More Debt = Lower Unemployment?

This is the video in question:

These are the numbers I am looking at:

History of the US Public Debt

History of US Unemployment

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James Galbraith’s “Wisdom” on the Deficit

If your head doesn’t explode when exposed to the brain-numbing, foggy, clouded, boring, repetitive, and useless droning of mainstream economists, then you might find this post entertaining.

Otherwise, I recommend you don’t read on.

Here is a comment that James Galbraith made in a recent interview:

EK: You think the danger posed by the long-term deficit is overstated by most economists and economic commentators.

JG: No, I think the danger is zero. It’s not overstated. It’s completely misstated.

EK: Why?

JG: What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate.

My comment: Wow, that’s pretty amazing indeed. If this is “the only possible answer” he can come up with, then of course it makes perfect sense for him to hold such beliefs. But in that case he might be well advised to take his half baked thoughts back into the kitchen and stick them in the oven once more.

The nature of the problems with deficits is unfortunately a fundamentally different one, and it has nothing at all to do with potentially rising interest rates. At the root of the problem with deficits is the misdirection of resources toward bureaucratic waste and corruption, away from demanded productive factors and voluntary choices, which ultimately all has to be borne by the taxpayer in the form of higher taxes. As I explained before in great detail:

The burden of restricted consumption is thus shifted over time from the investor over to the taxpayer. However, the investor made the choice voluntarily, along with all the risk of default which comes with the contract. (In fact, a complete debt default is precisely what the investor would suffer for funding a comparable project on the market, ensuring corresponding and healthy incentives moving forward.) The investor’s time preference and value preference is at no point being acted against. Nothing is violently taken away from him or anybody else. He willingly participates in the transaction.

The taxpayer, however, never had any choice. He doesn’t necessarily realize that what the government consumes now will be funded by his restricted consumption in the future. Money that would usually have been used to fund the purchases and thus spur production of capital goods (whose employment would increase the production of consumer goods in the future), is now employed in fundamentally consumptive government activities which necessitates that the debts be paid off through the restriction of future consumption lest a default occur.

But the crucial point with the budget deficit is that, from the consumers’ (= the majority’s) point of view, the effects of deficit financing don’t show up until a later point in time. In the meantime it all appears to be taking its normal course as things would on the market. But when the debts need to be paid off, the expectation that the borrowed funds were used to obtain capital goods which would enable repayment through the production of more consumer goods with less labor input than before, turns out to be a completely false one. No new capital was generated from the projects in question and upkeep of existing capital was, as a tendency, being neglected. Capital consumption inevitably ensues.

Thus, with a budget deficit, and more broadly with the public debt, the fundamental damage occurs at the point where money is taken away from the taxpayer to pay off the investors who voluntarily funded unproductive and ultimately coerced projects in the past.

Now, if anybody thinks he brings something new to the table by objecting with the argument “but the government does invest in demanded productive factors”, I would kindly ask that person to show me the prevailing and abounding examples of government projects that were so productive that the debts which funded them could be paid off out of the proceeds from the sale of the plentiful output of demanded consumer goods generated via the “investments” made, so that taxes were not needed to pay off the debts. To make it easy, I would even, just for starters, be happy with one single example! Not that that would rest the case, but if would show some foundations to the objection, rather than just mindless trash pulled out of nowhere.

Anyway, Mr. G. rambles on:

Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn’t be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis.

My comment: You see how he misses the fundamental point? He thinks that the concern over the deficit is driven by concerns over the government’s ability to fund the deficit. I have little doubt, and have always said so, that for now and probably for quite a while longer the US government will be able to honor its public debts. But what I have also said is that it will do so by taxing and looting us to the hill! Galbraith doesn’t give a damn about this problem. To him, as long as the government can pay off its debts, there are no problems.

From his point of view it makes perfect sense. He has been a public servant for pretty much all of his professional career, and probably depends, directly or indirectly, on government grants, subsidies, and positions/fellowships in his job. He has never had to sell any products and services on the market, deal with consumer feedback, or fundamentally understand the incentives provided by competition and the vices of bureaucracy. He will pay lip service to some of these ideas where it’s absolutely necessary. But he will never understand what it means to be in the shoes of someone who is not in government.

He sees no need in delving into such mundane subjects as entrepreneurship, profit and loss, factors of production, the problems with bureaucracy, the problems with letting concepts overshadow empirical reality.

So there are two possibilities here. One is the theory is wrong. The other is that the market isn’t rational. And if the market isn’t rational, there’s no point in designing policy to accommodate the markets because you can’t accommodate an irrational entity.

My comment: Isn’t it amazing how he talks in absolutes all the time? Again and again he says things like “there is only one possible answer” or “there are only two choices”. But saying so doesn’t make it true, Mr. Galbraith. You do need to provide some reasoning if you don’t want to appear like a complete clown.

Let’s assume for a moment (yes, I am making it as easy as possible for him) that he is right about the idea that the only problem one could possibly think of when talking about the deficit is that they push up interest rates. Fine. In that case you can’t just look at the nominal interest rate that currently prevails on the market! You have to look at the difference between the rate that would have prevailed, had the government balanced its budgets from now through the next decade, versus the rate that prevails now based on trillions upon trillions in deficits.

I would humbly submit that the prevailing rate would now be much lower than it currently is, had the government balanced the budget. This is not to say I know this for an absolute fact, nor does Mr. Galbraith or anybody on this planet. But evidence and logic leads me to believe that this would be the case. And I do think I might have at least a little bit of credibility based on my past predictions in the Treasury market. So even when I accept and apply his completely false premise, I still end up unsatisfied and utterly unimpressed with his “logic”.

I hope you can understand that if his fundamental knowledge and theories about the government deficit are based on such rampant nonsense, there is really no point in listening to or dealing with anything that follows from it.

Thus I won’t delve into the remainder of his ramblings because it quite honestly makes me angry. I have nothing but sincere disdain for pompous intellectuals who carelessly advance such dangerous theories that are bound to hurt millions of people in the long run.

The blood and sweat of generations is on the hands of the mystics and apologists of the powers that be. They are the ones who make suffering and corruption possible, and they are the ones we have to defeat once and for all in the battle of ideas.

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Federal Deficit Hits April Record; 4 Times Higher Than April ’09; Where’s the Recovery?

The Federal deficit has reached a record level in April:

The federal budget deficit hit an all-time high for April as the government kept spending to aid the recovery while revenue fell sharply.

The Treasury Department said Wednesday the April deficit soared to $82.7 billion. That was significantly higher than last year’s April deficit of $20 billion and the largest imbalance for that month on record.

The government normally runs surpluses in April as millions of taxpayers file their income tax returns. However, income tax payments were down this April, reflecting the impact of the recession which has pushed millions of people out of work.

Total revenues for April were down 7.9 percent from a year ago.

The Obama administration forecast in February that the deficit for this year will hit an all-time high of $1.56 trillion, surpassing the current record $1.4 trillion set last year. Many private economists believe this year’s imbalance will be closer to last year’s figure and that deficits will remain high for years to come.

Flashback – in January 2009 I wrote:

The estimated receipts for 2008 are $2.5 trillion. It is save to assume that the upcoming tax shortfall will dwarf all precedents. But to make the outlook as optimistic as possible we shall assume a drop of just 10% per year:

Federal tax receipts will fall to $2.25 trillion in 2009, to $2 trillion in 2010, to $1.75 trillion in 2011, and to $1.5 trillion in 2012.

In February 2009 I followed up re. the deficit:

Now that we have updated figures on coming expenses it’s time to update the deficit predictions:

  • $1.65 trillion for 2009
  • $1.6 trillion for 2010
  • $1.95 trillion for 2011
  • $2.2 trillion for 2012

If President Obama keeps spending like this, and really wants to cut the deficit in half by 2013, he will at one point be faced with no other choice but to raise taxes on all Americans, rich, middle class, and poor.

Reuters notes U.S. posts 19th straight monthly budget deficit:

It was more than twice the $40-billion deficit that Wall Street economists surveyed by Reuters had forecast and was striking since April marks the filing deadline for individual income taxes that are the main source of government revenue.

Department officials said that in prior years, there was a surplus during April in 43 out of the past 56 years.

The government has now posted 19 consecutive monthly budget deficits, the longest string of shortfalls on record.

For the first seven months of fiscal 2010, which ends September 30, the cumulative budget deficit totals $799.68 billion, down slightly from $802.3 billion in the comparable period of fiscal 2009.

Outlays during April rose to $327.96 billion from $218.75 billion in March and were up from $287.11 billion in April 2009. It was a record level of outlays for an April.

Department officials noted there were five Fridays in April this year, which helped account for higher outlays since most tax refunds are issued on that day.

But for the first seven months of the fiscal year, outlays fell to $1.99 trillion from $2.06 trillion in the comparable period of fiscal 2009, partly because of repayments by banks of bailout funds they received during the financial crisis.

Receipts in April — mostly from income taxes — were $245.27 billion, up from $153.36 billion in March but lower than the $266.21 billion taken in during April 2009.

Receipts from individuals, who faced an April 15 filing deadline for paying 2009 taxes, fell to $107.31 billion from $137.67 billion in April 2009.

The U.S. full-year deficit this year is projected at $1.5 trillion on top of a $1.4 trillion shortfall last year.

White House budget director Peter Orszag told Reuters Insider in an interview on Wednesday that the United States must tackle its deficits quickly to avoid the kind of debt crisis that hit Greece.

What he means by that is of course: We need to quickly raise taxes to solve the problems caused by the deficits.

See, the problem with budget deficits are that at some point higher taxes will be needed to pay off old debts. Thus, these brilliant geniuses will sooner or later tell us that the “solution to the problem of deficits will be higher taxes” … which are the very problem of deficits.

You really couldn’t make this stuff up. Only in government

In light of consistently falling tax revenues across the board, with the reasons cited being less employment and lower sales, one just might feel impelled to be so insolent to ask: Where’s the recovery we keep hearing about all over the place?

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Federal Tax Receipts & Deficits Develop as Expected; Obama Administration on Solid Track to Post Largest Deficits Ever

Annual federal tax receipts are dropping toward the 2 trillion mark:

Meanwhile deficits reaching absolute record levels:

Here are my estimates from earlier this year which I believe our government is more or less on track to meet or even surpass:

Federal tax receipts will fall to $2.25 trillion in 2009, to $2 trillion in 2010, to $1.75 trillion in 2011, and to $1.5 trillion in 2012.
Now that we have updated figures on coming expenses it’s time to update the deficit predictions:

* $1.65 trillion for 2009
* $1.6 trillion for 2010
* $1.95 trillion for 2011
* $2.2 trillion for 2012

… record deficits everywhere and no end in sight.

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