
The Economy Is Soaring, and Now So Is the Deficit. That’s a Bad Combination - samsolomon
https://fivethirtyeight.com/features/the-economy-is-soaring-and-now-so-is-the-deficit-thats-a-bad-combination/
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EGreg
Usually when the economy is soaring, it's time to pay back your debts.

To do that, you have to at least rein in your deficits.

When the private sector is doing great, the public sector doesn't have to
stimulate it anymore.

However, infrastructure projects tend to have high multipliers - think the
interstate highway system and the internet.

I would cut overseas spending. That accounted for trillions of dollars. Why
should we pay more for the army's unspecified expenses around the world, when
there is this: [https://www.rt.com/usa/356562-pentagon-account-trillion-
audi...](https://www.rt.com/usa/356562-pentagon-account-trillion-audit/)

Why should we help Saudi Arabia with billions in weapons to bomb Yemen in
their proxy war against Iran?

~~~
gwright
I don't think weapons sales are a component of the federal deficit. As far as
I understand it the sales are vetted/approved by the government but the actual
transaction is between the manufacturer and the foreign government (Saudi
Arabia in your example).

Not trying to take a stance on selling weapons to anyone or to Saudi Arabia in
particular or to bomb Yemen in particular, just trying to point out that
weapon sales aren't the source of US federal deficits.

~~~
EGreg
You're right, that's a separate moral issue.

But as far as expenditures on NATO and the 800 bases around the world with all
their stores that's what contributes a lot to the deficit.

~~~
gwright
Agreed, providing a national defense for our allies is expensive and our
allies have taken advantage of our defense umbrella. Spending more on social
welfare programs is a lot easier if someone else is paying for your national
defense.

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mrfusion
I’ve heard that infrastructure projects take a long time to get started. So
the ideal time to launch an infrastructure bill might actually be during a
strong economy.

~~~
dx034
If you have prepared plans, infrastructure is well suited because it can be
started so quickly. Hiring can start immediately once the contract is signed,
construction often starts only a few months later.

But that assumes that all planning stages have been completed. Those take the
longest (often several years) but are less costly. So preparing those would be
worth it now, starting to actually hire people to build would however increase
the risk of overheating the economy.

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jnordwick
He's using this horrible thing called the growth gap. It is this made up
metric that assumes economic models are correct ahead of actual reality. It
essentially measures actual growth against opinion. Its the old quip "It may
work in practice, but it will never work in theory."

Potential GDP is defined as what the economy is capable of growing at. How is
that determined? By a model. And if we are growing faster than the model says,
it is assumed to be growth borrowed from the future. And growth below
expectation can then be seen as storing up for the future. Under this
incredible strange up-is-down interpretation, you'll see how far below
expectation the Obama administration was. Some how not meeting expectations
can now be a good thing.

1- So even if this were true, the above and below periods should balance to
zero over a long enough time. If they don't, then there is a problem with your
model not predicting growth properly. In the second chart, growth is often
below expectation since the 1960s (as far back as the chart says) and almost
entirely below since the 1980s. Something is clearly wrong with the potential
growth model.

2- if it were true, why is this not a rebounding from the previous below
potential of the last couple decades? In that case we aren't above potential
just catching up to it.

3- using the output gap as a strong/weak signal doesn't even pass the smell
test: it would show the economy of the 1980s as being inferior to the 1970s.
In fact, it would show no economy being as magical time known as the 1970s!

Curious who this guy is, it is a terrible article, i found his academic page:
"Evan Horowitz is an assistant professor of English at the University of North
Texas who specializes in Victorian literature and culture."

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astro_robot
It seems like the article can be boiled down to 2 points.

1.) Deficit increasing projects (Infrastructure the main example) should be
conserved for when the economy is weak so the Government can use it as a way
to introduce money into the economy.

2.) Increasing deficits during an economic strong period requires the
Government to increase the number of lenders by increasing the interest rates,
which in turn puts unneeded pressure on companies to increase their interest
rates.

I have a couple of confusions from this article. Isn't beneficial for the
Government to increase interest rates so they are able to cut the rates during
the next recession to increase borrowing? Also, why is it bad for companies to
be increasing their interest rates? I am presuming that the tax cut bill will
introduce more money into companies to be able to increase their rates.

I'm always worried reading the opinion articles on Five Thirty Eight since
they tend to have a left-ward leaning bias. Their articles that focus on
statistics are usually fantastic.

~~~
thisisit
> Isn't beneficial for the Government to increase interest rates so they are
> able to cut the rates during the next recession to increase borrowing?

I am no economist but interest rates not raised so that they can cut it later.
Rates are used for variety of reasons - control money flow and inflation are
two of them.

If say today you can get cheap credit at say 1% interest rate you will take
it. I can't afford whatever you built but I can get 1% interest, I will take
it and spend it. Sooner or later, there will be lot of companies and consumers
jostling the limited space and prices start to spiral making it stifling the
exact innovation cheap credit was supposed to inspire. So government starts to
raise rates.

The idea is to keep things in balance but no one really has an exact formula.
Hence, things go from one extreme to other.

> Also, why is it bad for companies to be increasing their interest rates? I
> am presuming that the tax cut bill will introduce more money into companies
> to be able to increase their rates.

Let's take the example of Tesla. They have taken tons of debt. Their strategic
plan might be to scale to x number of cars each year to pay off the debt.

Every time car production is delayed, there is stress on their cash reserves.

Today they might need to pay back y amount of money. But if interest rates are
increased tomorrow it might be y +2 which might deplete their cash reserves
even faster.

Tax cut just like interest cuts are one of the tools used to encourage
spending. Just like higher interest rates, tax cuts are more beneficial during
a slump.

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paulpauper
If you look at the blue graph, hardly looks like 'soaring' to me. 3% GDP is
not soaring

~~~
samfisher83
Not sure which graph you are looking at. If you look at the following:

[https://espnfivethirtyeight.files.wordpress.com/2018/02/horo...](https://espnfivethirtyeight.files.wordpress.com/2018/02/horowitz-
deficits-011.png)

You will see as economy gets stronger deficit will shrink which is what you
see in the late 90s and toward the end of W the era. When Financial crisis hit
the deficit grew as government pumped in money to stabilize the system and as
the economy grew better under Obama the deficit shrunk. The economy is pretty
strong by most measures so you would think the deficit would shrink. However
with tax cuts and spending increases that is not going to be the case.

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paulpauper
When Trump won, the odds of tax cuts instantly jumped from 10% (the odds of
Trump winning) to about 100%. The may have caused companies to change their
forecasts and spending as if the tax cuts had already happened, possibly
providing a small economic boost despite the tax cuts having not yet happened.
Same same for stimulus spending, but the odds on of that are less certain
(maybe 50%). What is more likely to happen now is that there will not be high
inflation despite the high deficits. I remember reading the same arguments in
the 2000's about how the Bush tax cuts would cause high inflation, but the
inflation never came. The reason is tax cuts and stimulus cannot be both
ineffective and inflationary. The consensus by many economists seems to be
that tax cuts and stimulus only provide a most a modest economic boost, if
any. This means that interest rates won't have to rise too much, but longer-
dated bonds may suffer.

~~~
omgwtfbyobbq
I believe a big reason inflation didn't take off last time was that the Fed
kept rates low until we were solidly in a bubble, and only raised rates a year
or two prior to the asset bubble bursting. I wouldn't be surprised if the ~4-5
years of lower rates, plus the tax cuts, and maybe other increases in
spending, allowed asset prices to rise well beyond their real long-run
averages.

If the Fed raises rates going forward, that should temper asset prices, but if
they don't, I would be surprised if asset prices didn't increase.

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oldcynic
Funny that. Not exactly surprising. How many years will it take to debunk
Friedman I wonder? Or at least to fall from fashion.

It's a pity Bretton Woods only let the world try a watered down version of
Keynes.

~~~
jackhack
As a student of the Austrian economics model, I say thank God Keynes' heavy
intervention model was never fully adopted. Meddling in markets makes for more
volatile reactions when the markets finally correct -- and they always do.
market forces are intrinsic and can only be ignored (or papered over) for so
long.

[https://seekingalpha.com/article/2826066-keynesian-vs-
austri...](https://seekingalpha.com/article/2826066-keynesian-vs-austrian-
economics)

Bonus topic: For those who are not aware, the Federal Reserve is not a branch
of government. It is a cabal of international banks, formed in a secret
meeting of world banking leaders travelling under false names, at Jekyll
Island, South Carolina, and voted on in a christmas-eve session of congress in
1913 when many members had already left for home (so a majority was easier to
achieve). They are absorbing the wealth of the world through inflation.

Andrew Jackson was right -- a den of vipers and thieves, indeed.
[https://en.wikiquote.org/wiki/Andrew_Jackson](https://en.wikiquote.org/wiki/Andrew_Jackson)

~~~
oldcynic
Austerity and letting the markets get on with it is far from always
successful. Look at the UK's economy since '08\. It didn't get us out of the
Great Depression either.

Agree more fully on your den of vipers topic - but that rather reinforces that
markets are not fully free or fair. Homo Economicus is, after all, very
different from Homo Sapiens. :)

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sgt101
The fed will have to put up interest rates.

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mrfusion
What’s the counterargument to all this doom and gloom?

~~~
dschuler
I think it was a footnote in The Intelligent Investor (Graham) that mentioned
inflation could be seen as a benefit for government, by reducing the value of
the national debt.

Now official inflation figures are still quite low (around 2.5% from Bureau of
Labor Statistics [1], unless I'm reading it wrong or not looking at the right
chart), but from personal experience I think these figures are being lowballed
significantly. Compare for example the cost of buying a condo in a major city
or the price of a cup of Starbucks coffee - both have easily outpaced a 2.5%
increase.

[1] [https://www.bls.gov/charts/consumer-price-index/consumer-
pri...](https://www.bls.gov/charts/consumer-price-index/consumer-price-index-
by-category-line-chart.htm)

~~~
skellera
Home values are extremely inflated from the low interest rates. Credit became
so cheap so people could “afford” much more expensive homes. As rates go back
up, housing prices SHOULD fall. I worry they won’t though and people will no
longer be able to own a home unless they are pretty wealthy.

~~~
onlyrealcuzzo
House prices are sticky. They easily go up when interest rates fall. But when
interest rates rise, housing usually remains stubborn until the cycle
collapses.

~~~
jazzyk
It did take 5-6 years, but prices in Spain fell ~40% off their highs reached
in 2008

------
mempko
The real potential problems with a deficit are inflation (which isn't high)
and bad allocation of real resources. Financing it isn't a problem.

The US government spends X amount. That means X amount enters the economy.
Then they ask for Y amount back. Y amount are taxes. X-Y is the deficit. The
deficit ends up in our bank accounts as savings. Reducing the deficit means
fewer dollars enter the economy which means less money in people's savings
accounts. Smaller deficit means a slowdown in the economy.

Where does the federal government get X amount? Same place a score keeper gets
the points they give out in a football match. It comes out of nothing. Its
literally a computer key stroke. The treasury and the IRS don't even talk to
each other. There is no problem financing the deficit.

~~~
onlyrealcuzzo
Just a writing tip:

You're getting down voted, and if you reordered your statements you probably
wouldn't.

This is a thread that attracts people complaining about the budget. Your first
statements make it look like you think everything is fine, which is in
disagreement, which turns people off and makes them down vote you.

But your point is that there is a problem, and it's actually allocation, which
is a good point.

If you put that first and backed it up, and then debunked the deficit, more
people would likely read it, and they might agree with you too.

Anyway, hope that helps.

~~~
mempko
good tip, edited the original

