Saturday, February 28, 2009

State of the Union review & deficit spending

My 2¢ on the GOP penchant for deficit spending:

It is usually political suicide to cut federal spending for entrenched, existing programs. It is a much easier row to hoe to reduce taxes. In the Field of Dreams analogy, if there is money, government will spend it. Before GWBush's "Compassionate Conservatism", which looked like a donkey in an elephant suit, the GOP usually tried to limit the size of government to the size they inherited versus turning back the clock. Thus, the GOP would limit government revenue with the hope that government spending would be reduced to fall in line with input. This never happens, so the Democrats raise taxes to pre-GOP levels as soon as they enter office to eliminate budget deficits. My hypothesis is that if we didn't play this sinusoidal tax rate kabuki game, government expenditure would continuously increase, driving the tax rates to increase until it reached 100%. As Margaret Thatcher pointed out: "the problem with socialism is that you eventually run out of other people's money” .

On to summarizing the online game of political baseball:

From center right field:

For those interested, [Adagio: A usually leftward leaning source] has an article outlining some incorrect claims made by Barack Obama in the Not Really the State of the Union Address the other night.

One thing that is unfortunately missing from their report relates to the "deficit [Democrats] inherited". The deficit in 2008 was 455 billion dollars. It has been more than doubled to 1,186 billion dollars in 2009 , partly due to decreased revenue, but mostly due to additional spending.

If you look at it in terms of percentage of GDP, it looks much worse.

However, the percentage of GDP graph exaggerates the change in budget deficit, probably because GDP is most likely shrinking.

There was no deficit in 2000. There was a surplus of approximately $230 billion. So, it seems the previous administration (and Congress, the last two years Democratic) added as much to the deficit over the last eight years as the current administration has in the last two months.

Byron Duvall

From far left field:

Wow! Yes, a mere $250 billion in decreased revenue, which also happens to be better than a third of the additional deficit. And, "mostly due to additional spending." Let's see what that additional spending would be. $184 billion for TARP to bail out the financial services industry. And $218 billion to cover the private sector's screw ups with Fannie Mae and Freddie Mac.

Let's be clear about what is happening here. bush and his cronies drove the country into the ground. Obama is trying to fix it [Adagio: I get the impression we just changed to different clique of cronies siphoning off government subsidies]. If you've got a better solution let's hear it [Adagio: It's called free marker capitalism: Let poorly managed businesses fail & well managed businesses prosper. Do not tax well run businesses to subsidize poorly run businesses that just happen to be politically well connected].

Dennis Loranger

From center-right field:

One problem in determining how much deficit spending is really taking place is that revenue generated by the payroll tax (Social Security) is borrowed by the federal government to cover current spending levels. Currently Social Security runs a surplus that is there is more money coming into the system than needs to be paid out. In about 2017 that changes. At that point the federal government will have to pay itself back, so to speak, to make up the difference between the money that comes in from Social Security taxes and the payments to those who are receiving Social Security benefits. Add to this situation the amount of money that will be needed to service the federal debt and a troubling scenario begins to emerge. I found a GAO report that explains this is good detail and it is worth a look. Here is the link:

As to whether stimulus spending works, well that is something that generates considerable debate among economists (Note: I am not an economist but had a heavy dose of economic policy while earning my MPA). Those that prescribe to Keynesian theory will argue that it works while those that subscribe to the theories of the Austrian School and the Chicago School will argue that it does not. The difference between these different schools of thought can get rather complex and a thorough discussion and debate of these theories is not possible to provide in this forum. I would encourage all who read this to do their own research and background readings to develop a solid understanding of these different ideas in Economics. From what I have read the bailout money given/loaned to the banks was probably necessary (both the Obama administration and the Bush administration agree at least in principle on this). There is just so much bad debt held by the major banks and other financial institutions that something needed to be done. Was the bailout the right thing to do? We don’t yet know. One problem I have with bailing out institutions is that it can be a moral hazard. A moral hazard is a policy that encourages perverse behavior. In the future financial institutions may have an incentive to engage in risky behavior with the belief that the government will bail them out. [Adagio: hear! hear! It's called Pavlovian conditioning. We are punishing the prudent & rewarding the profligate]

Brent Stocksdale

From the cricket pitch:

It is the worst time arguing about deficit spending. Just a few hours ago, Citi Bank, once the largest bank in the world, was de facto nationalized (Fed. is now the largest shareholder). The only alternative for Citi is bankruptcy. Without deficit spending and stimulus package, many of us would be out of jobs. We, USA, are running the biggest Ponzi scheme ever. Once it started, we have to keep running until it gets burst. Obama chose to keep the party going to buy some time. Why shouldn't he? It is so unfair that white guys ripped off everybody and left the broken nation on the shoulder of a poor black man hoping for some kinds of Africa mystery magic to find treasures [Adagio: only a non-Caucasian can get away with alluding to Spike Lee's "magic negro" terminology & not be disciplined].

Dr. Chaocheng Huang

More bowling on the cricket pitch:

Is there any economist who is truly politically independent? Isn't it a well-known fact that every economics theory either is motived by a particular political/religious ideology or coincides with such a political ideology? It seems to me that everything financial crisis happening right now is exactly what predicted by Karl Marx, the pioneer of Socialism. We are simply in denial, due to the political circumstance. Only Socialism will save USA.

Obama is spending tons of money to only make us happy, and he is doing what a politician is supposed to do under our political system. Without this stimulus package, our university budget would be severely cut and many hard working staff members here would lose their jobs. Is that what you want?

Even ultra-conservative Peter Carusone has been keeping quiet recently. He knows that he cannot make living anymore and his free-loaded pension would be cut off without continuous emergency transfusions by Fed. since Ohio state budget would be in deep trouble. We are all living in the fantasy and we all know the party will be over one day. But we all hope the party can last as long as possibly. There is no alternative. Enjoy while we can.

Dr. Chaocheng Huang

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