Recent Articles on Federal Debt and Budget Deficits

Some reading material on the issue of federal debt and budget deficits, which we’ve been working over pretty heavily in recent weeks (apparently we’ve staked out a decidedly contrarian position). Brief commentaries included (some articles may require subscription and/or registration):

Randall Forsyth of Barron’s, “A Foolish View of America’s Debt”, 11/18/2009 – Forsyth points to recent Treasury data showing that foreign purchases of Treasuries continue apace, and to research that questions how sustainable this buying is. We would argue that when the private sector is diligently saving, the public sector should be busy “dissaving”, i.e., fostering productive investment and engaging in sound counter cyclical expenditures. In a global financial economy, the ability of domestic savers to fund overseas investments poses some risk to Treasury’s cost of capital. But to the extent that foreign savers are willing to finance our public deficits, we should take advantage (though one worry is that some or much of the buying might have to do with exchange rate management by foreign authorities, which is likely to have inflationary consequences globally, and could be a more volatile source of funding than ‘real’ savings).

A mostly spot on critique of the fiscal stimulus debate from the FT, 11/12/2009 – The author calls both Dems and the GOP to task, and points out that progressive Dems need to admit that policy uncertainty undermines productive private sector activity. Unfortunately, the author falls prey to the questionable orthodoxy that we somehow know the upper limit of public debt, and thus will require “fiscal consolidation” in the mid term. These assertions need better theory and (especially) better data. As we pointed out in our recent Idle Speculator piece, an honest empirical economist will admit that the data set on modern, developed financial economies is rather limited.

The FT’s Samuel Brittan, “Simple truths about the economy”, 11/13/2009 – An important counter point to the prevailing orthodoxynoted above, Brittan argues that ”The hole in the world economy can only be filled by deficit spending by the stronger western governments.”

“Are the US and UK heading towards debt crises?”, FinanceAsia.com, 10/15/2009 – A short paper that lends some current and historical empirical support to Samuel Brittan’s assertion that western governments should be running sufficiently large budget deficits. The argument that debt-to-GDP should not exceed some magical threshold is based on a lot of conjecture (IMF, are you listening?). 

President Obama will be holding a “jobs forum” in December - The federal government has done well with counter cyclical stabilizers, and an OK job trying to clean up the mortgage mess; but it’s come up far too short on stimulating productive investment, both in public projects and in private sector initiatives. The President and his party are in a tough spot.

President Obama states in an interview that ”it’s important to recognize that if the nation keeps adding to deficit spending through tax cuts or more stimulus spending, at some point people could lose confidence in the U.S. economy and that could ‘lead to a double-dip recession.’” Err, Mr. President, judging by (the admittedly limited) historical data, the surest recipe for a double dip recession is premature fiscal and/or monetary tightening (see the U.S. 1936-37 and Japan over the past two decades). In other words, if the President and his party fall prey to budget hawkishness, both a double dip and a loss of political power are likely to result. Obama did say that he is weighing tax breaks that would incentivize private sector hiring, but judging by their policy actions to date on that front, and the current makeup of Congress, the resulting policies and their economic impact are likely to be piecemeal. And, of course, temporary, like a “sunset”.

“Tax Amnesty Reaps Billions for Treasury”, FT, 11/17/2009 – Sometimes risk taking in the domain of taxes can produce positive results, as we’ve remarked before. In today’s economic climate, the deficit hawks and redistributionists should reconsider their approaches. A less distorting tax code, and a lower marginal tax burden, might not blow up the Treasury’s credit rating if coupled with productive public investments and a sound and reasonably certain regulatory outlook. Such measures are likely to be subsumed to continuing legislative efforts on health care and financial reform, which is unfortunate. Putting the economic horse ahead of those carts might have meant an earlier downturn in  unemployment, and more political capital for getting them done. Instead, we won’t see unemployment turn down until mid-2010 at the earliest; and that could prove a bigger risk for Democrats in midterm elections than budget deficits.

“Geithner: Recovery not enough without reforms,” Reuters, 11/19/2009 – Geithner testified to Congress that “the regulatory regime that failed so terribly leading up to the financial crisis is precisely the regulatory regime we have today.” Congress and the Administration’s legislative onslaught isn’t helping matters. There’s a lot on policymakers’ plate. In the meantime, the prevailing dynamic in the global financial system is the same one that has made financial crises such frequent visitors since the 1970s and 80s.

URLs:

http://online.barrons.com/article/SB125846371623352037.html

http://www.ft.com/cms/s/0/0c521d8c-cfbb-11de-a36d-00144feabdc0.html

http://symmetrycapital.net/idlespeculation/20091109.pdf

http://www.ft.com/cms/s/0/66e41076-cfc4-11de-a36d-00144feabdc0.html

http://www.ft.com/cms/s/0/0570e674-cf98-11de-b876-00144feabdc0,s01=1.html

http://www.financeasia.com/print.aspx?CIID=158204

http://news.yahoo.com/s/ap/20091118/ap_on_re_as/as_obama_economy

http://en.wikipedia.org/wiki/Sunset_provision

http://www.ft.com/cms/s/0/12465b26-d390-11de-9607-00144feabdc0.html

http://www.reuters.com/article/ousivMolt/idUSTRE5AI2Z820091119