Said the Joker to the Thief
There’s too much confusion here,
I can’t get no relief – Bob Dylan
Spending freezes. Monetary tightening. My credit card balance. Yes, the debt crisis is everywhere these days, to the point where your wandering correspondent can’t safely travel the blogosphere without tripping over threats to raise the Fed fund rate.
Originally, I had hoped to solve this problem in a single blog post. But it seems you’ve gotten yourself in quite the mess. Even my venerable intellect would be taxed to clean it up in a mere seven hundred words.
So instead we’ll take it easy: follow-through is important here. From time to time these posts will crop up, and I’ll explain the basics of our debt problem – its characteristics, its management, its cyclical and structural issues, until, much farther down the line, we’ll arrive at the obvious solution. All written in prose so clear and lucid that even a peasant like you can understand it.
But first, we’ll have to clear up this strange confusion between the debt and the deficit.
Debt and Deficit – Two Entirely Different Ways To Screw Yourself
Details, details. The debt is simple – it’s the measure of the outstanding liabilities of the U.S. government. Like all debt, its value rests on the expectation of timely payments from the borrower. It takes many forms: treasury bills, notes, and bonds, TIPS, and assorted other government securities. Indeed, it is the management and sale of these securities that forms an important part of our monetary policy.
The debt is also, in nominal terms, quite large.
The Deficit – Some Problems Find You
The deficit, on the other hand, is not a current obligation. Rather, it’s the difference between the money our government acquires and the money it spends. It is the rate at which we add money to the debt.
Now, those of you who have been poorly educated, are of weak constitution, or who cannot be ballsed to keep up with current events, will be troubled by this. “Tis Obama!” you cry. “And his terrible, socialist, no good health care policy. Or perhaps the bailouts.” Which brings us quite conveniently to our first important point:
Our First Important Point
Ponder, if you will, this graph:
Here, we find something very clearly demonstrated. That there a two ways to run a deficit – and, in evils, they are worlds apart.
Lesson The First – The Cyclical Deficit
The cyclical deficit. The hurricane in otherwise peaceful financial waters. Like a seasonal storm, it swoops down among our nation’s finances to wreak untold havoc. Like a seasonal storm, it passes quickly, leaving nary a trace behind.
In normal times, the government raises money through taxes, and spends it in the budget. During a recession, tax revenue falls, while our spending remains the same. A deficit ensues.
Falling revenue alone is enough to cause a deficit. But of course our government is not content with a merely passive role, so they engage in assorted types of expensive action designed to bring the economy back to health. And the deficit increases.
Once the economy is chugging nicely along again, the cyclical deficit all but disappears. Tax revenues go up, spending drops back to it’s original level, and cyclical factors – like the much maligned fiscal stimulus and the Troubled Asset Relief program – fade into tiny lines in the future horizon.
Lesson The Second – The Structural Deficit
The structural deficit is an altogether different animal, nasty and full of venom. A structural deficit is not a product of a recession. It is always there. It is simply a feature of the things we cannot afford, and the things we refuse to pay for.
The cyclical deficit ebbs and flow. The structural deficit does not. Like cancer, it just grows and grows. An increasing part of it is caused by health care costs, which will absorb 49% our GDP by 2082.
It’s also caused by programs that have no tax offset. Since raising taxes is so politically unpopular, we stopped doing it – between 2000 and 2008, we simply put everything on the credit card. The wars in Iraq and Afghanistan, the Bush tax cuts, the 2003 Medicare Part D Prescription Drug expansion – all of these were enacted without a single offsetting piece of revenue, in the midst of an already growing deficit.
Truly, people. How the current Republican party became a model of fiscal prudence is insulting in its audacity. They passed a massive, budget busting tax cut that primarily benefited the richest Americans, along with an expansion to Medicare that cost $1 trillion dollars, and did not bother to come up with a single dime.
In closing: What have we learned?
1) When we fix our debt problem, we cannot focus on cyclical factors. We must concentrate on the structural problems that threaten our solvency.
2) Using quick, back of the envelope calculations, the 10-year financial impact of both the Troubled Asset Relief Program and the fiscal stimulus have exactly this much impact: F@%&-all.
3) When passing the largest tax cut in American history, it’s best to find a way to pay for it, first.
