The economists who are advising Presidential candidate Joe Biden recently met virtually at the Brookings Institute to discuss the impact of annual government budget deficits and the total public debt.
They concluded that in the short term, the deficit and the debt really do not matter, meaning they will encourage the prospective/maybe Biden Administration to increase government spending.
Former Treasury Secretary Summers attacked the wisdom of the Hussein Obama-commissioned 2010 Simpson-Bowles recommendations that the deficit should be reduced immediately and that the federal government should work toward a balanced budget.
Mr. Summers said, “Everyone was in agreement that having something like Simpson-Bowles would have been a good thing. If that goal had been achieved the consequences would have been catastrophic.”
Mr. Summers and the others said that deficits and the large public debt should be tolerated, at least in the short term and perhaps even longer, because of the current state of the economy.
They have a point, however the problem is that once deficits are incurred, it becomes very difficult to balance the budget in future years.
Ever since Y 1963, when the Kennedy/Johnson tax cuts created a deficit, the budget has had a deficit for 53 of the last 57 yrs. The result: the public debt, which is the total of all deficits, is now $26-T.
The Big Q: Is that a problem?
The classic Big A is that as long as the public debt is less than 1 yr’s GDP, it is tolerable. Above that, the public debt is a problem. This yr’s GDP will be in the $20.5-T range, meaning the debt exceeds 1 yr’s GDP.
The panel had a response to that, saying that the public debt should not be measured by 1 yr’s GDP. Rather, they argued, the debt should be measured against the present value of all future income. They say that even with today’s huge deficit, that measure has been relatively constant.
There is a problem when calculating present value.
These 2 basic assumption have to be made: 1 is the average annual growth rate. What will the average long-term growth rate be, is it 2% or 2.5 % or 3%, or higher? That assumption has a huge impact on the present value.
And 2, to compute present value an interest rate must be used. The panel will justify their argument by using low interest rates, which increases the present value. The higher interest rates that will eventually result from a huge public debt, also has a large negative impact on present value.
Because of the uncertainty in those 2 assumptions, it is very difficult to calculate a reliable present value.
Another Key issue is the interest payments on the public debt currently about $400-B annually, which is almost 9% of government spending. That number will increase significantly as deficits are incurred and the total debt increases. That’s $400-B of taxpayer dollars that can’t be used to fund valuable programs.
Plus there is no mechanism in place to ever repay the debt, unless the government runs a budget surplus.
In other words, to finance the annual deficit long term bonds are sold. Interest is paid annually on those bonds. When the bonds mature and must be repaid, the government sells new bonds to pay off the old bonds, meaning the debt is never repaid
Mr. Summers’ group measures the debt and the annual interest expense against total GDP, arguing that GDP shows the total income earned in the economy. But the debt is the federal government’s debt and should rightfully be measured against the federal government’s income.
In that case the current debt of $26-T is about 700% of the federal government’s annual income of $3.6-T. As interest rates rise the interest expense will increase and eventually the burden will crowd out other spending and lead to growth-slowing tax increases.
Economic policy should be geared to making sure that the V-Shaped recovery from the deep instant recession, continues, so that some deficit spending makes sense for Y 2021. Beyond that, no analysis of alternative facts and measurements, can justify deficit spending into the future.
Assuming the virus is nearly eliminated by Spring 2021, and that the current growth-oriented tax and regulatory policies are continued, Y 2021 should show strong growth. Future policy should be geared to reducing deficits and controlling the public debt. The alternative could be very problematic for future generations.
Note: The MSM has called the Presidential election for Joe Biden, who would take office 20 January. President Trump has/is challenging the election results, alleging widespread fraud, and has not conceded.
Wednesday, the benchmark US stock market indexes finished at: DJIA+59.87 at 29883.73, NAS Comp -5.74 to 12349.28, S&P 500 +6.55 at 3669.02
Volume: Trade on the NYSE came in at 997-M/shares exchanged.
HeffX-LTN’s overall technical analysis of the US major market indexes is Bullish with a Very Bullish bias in here.
- NAS Comp +37.6% YTD
- S&P 500 +13.6% YTD
- Russell 2000 +10.2% YTD
- DJIA +4.7% YTD
Looking Ahead: Investors will receive the weekly Initial and Continuing Claims report, the ISM Non-Manufacturing Index for November, and the final Markit Services PMI for November Thursday.
Have a healthy day, Keep the Faith!