Category Archives: DEFICIT

Rewriting History: James Buchanan and the National Debt


It is customary not to say bad things about people when they die, but that is not a reason to construct an alternative reality, as the NYT appears to have done in its obituary for James Buchanan. The obituary tells readers:

“Dr. Buchanan partly blamed Keynesian economics for what he considered a decline in America’s fiscal discipline. John Maynard Keynes argued that budget deficits were not only unavoidable but in fiscal emergencies were even desirable as a means to increase spending, create jobs and cut unemployment. But that reasoning allowed politicians to rationalize deficits under many circumstances and over long periods, Dr. Buchanan contended.

“In a commentary in The New York Times in March 2011, Tyler Cowen, an economics professor at George Mason, said his colleague Dr. Buchanan had accurately forecast that deficit spending for short-term gains would evolve into ‘a permanent disconnect’ between government outlays and revenue.

“‘We end up institutionalizing irresponsibility in the federal government, the largest and most central institution in our society,’ Dr. Cowen wrote. ‘As we fail to make progress on entitlement reform with each passing year, Professor Buchanan’s essentially moral critique of deficit spending looks more prophetic.'”


This discussion turns the reality of U.S. budget deficits on its head. As can be seen, the debt to GDP ratio was consistently falling in the 35 years following World War II. This was the period when we seeing the indiscipline of Keynesian economics at its fullest bloom. As Richard Nixon famously remarked during his presidency, “we are all Keynesians now.”

The debt to GDP ratio began to rise again in the Reagan era as a result of his tax cuts and military buildup. Ironically the piece tells us that Reagan era was when Buchanan’s agenda became “ascendant.”  In the post-Reagan era the debt to GDP ratio again began to decline under President Clinton. It rose slightly under President Bush, who is not generally viewed as a Keynesian, and then exploded after the economic downturn caused by the collapse of the housing bubble. 

In short, if Buchanan’s argument was that liberal demands for an ever expanding welfare state would lead to chronic deficits, history has shown him to be wrong. If the argument is that the desire for tax cuts and increased military spending, coupled with macroeconomic mismanagement, could lead to large deficits, there is a strong case.  

Rewriting History: James Buchanan and the National Debt
Thu, 10 Jan 2013 14:04:49 GMT

Debt Ceiling

It seems to me that the whole notion of debt ceiling is kind of foolish. If the Congress makes laws (with the President) to spend x trillion, and tax x-y trillion that implies a larger deficit. For the congress to mandate spending and inadequate tax to fund the spending, but then preclude borrowing is again foolish. Doesn’t the separation of powers imply the executive must choose which law to execute. That said borrowing in the executive purview, especially given the 14th amendment.

Are these the shadows of the things that Will be…

I take the debt seriously, but even so this is a bit over the top.

But it fits for Christmas.

via Economics One

(John B. Taylor) on 12/24/12

. . . or are they the shadows of things that May be, only?
But if the courses be departed from, the ends will change. So go back to First Principles, 102ff

Things you can do from here:

Krugman on the Budget deficit’>Further Notes on ONE TRILLION DOLLARS –

I generally agree with Krugman’s thesis.  The whole thing is below.  My quibbles would be:

1. He seems to assume we are willing to keep share of debt to gdp where it is now.  It’s almost as high now as right after the war, so I would question that.

2. I think his assumption about full-employment doesn’t recognize the reduction in full employment GDP that may be due to structural changes, some of a permanent nature from the recession among other things.

Together, I think this implies we have maybe a 100 to 200 billion hole in our budget even with full employment.

Yesterday I noted that the preoccupation with the size of the current deficit — which, as everyone reminds us, is ONE TRILLION DOLLARS — is completely misguided. Since then I’ve done some more arithmetic, which solidifies the point.

So, in fiscal 2012 (which ended September 30) we did in fact have a federal deficit of $1.1 trillion (pdf). The question is, however, whether this deficit represents, as everyone claims, a fundamental mismatch between what we want and what we’re willing to pay for — or whether it’s mainly just a reflection of the depressed state of the economy.

For starters, we need to be aware that we don’t need a balanced budget to have a stable fiscal situation; all we need is for debt to grow no faster than GDP. At the beginning of fiscal 2012, federal debt in the hands of the public was $10 trillion. Meanwhile, most estimates of long-run growth and inflation put them at a bit more than 2 and 2 respectively; so we can reasonably say that nominal GDP growth can be expected to be more than 4 percent per year. If debt grew at 4 percent, it would grow by $400 billion. So the deficit should be scaled down by that much.

That still leaves $700 billion. Where’s that coming from?

OK, revenues were $2.45 trillion, which was 15.7 percent of GDP, at $15.5 trillion. The CBO estimates, however, that potential GDP — what the economy would have produced at full employment — was $16.5 trillion over the same period. And if the economy had been at more or less full employment, we wouldn’t just have collected taxes on the additional income; historically, the tax share of GDP varies strongly with the business cycle. If the economy had been at potential and revenue had been a historically normal 18 percent of GDP, revenue would have been more than $500 billion more than it was; even if revenue had been only 17.5 percent, it would have been almost $450 billion more than it was.

Meanwhile, on the spending side, a large part of the rise in spending came from “income security” payments — in this case, basically unemployment insurance and food stamps — which surged due to high unemployment, but are already coming down. Here’s what happened:


You don’t want to attribute all of the $250 billion rise since 2007 to the state of the economy, but a large fraction surely is slump-related. Also, the slump had impacts elsewhere too — for example on Medicaid spending, probably on more people taking disability, and so on. So a conservative figure for slump effects on spending would be at least $150 billion.

Put these together: $400 billion that doesn’t increase the debt-GDP ratio; $450 billion or so in slump-related revenue loss; $150 billion or more in slump-related expenses; and guess what: the ONE TRILLION DOLLARS is basically just a depressed-economy story, having nothing to do with any fundamental mismatch between what we want and what we’re willing to pay.

And this makes a lot of sense! The budget wasn’t deep in the red in 2007, and there have been no fundamental increases in government responsibilities or cuts in taxes since then (Obamacare won’t kick in until 2014, and it’s paid for in any case).

Let me say once again that this doesn’t mean all is well in the longer term. Baby boomers are retiring and health costs are still rising, so the budget prospect for 2020 or 2025 is troubling. But the current deficit has nothing to do with those troubles — which means that anyone who invokes ONE TRILLION DOLLARS to make a point about the budget thereby demonstrates that he has no idea what he’s talking about.

Fiscal Myths

A bunch of myths these days.

One is that the rates for increased taxes for high income individuals are only going back to the Clinton rates.  That’s not true since we face the higher rates of Obama care and higher income tax rates.

Another is that the fiscal cliff will further explode the deficit.  In fact, the deficit will decrease if we go over the cliff.  As noted 47% (that number again!!) think this.

Going over the cliff might be good for us if we get a real start on balancing our books.  I think we need to reductions in entitlements and increased taxes that impact most of us.  Maybe the wealthiest should bear the largest burden, but politicians have to stop telling us that we can have lots of service and GET SOMEONE ELSE TO PAY FOR IT:  no more trying to lay off the deficit on the back of the poor (the GOP) or the rich (I am talking to you Democrats.

Published on Calculated Risk | shared via feedly mobile

Oh my. From Business Insider: 47% Of People Think The Deficit Would INCREASE If We Go Over The Fiscal Cliff

Were the United States to “go over the fiscal cliff,” what do you expect would happen to the National Deficit?

At least according to the CBO and most economists, the correct answer is that “It will decrease.” Going over the Fiscal Cliff would, according a Congressional Budget Office study, result in a reduction in the National Deficit of $607 billion between fiscal years 2012 and 2013.

However that was not the most popular answer. Per the survey, 47.4% of respondents said that the deficit would INCREASE if we went over the Fiscal Cliff. Only 12.6% think it will decrease.

Sent from my Kindle Fire

Balancing the Budget with Tax Cuts and Defense Spending Increases

Obama’s record on the dealing the deficit leaves a lot to be desired.  However, it seems that Romney would be worse, especially given the fact that he wants to increase defense spending, even though we already outspend the next several biggest spenders combined.

Charles Riley of CNNMoney has a must see graph showing how defense spending under Mitt Romney would compare to the current DOD baseline budget over the next decade. His title notes the spending over the next decade will exceed the baseline budget by more than $2 trillion. I like this:

Romney has proposed a slew of tax cuts, and plans to cap federal spending at 20% of GDP. But in both cases, the Romney campaign hasn’t fully explained how those provisions will be paid for. The lack of detail means that Romney’s claim of moving toward a balanced budget requires a great deal of trust.

But no one should trust Mitt Romney on fiscal matters. No one.

Balancing the Budget with Tax Cuts and Defense Spending Increases
Thu, 10 May 2012 20:08:00 GMT

Econ 101 for the Supercommittee at Steven Landsburg | The Big Questions: Tackling the Problems of Philosophy with Ideas from Mathematics, Economics, and Physics

Econ 101 for the Supercommittee at Steven Landsburg | The Big Questions: Tackling the Problems of Philosophy with Ideas from Mathematics, Economics, and Physics.