![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
solarbirdThere are several items going around during this debt crisis which I hear often, and upon which I would like to comment.
First, and I paraphrase: "there is no Social Security crisis, the trust fund is good until 20[25|40|etc]." The trust fund is a lie. There are not mountains of money store anywhere, not even electronically.
Yes, on the books, Social Security has billions stashed away to handle the shortfalls which have already begun (earlier than expected) in tax payments for the programme. But none of that money is actually there, because it was borrowed by the Treasury and spent in the general fund. Social Security's excess income has all been spent. All of it.
If I borrow $30,000 from my friend Geri, and then spend it - along with all my other money - on hookers and blow, does Geri still have $30,000? No. Is it likely Geri's going to get the 30,000? Not unless I get a job. Geri has possession of a debt obligation from me saying I owe her $30,000, but that does not make the money actually appear. The US Federal Government can get that money - but it's going to have to raise revenue or cut some other spending to do it.
That's exactly the state of the Social Security Trust Fund. It's empty. Like everything else, it's been part of the looting process I've been talking about for the last several years.
Second, and again I paraphrase, "The banks are sitting on trillions of dollars in taxpayer loans and they won't lend them out!" Mostly, it is asserted, because they're being greedy mean in one form or another. This is true - they are greedy, and the system is corrupt - but not in the way generally discussed.
They do have trillions in dollars, siphoned to them through AIG and various swap vehicles, courtesy of the Fed, and that vampire squid on the face of humanity, Goldman Sachs. This is to mask the valuelessness of those banks, and the zero- to near-zero-value of those CDOs and MBSes and all those other instruments of the last bubble. If they start handing out and loaning out that money at scale, they have to admit they're broke. You remember that boat anchor I keep talking about (see Part IV)? This is that boat anchor. This is the back hole sucking up liquidity and life from the economy.
Third, and another paraphrase, "Debt is good! We don't have a debt problem. We can spend our way out of this - the only problem with the stimulus is that it wasn't big enough!" I want to say first that if you are in the right environment, all these things are true. This would've been certainly true in the 70s and 80s, and maybe the 90s.
But circumstances do not remain static. This has been the failure of the Keyesnians here: Keyesnian spending works when you build credit/pay of debt in better times, which hasn't entirely been happening. At least as importantly, it also requires that the amount you're going to deficit-spend be at least adequate to cover the debt overhang you're trying to patch, and it hasn't been close to that. (Krugman is exactly right here.) But in this case, the stimulus can't fill in that overhang, because it can't be without destroying the currency. The debt overhang, in part thanks to all the looting, is far too large; what you'd actually trigger is a devaluation of the US dollar in rather more abrupt terms, and that triggers the interest rate "death spiral" I discussed in Part IV.
(See also Charles Hughes Smith at Zero Hedge talking about this refusal to acknowledge changes in underlying economic forces, most notably, the institution of "too big to fail," and the resultant behavioural changes.)
It also requires that your borrowing costs be covered by the resultant economic output. That's not happening in no small part because of the debt overhang. Even if you spend it directly on more productive stuff (infrastructure, research science, etc), money is still fungible, and anything excess goes to the financial system and the overhang. The financialisation of the economy has introduced tremendous inefficiencies atop everything else.
When this happens, it means that more debt means lower economic production, not higher. It boosts the GDP briefly because of the immediate expenditures - go back and read Part II and look at how GDP is calculated - but it actually reduces net economic output.
This is a credit death spiral and it is intensely deflationary.
So please, remember, spend-your-way-out is situationally dependant. The growth rates advocates say are required to "grow out of" the debt required to kick over this debt overhang have never been achieved in modern history, at least not over the amount of time required. (10 years of 8% real growth? That's one figure I read from one Keyesnian advocate, and I'm sorry, but no. Because no.)
Fourth, "We give BILLIONS in FOREIGN AID!! Why the hell are we doing that when there are [X] NEEDS HERE" and also, "WHY are we talking about DEBT when the WORLD owes us SO MUCH MONEY from FOREIGN AID!" The capslock is typically part of the complaint. (I see this on Facebook a lot, along with "bet you won't dare to repost this!!" addendum. Well, you're right, I won't, because it's stupid and wrong.)
The United States has not been a net creditor nation since Ronald Reagan, running massive trade deficits for decades. It has mostly also run massive current accounts deficits since Mr. Reagan as well. The United States is not a net creditor. It is a massive debtor nation.
Does the US spend "billions" in foreign aid? Technically, yes. But the implication is that it's a substantial part of the budget. It's not. In 2008, which is the latest you get in the 2011 census report, there was US$33.6 billion in non-military foreign aid, of which US5.1B went to Iraq and Afghanistan. It's about 0.6% of the US Federal budget. Add in military foreign aid (which I argue is generally not aid) and you get up to around 1%. Take back out Iraq and Afghanistan - where most economic aid is pretty military in nature - and you're looking at about half a percent of the total US budget.
You're not balancing the budget on that.
Fifth, and yet another paraphrase, "Half of Americans pay no taxes!" implying that they're all, I don't know, bums of one sort or another, or that tax burdens on "the wealthy" are too low. Okay, first, that's just wrong. 46% of taxable units do not pay income tax, which is a very different statement. Everybody's paying sales tax, for example.
Of those "taxable units" (mostly households) which don't pay income tax, half of those are because they don't make enough income to qualify; no income means no income tax. Gosh, really? What's that say about tax rates? Not much. It says a lot more about incomes, not much of which is good.
That leaves 23% who are making some money. Most of those households are earning between $20,000 and $30,000/year. 23% breaks down to 10% who are elderly and income-sheltered, 7% who have enough deductions and tax credits that they wipe out their income tax, and 6% who are getting tax credits for children and/or are working poor. (sources)
Good luck balancing the budget by taxing people with no money. That doesn't work either.
That's all for now. Good luck.
1: I am ignoring actual costs of loan processing and such here; I'm oversimplifying to communicate an important idea. Please bear with me, those of you who know better.
eta: Talking of our favourite vampire squid: Business Insider reports Goldman Sachs storing mass amounts of aluminium in order to drive up market costs. Thanks to Livejournal user 403 for the article!
First, and I paraphrase: "there is no Social Security crisis, the trust fund is good until 20[25|40|etc]." The trust fund is a lie. There are not mountains of money store anywhere, not even electronically.
Yes, on the books, Social Security has billions stashed away to handle the shortfalls which have already begun (earlier than expected) in tax payments for the programme. But none of that money is actually there, because it was borrowed by the Treasury and spent in the general fund. Social Security's excess income has all been spent. All of it.
If I borrow $30,000 from my friend Geri, and then spend it - along with all my other money - on hookers and blow, does Geri still have $30,000? No. Is it likely Geri's going to get the 30,000? Not unless I get a job. Geri has possession of a debt obligation from me saying I owe her $30,000, but that does not make the money actually appear. The US Federal Government can get that money - but it's going to have to raise revenue or cut some other spending to do it.
That's exactly the state of the Social Security Trust Fund. It's empty. Like everything else, it's been part of the looting process I've been talking about for the last several years.
Second, and again I paraphrase, "The banks are sitting on trillions of dollars in taxpayer loans and they won't lend them out!" Mostly, it is asserted, because they're being greedy mean in one form or another. This is true - they are greedy, and the system is corrupt - but not in the way generally discussed.
They do have trillions in dollars, siphoned to them through AIG and various swap vehicles, courtesy of the Fed, and that vampire squid on the face of humanity, Goldman Sachs. This is to mask the valuelessness of those banks, and the zero- to near-zero-value of those CDOs and MBSes and all those other instruments of the last bubble. If they start handing out and loaning out that money at scale, they have to admit they're broke. You remember that boat anchor I keep talking about (see Part IV)? This is that boat anchor. This is the back hole sucking up liquidity and life from the economy.
Third, and another paraphrase, "Debt is good! We don't have a debt problem. We can spend our way out of this - the only problem with the stimulus is that it wasn't big enough!" I want to say first that if you are in the right environment, all these things are true. This would've been certainly true in the 70s and 80s, and maybe the 90s.
But circumstances do not remain static. This has been the failure of the Keyesnians here: Keyesnian spending works when you build credit/pay of debt in better times, which hasn't entirely been happening. At least as importantly, it also requires that the amount you're going to deficit-spend be at least adequate to cover the debt overhang you're trying to patch, and it hasn't been close to that. (Krugman is exactly right here.) But in this case, the stimulus can't fill in that overhang, because it can't be without destroying the currency. The debt overhang, in part thanks to all the looting, is far too large; what you'd actually trigger is a devaluation of the US dollar in rather more abrupt terms, and that triggers the interest rate "death spiral" I discussed in Part IV.
(See also Charles Hughes Smith at Zero Hedge talking about this refusal to acknowledge changes in underlying economic forces, most notably, the institution of "too big to fail," and the resultant behavioural changes.)
It also requires that your borrowing costs be covered by the resultant economic output. That's not happening in no small part because of the debt overhang. Even if you spend it directly on more productive stuff (infrastructure, research science, etc), money is still fungible, and anything excess goes to the financial system and the overhang. The financialisation of the economy has introduced tremendous inefficiencies atop everything else.
As a long aside - that's why all this is blockquoted - debt having to pay for itself is true for any debt. If you take out a $10,000 loan to start a small business, and the total interest cost of the loan over its life is $2,000, you need to make $10,000 + $2,000 = $12,000 from the business over the life of the loan, just to break even yourself.The additional US debt that has been taken on thus far has produced much less little additional economic activity than new debt. Calculations I've seen indicate that the return on the new Federal borrowing is barely breakeven, if that (1:1). (Some estimates say it's worse, at 0.8. The best easily-accessible analogue to calculation, the M1 Money Multiplier, has crashed to 0.73ish, the lowest point since records are on file. That's bad, but I don't know how it correlates to the real figure since I haven't got access to the more recent complete figures I saw before. Stupid paywalls.) If interest rates rise, then we will also have to pay off that debt, which means we'll have to subtract that interest back out - and you'll go below 1.0.
Let's say you don't do that. Let's say you only make $10,000, and you pay the lender. The lender hasn't actually lost anything1 (other than opportunity cost, about which I can rant extensively), but hasn't made anything either. You haven't made anything. The economic return on debt is 1:1 - $10,000 out, from $10,000 put in. More debt wasn't really bad. It wasn't good for anyone, but it wasn't awful.
Let's say you do a little better, and make $12,000 instead. In that case, the lender gets their money back with a profit. You've lost some time, but assuming you had someone else covering your living expenses or had other income for that, you haven't lost anything either. The economic return on debt is 1.2:1. $12, 000 out, from $10,000 put in. That's definitely better. More debt wasn't great, but it wasn't too bad - more economic activity was generated than cost, just not very much more.
Let's say you do a lot better! If you make $50,000, you've profited by $38,000! ($50,000 - 12,000 = $38,000.) The lender makes a profit; you make a profit; everyone is happy! And the economic balance is $50,000 out on $10,000 put in; economic return on investment is 5:1! That's really great! Lots of economic activity was returned vs. cost!
But if you only make $5,000 - now there's a problem. $10,000 went in, and only half of it came back. You lost half the money. That's $5,000 out on $10,000 in, an economic return on debt of 1:2, or less than one. The additional debt resulted in a net reduction of economic activity.
When this happens, it means that more debt means lower economic production, not higher. It boosts the GDP briefly because of the immediate expenditures - go back and read Part II and look at how GDP is calculated - but it actually reduces net economic output.
This is a credit death spiral and it is intensely deflationary.
So please, remember, spend-your-way-out is situationally dependant. The growth rates advocates say are required to "grow out of" the debt required to kick over this debt overhang have never been achieved in modern history, at least not over the amount of time required. (10 years of 8% real growth? That's one figure I read from one Keyesnian advocate, and I'm sorry, but no. Because no.)
Fourth, "We give BILLIONS in FOREIGN AID!! Why the hell are we doing that when there are [X] NEEDS HERE" and also, "WHY are we talking about DEBT when the WORLD owes us SO MUCH MONEY from FOREIGN AID!" The capslock is typically part of the complaint. (I see this on Facebook a lot, along with "bet you won't dare to repost this!!" addendum. Well, you're right, I won't, because it's stupid and wrong.)
The United States has not been a net creditor nation since Ronald Reagan, running massive trade deficits for decades. It has mostly also run massive current accounts deficits since Mr. Reagan as well. The United States is not a net creditor. It is a massive debtor nation.
Does the US spend "billions" in foreign aid? Technically, yes. But the implication is that it's a substantial part of the budget. It's not. In 2008, which is the latest you get in the 2011 census report, there was US$33.6 billion in non-military foreign aid, of which US5.1B went to Iraq and Afghanistan. It's about 0.6% of the US Federal budget. Add in military foreign aid (which I argue is generally not aid) and you get up to around 1%. Take back out Iraq and Afghanistan - where most economic aid is pretty military in nature - and you're looking at about half a percent of the total US budget.
You're not balancing the budget on that.
Fifth, and yet another paraphrase, "Half of Americans pay no taxes!" implying that they're all, I don't know, bums of one sort or another, or that tax burdens on "the wealthy" are too low. Okay, first, that's just wrong. 46% of taxable units do not pay income tax, which is a very different statement. Everybody's paying sales tax, for example.
Of those "taxable units" (mostly households) which don't pay income tax, half of those are because they don't make enough income to qualify; no income means no income tax. Gosh, really? What's that say about tax rates? Not much. It says a lot more about incomes, not much of which is good.
That leaves 23% who are making some money. Most of those households are earning between $20,000 and $30,000/year. 23% breaks down to 10% who are elderly and income-sheltered, 7% who have enough deductions and tax credits that they wipe out their income tax, and 6% who are getting tax credits for children and/or are working poor. (sources)
Good luck balancing the budget by taxing people with no money. That doesn't work either.
That's all for now. Good luck.
1: I am ignoring actual costs of loan processing and such here; I'm oversimplifying to communicate an important idea. Please bear with me, those of you who know better.
eta: Talking of our favourite vampire squid: Business Insider reports Goldman Sachs storing mass amounts of aluminium in order to drive up market costs. Thanks to Livejournal user 403 for the article!
Rushed rewrite of half-baked amateur thoughts
Date: 2011-07-31 12:22 am (UTC)First/S.S. - Thank you for posting this. I realized that the SS trust fund had been looted-err, borrowed from-to an extent, but not that it was gone in its entirety. This needs to be made more widely known; perhaps it would make a start on generating the sort of outrage that people should have towards our government, for some of the right reasons (as opposed to present outrage, which is usually for either wrong or non-existent reasons and generally lacking from the people who should be most upset).
Alas, my take on it is somewhat different from our political elite. If there is a shortfall due to the fund being looted, the first thing we need to do is PUT THE MONEY BACK. And I'm pretty sure there are a LOT of ways to do this. Should all else fail, we can start by getting rid of the withholding tax cap. It's pretty ridiculous, anyway, that people making less money are putting a higher percentage of their income into this than people making more money. And to answer some of the inevitable objections, very few people are going to put off buying that new car they want because suddenly that next 700k of income is subject to a tax it was previously exempt from. People who own large or medium sized companies are not going to suddenly not hire people because a few extra tens of thousands departed from their millions. Even if they mean to, out of sheer spite, they will have better things to do than constantly focus on not spending their money. And for the sake of argument, to the extent some of them do buy less, any impact this has will be far less than the impact of cutting the SS checks of people who NEED this money to buy food/clothing/shelter/ac/heat/transportation. In a sane world, the greater priority here would not even be up for discussion. Also, for all the folk who will say "but then people will start treating it like a welfare program and respect it less/cut it back" I have this to say: "See present treatment of said program." Also, to the extent this cry is coming from progressives--"Yo, people. You are supposed to be FOR a welfare state, and recognize that such works really well in many places, and that helping people is a good thing, not a dirty word, if we don't get more jobs back we better work harder to become more of a welfare state fast!!! So please quit supprting the other side's propaganda."
2d/banks/assets - Nothing to say about your main point, but wanted to add that the return of easy credit for all is not a real solution. It might even exacerbate the problem, as I'd say it already has in the past, for reasons similar to what you discussed in another section. The economy was seriously fucked for YEARS while everyone thought it was doing fine, because the whole thing was being propped up by consumer spending that was itself not coming from income but from credit cards in excess of what income could cover. This not only hid structural problemss but allowed them to become worse while idiots patted themselves on the back for doing a great job managing the economy. If everyone was suddenly lent 10k at 30% interest (as opposed to given 10k, which would have been a damn sight better use of the TARP funds than a bank bailout), we would again have dumbasses patting themselves on the back at the uptick in consumer spending while the structural problems got worse (in part because of the high interest rates on the loan, which would suck money out of more useful things, etc).
3rd/stimulus spending/debt seriousness/etc. Here is the one area where we probably disagree. I think. Having read money deficit doves and deficit owls and the occasional deficit hawk (mostly by accident, other than you), and knowing that you all have done all (or at least a lot) of the math, which I haven't, and studied in depth the underlying facts of the case, which I haven't, and presented compelling, logically coherent arguments that hang together nicely, I would be loathe to argue with any of you. Except there are a variety of different and often conflicting conclusions out there. So, taking as my basic assumption that all of you (and by that I mean the people I pay attention to; I ignore genuinely conservative economists becasue I was forced to read and think about them for three of years of my life, which left me much more economically liberal/populist than I had been and absolutely convinced that said economists were fundamentally delusional, albeit *some* of them are surprisingly nice people in person) are correct on most of the underlying facts, and that the MMT crowd are wrong about the desirability of permanent deficit spending and that at the least are current level of debt is way too high and intensely problematic ...
The debt is A problem, not THE problem. Even our current debt, with all the surrounding circumstances you mention. And while it's one of those symptoms that can make the underlying problems worse, it is a symptom of Other Things We Are Doing Wrong, more than a Wrong Thing itself. So, to start with, fix the immediate issue by invoking the 14th amendment. Then, where thee, I and Krugman all agree--Get rid of the Bush tax cuts. ASAP. This will fix a huge chunk of the problem all by itself. Also, the initial stimulus spending upon which so much debate centered was doomed to failure. Not enough to do more than cause a temporary blip. But, where I might depart from you two, I think it did exactly what it was intended to do; deflect some of the short term heat, while discrediting the whole idea of stiumulus spending in the longer term, thereby setting the stage for the massive and certain-to-be-disastrous spending cuts now being proposed by both sides. That it didn't work should NOT be taken as evidence that stimulous spending can't work now. (and this might involve printing some extra money. I'm honestly not sure; again, haven't done the math. But as problems go, any problems this might cause strike me as vastly lesser than the alternatives to not making certain spending increases). Invest this money primarily (but not entirely) in solar panel manufacture and installation (and hell, sales) and research, other alternative energy research, and infrastructure repair. You firstly put a ton of people to work. These are primarily people who will immediately spend most or all of their money, thereby giving the economy maximum bang for its buck, even aside from any other positive effects of the work they are doing. And the work they are doing would have a LOT of positive effects. Transitioning off a fossil fuel economy is necessary, anyway, or our current budgent/debt issues are going to look like a five year old stumping his toe compared to the sort of catastrophes heading our way. So, this accomplishes that, and (why are all the conservatives not raving about this idea?) possibly frees and at least diminishes us from our "dependance on foreign oil."
Another possibility not being discussed is actually *lowering* the social security threshold. This takes a certain percentage of the population out of the workforce while giving them money to live on. It will all be people who are tired and ready to retire, no one can call them lazy (okay, someone who never got near the military got elected post-9/11 by impugning the courage and patriotism of someone who lost limbs throwing himself on a grenade, so, obviously, people can say damn near anything and get others to believe them, but, if held up to light, the "lazy bum getting free money" is a non-starter here). Again, more money overall being spent, thus more jobs, etc.
And this is the only way we are going to get more jobs--giving people, one way or the other, more money to spend. The companies are not going to hire people out of the goodness of their hearts. The small companies can't; the big ones have proven repeatedly over decades and more now than ever that even suggesting they do things for the common good is either a laugh line or a sign of insanity or proof that the speaker is either lying or doesn't know what they are talking about. Giving the companies money from the government won't make them spend or invest. What will make them do this is more people buying their products, creating a greater need for more employees and equipment and such so they will be able to mximize their profits.
I don't know how much growth this will achieve, but it's a hell of a lot more than we'll be getting if we don't do these things. (and all of this has ripple effects all over the place beyond what there is space to talk about here).Also, we should be taking a long hard look at what worked for Brazil and various other Latin American countries who made things better after being in much worse situations than we are YET, and also taking a long hard look at places like Ireland who did more or less exactly what we are talking about doing and where things got MUCH WORSE.
4th and 5th points-- ::applause::
final point -- Neither side is arguing about much that is real. Both sides are proposing disasters, simply disasters of different scale. We have to change (either their minds, their character, or their names) our elected officials, and do it fast. If we keep the public debate where it is now, turn out the lights, the party's over, and buckle up for the roller coaster ride that ends with a giant crash into sharp rocks at the bottom of a deep gorge.
Re: Rushed rewrite of half-baked amateur thoughts
Date: 2011-07-31 12:37 am (UTC)