Today’s topic: When should we start caring about federal deficits? When should we start doing something about them? Dean Baker and Maya MacGuineas continue their debate on the relationship between unemployment rates and economic recovery, and how much Washington can do about both.
Point: Maya MacGuineas, New American Foundation Committee for a Responsible Federal Budget
The federal budget deficit was bad before the recession; now it is downright alarming. In the fiscal year that just ended, the deficit was about $1.4 trillion — almost a trillion more than the prior year. And reasonable projections are that we will borrow close to $10 trillion more over the next decade.
Does that mean we should start to reduce the deficit this year? No, not at all. The economic recovery is still too fragile to aggressively start pulling money out of the economy, a policy blunder that could derail our anemic growth.
But at the same time, there are signs that markets and creditors could turn against us at any moment.
Well, the last dozen or so major hyper-inflation events have had their inflection when that nation’s annual deficit reached 40% of spending. For the just-ended FY’09 it was 43%. For FY’10 it is forecast at 40%, but such things have a habit of increasing, so it should be on the order of 43 to 45%.
The US is now clearly within a danger zone. This economy, however, is much more creative and resilient than most, and all signs point to several years of ongoing deflationary pressure — been offered a raise or more hours recently? — so the US may be able to buck the historic odds on this one.
[b]Government debt is the result of political cowardice.[/b]
Faced with a shortfall there are but three options:
a) Cut spending (politically unpopular)
b) Raise taxes (politically unpopular)
c) Borrow the money (punts the problem to others)
At all levels of government, we are led by mice.
[blockquote][b]Government debt is the result of political cowardice.[/b][/blockquote]
Amen to that! Add to that the fact that all 3 options have the potential to cause their own economic problems. Still, it seems like reducing as-yet unspent funds would be a good first step. For example, see [url=http://www.npr.org/templates/story/story.php?storyId=111721655&ft=1&f=1013]here[/url] and [url=http://republicanwhip.house.gov/newsroom/2009/09/icymi-cantor-stimulusanddebt.html]here[/url].
The first thing to do is to stop dragging down the economy.
If you don’t dare increase taxes or cut spending, at least cut regulation and reform litigation. Both are hidden taxes on productivity. Both make it impossible to hire or expand or to respond creatively to any problem.
Make those who bring lawsuits pay for defense costs if they lose.
Cut those government services who regulate marginal industries. Free hair dressers and baby sitters from regulation. Let Moms and Dads decide whom to choose for a babysitter without having to worry about paying SS taxes or ensuring that the place meets criteria.
Let folks offer child care, laundry service, cleaning service etc. without having to pay taxes, have a license etc. Taking in laundry was how folks survived the last depression. This depression, thanks to regulation, those options are gone.
Stop the medical monopoly. Let noncontrolled, essential drugs be over the counter. Most people can manage their hypertension without a doctor. Let them. It will bring down costs. Let them manage their diabetes, asthma and cholesterol also. Most people can.
Stop the legal arm twisting. Let doctors enter into contracts with patient that permit binding arbitration and malpractice caps in exchange for lower costs. Right now they are forbidden to do so.
For that matter, let nursing homes and childcare centers enter into such contracts. These also are not permitted to offer such contracts even though Wall street may do so.
None of these will increase government debt. All of these will reduce costs that real people pay. All of these will help stimulate home business. Right now, between the regulation, the taxes and the litigation nobody dares begin a new business. Businesses that bring in below the poverty level in “profits” (about 24,000 for a family of four) should not be taxed. Most new businesses would qualify.
Government debt is far more sinister than most people realise, for it constitutes direct and potent competition to normal business lending. Because government have the power to tax they are quite unlikely ever to default, therefore offering “no risk” investment. Businesses of all sizes are somewhat risky and both individuals and institutions head for the greater perceived safety of government paper.
In the meantime, healthy businesses have great difficulty obtaining even normal operating loans to manage traditional cash flow swings in their production cycle.
Our business has been steadily profitable for 18 years, and we have monster equity in our properties. Even with a 30+% EBITDA (earnings on operations) we cannot get a loan in the current environment — we’re too ‘risky.’
Instead, the banks would rather borrow at 1/4% from the Fed and use the proceeds to purchase a 10-year Treasury Note at 3.25%, garnering a 3% spread at absolutely zero risk. That Treasury Note funds government deficits instead of helping me expand my business.
[b]Government debt transfers much-needed working capital from the most productive sectors of the economy to inefficient and befuddled parasites[/b] in Washington and elsewhere.
Do away with the Fed. Without the Fed there would have been no bubble therefore there would have been no bailouts, stimulus and trillions in deficits and debt. I short, we would not be in this pickle. Something to ponder – since 1913 when the Fed was established the dollar has lost over 90% of its value.