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The Economy Is Soaring, and Now So Is the Deficit. That’s a Bad Combination (fivethirtyeight.com)
35 points by samsolomon 10 months ago | hide | past | web | favorite | 34 comments

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...

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

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

In theory. In reality that can be the case but is very hard to forecast. Those projects rely on 30+ year estimates of travel habits. Much of the fibre infrastructure put in the ground during the dotcom bubble would still not really be profitable. On the other hand, road demand is far above expectations because of ecommerce and more complex supply chain.

Doesn't mean we should do these projects but financing them purely out of debt because of higher anticipated growth is dangerous.

The trillions of dollars was spent on what is the us military industrial complex. If the wars in Iraq and Afghanistan cost 2-3 trillion 80-90% actually went to american companies. One of the reasons it is hard for the US to get out of wars and decrease spending on military is that will stop the economic growth in many US states. If us gave billions in aid to fighters in Syria most of the money came back to the us through sales of arms.

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.

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.

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.

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.

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.

During maybe if you time it right, but beginning at the start of an economic rally, so it's accelerating effects kicks in just in time to fan the flames at their height?

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."

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.

> 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.

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

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


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.

But it does look like we're at the start of an economic rally.

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.

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.

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.

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.


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

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. :)

If you have a few minutes, I wonder if you could translate these proper names, and what you're saying here, for the non-economists out here? (:

I've seen Keynes mentioned here and on reddit with some frequency, but that's about it.


I'll try - it's a huge topic, and I'm only an interested amateur!

[This will be too condensed and no doubt inaccurate in many places.]

Keynes was a famous British economist who advocated saving a proportion of income during a surplus and using it to smooth out the worst of a downturn. In short he was in favour of intervention, but on the back of saving some during times of surplus. What's taken for Keynesianism today is usually just the spending on infrastructure during a downturn. Which is what he advocated at the height of the great depression after years of failed austerity. Crucially, perhaps, he didn't advocate intervention in every case. He was highly critical of the UK govt austerity response to the Great Depression. That criticism led to communications with Roosevelt and they met at the height of the depression. The build up to war turned out to be the largest test of "Keynesian" ideas rather than policies.

Toward the end of the war Bretton Woods was an agreement of the major nations to set rules for trade and finance. The USSR attended too but declined to ratify. It led to the formation of the IMF, and World Bank. I say watered down as the Keynesian vision was to provide incentives to return to mean for both surplus and deficit countries. What we got put the responsibility on the deficit country only as a result of American pressure. Keynes was overruled by the US representative Harry White on many points, but later events often proved him correct. Keynes died in 1946. Interestingly Harry White turned out to have been a Soviet agent from at least mid-war on.

Milton Friedman, Fredreich Hayek and the Chicago School of economics, believed in the free market and a hands off approach. He was an adviser to both Thatcher and Reagan. His ideas are more of the "let the market sort it out". What we got under Thatcherism and Reaganism is not a fair reflection of Chicago School ideas either as Hayek was quite comfortable with the idea of a welfare state and healthcare. They also seemed comfortable with strong regulation to ensure the fairness of the market. That seems somewhat at odds with the government policies that resulted "in their name".

Friedman was a US academic at the University of Chicago who, along with Hayek, was part of the Chicago School of economics. A little known fact, thanks to the association with Thatcherism/Reaganism, is Friedman advocated a negative income tax to give all citizens a basic minimum income!

There does seem to be, to me, to be too much of a mission against Socialism especially in Hayek he hammers the point so often that it really detracts from his point. Keynes, however, was certainly not a Socialist. Aside: it was Keynes who nominated Hayek for membership of the Royal Academy.

TL;DR We've seen a partial implementation of both schools of thought but neither completely or accurately.

The fed will have to put up interest rates.

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

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...

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.

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.

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

As always, some variation of “it’s different this time.”

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.

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.

good tip, edited the original

The government finances the deficit by borrowing real assets from capital markets. This borrowing is competition for private companies also seeking capital. The government generally invests in things that don't improve growth and productivity, such as military and repaying old debts, so this borrowing is a misallocation of resources. The government is taking money out of the private sector when it runs a deficit.

After the abolition of the gold standard, the bond markets are no longer necessary for financing. They are a historical artifact and today's real purpose is to provide businesses with a safe investment (federal gov can always pay back a bond+interest)

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