% now, tax-free, on obligations that are really identical to those issued a few years ago with much lower returns. Moody's ratings are extremely clumsy in the market.
The downside of bonds is the much more serious risk of inflation.
I think the Chinese interest in residential real property is fascinating, though I suspect it may be less renumerative for Chinese investors than they imagine. Even with a good management company, California law provides a fair amount of protection to tenants, especially in older multi-unit apartment buildings.
My recent experience on jury duty was instructive on this point. The plaintiff was a landlady who owned a crummy apartment building in a crummy neighborhood. She tried to evict a tenant over his dog (a lease violation) after the Housing Department demanded she fix some broken outlets, 20 year-old carpet and leaking windows. That's called retaliatory eviction, and is pretty darn illegal.
Trying to be as fair a juror as possible, I got a sense that this woman was not some big-time slumlord. It seemed that the investment proposition she had been presented with was the following sentence, "The landlord buys the building and comes to collect the money in cash on the first of the month." It's not nearly that easy.
Though I admit I would probably be excited if Chinese investors bought the half-finished construction site down the street and put up some townhouses.
-Seventh Sister
No doubt the landlord is complaining about big government.
Seventh Sister, I would be the Chinese investors are thinking more along the lines of future resale than current rents. They're betting that the real estate market will recover strongly sooner or later and probably sooner rather than later.
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