Dick Tracy

I think it is important though to recognize that. If we keep on adding to the [deficit] — Even in the midst of this recovery that at some point. People could lose confidence in the US economy in a way that could actually lead to a double dip recession.

Barack Obama: “if we keep on adding to the debt… that could actually lead to a double-dip”

Marshall seems to think Mark Halperin was onto something with his over-the-top comments about the President. When I heard about the comments, I thought Halperin was provocative, even unprofessional. But, then I remembered something I wrote inn 2009 which was identical in tone. Of course, I used a different word, but, it was still the same message in the same provocative, borderline unprofessional tone. So, legitimately, it sounds like Obama was taking my advice two years too late. Good for him.

Yet, while the tone may have changed, the rhetoric is still all wrong. Look at the quote from November 2009 above as an example. No one lost confidence in the US. They might do if we default on our debt obligations though.

This is what Marshall was getting at. So let’s have a little fun. Let’s play with Marshall and Mark’s word choice then.

In the spirit of Marshall and Mark, let’s get our Dick Tracy hats on and do a little sleuthing about President Obama, the deficits and real economics.

My first clue as a private dick is right here on Credit Writedowns from 2009. I will underline the important stuff for you:

We’ve got a long- term structural deficit that is primarily being driven by health care costs, and our long-term entitlement programs [and don’t forget military spending, Mr. President]. All right? So that’s the baseline.

Now, if we can’t grow our economy, then it is going to be that much harder for us to reduce the deficit. The single most important thing we could do right now for deficit reduction is to spark strong economic growth, which means that people who’ve got jobs are paying taxes and businesses that are making profits have taxes — are paying taxes. That’s the most important thing we can do.

We understand that in this administration. That’s not always the dialogue that’s going on out there in public and we’re going to have to do a better job of educating the public on that.

The last thing we would want to do in the midst of what is a weak recovery is us to essentially take more money out of the system either by raising taxes or by drastically slashing spending. And frankly, because state and local governments generally don’t have the capacity to engage in deficit spending, some of that obligation falls on the federal government.

Barack Obama gets it, Dec 2009

Putting my Dick Tracy hat on, it sounds to me like the President passed his economics 101 course at Columbia. Here’s what he’s saying: if any large participant in an economy cuts back, it will cause economic pain. That pain could translate into a recession in a weak economic environment.

Let me go further and suggest that what you want government policy doing is supporting the natural countercyclical nature of fiscal policy. We can get this from Economics 101 on government budget deficits.

Imagine you and I are the only two people in an economy. For the sake of argument, say we use sea shells as a currency and we trade with no one else but each other. So when we do trade, we exchange goods and services with each other for the amount of sea shells these goods and services are worth. From an accounting perspective, it’s a wash; if you buy my goods, I get the sea shells and lose the goods of equivalent value and if I buy from you, you get the shells and I get the goods of equivalent value. So far, so good…

Now, let’s introduce some deficits and debt into the scenario. For the sake of argument, let’s say that year in, year out we produce the same amount, the same value of stuff. However, in one particular year, you produce a lot of stuff – and I want to buy it. The problem is that I produce less stuff that you want to buy. What do we do? I could issue you an I.O.U. and tell you I will pay you back sometime later. You accept the deal and now I have received the goods and services and you have received an equivalent value from the two sources, currency and the I.O.U. Again, it is a wash from an accounting perspective. I have a deficit in this particular year and you have a surplus…

Now, even if we add [the foreigner] Harry… into the mix, it’s pretty much the same. For example, if you bought some of Harry’s services but didn’t have enough sea shells to pay for it, you could issue an I.O.U. to him for the shortfall. You would have a deficit with Harry for the year and Harry would have a surplus with you for the year…

What holds in my little example for three people also holds for three groups of people too. You could have 100 million people in a group that you represent that does trade with my group and Harry’s group and the accounting would be identical. So, let’s give our groups names. I am the government, you are the non-government sector and Harry is the foreign sector. The sea shells are the domestic currency and the silver represents foreign currencies.

If I were a good dick, I would see this and think: Government Deficit = Non-Government Surplus. A real dick would go further and say that means government deficits go hand in hand with private sector savings. You’re probably thinking, “Gee Wally, it sounds like people spending more and the government deficit goes down.” That’s exactly right. It would vanish entirely if the U.S. operated at full employment and had a trade surplus. So it is natural that when times are good and private sector savings rates go down, the government moves in the opposite direction. It is natural that when times are bad and people save more that the government again moves in the opposite direction. The government’s balance is naturally countercyclical.

Isn’t that what you want. Imagine you live in a fictional country, let’s call it Grecia. In Grecia, times were good and that filled the government’s coffers with the people’s tribute (taxes). Totally natural. But then government said, “Gee, we have a lot of money now. We should make sure we get elected by the people again, so let’s “make the masses happy by redistributing much of the tribute received, in popular ways.”” Not natural. Then, hard times came and people spent less. Totally natural. The coffers in Grecia were empty though. Grecia wanted to alleviate some of the pain of its suffering people but they could not. Instead, they themselves cut back too, sucking even more money out of the economy. Completely unnatural.

Barack Obama gets that. That’s what he was saying in December 2009.

But wait a minute, why was he saying and why is he still saying this stuff about double dips and deficits then? Me, I have no clue. Maybe the President gets his word choice confused. Maybe he’s politicking and pandering. Maybe he’s being advised by someone he trusts on the economy to say these things. I don’t know; I am not good enough a dick to sleuth these things out. What I do know is it is total nonsense.

Here’s How To Reduce Government Budget Deficits

My analysis here says that the Clinton years’ achievement was due largely to a booming economy fuelled by a capital spending binge in the telecom sector and by business generally, mixed with an unsustainable decrease in household savings. Barring a repeat of this – something I would argue is a bad thing – the only way to get around the government deficit is to depreciate the dollar. Right now, getting back to full employment should be the first priority. That would go a long way to reducing the deficit.

Seems obvious to me. But that doesn’t seem like where Team Obama has been headed. So, if you would, put on your Dick Tracy hats. Be dicks and figure this out for me. I would love to know what you think is going on. Does Barack Obama get it or not?

9 Comments
  1. Dave Holden says

    In a word I’d say politics.

    The counter cyclical spending thesis instinctively makes sense but
    working against that is the cyclical nature of the electoral system.

    (Aside: Is this why Keynesianism doesn’t seem to pan out?)

    Anyway conflate that with what many people see as a broken political system run for the benefit of corporations and financiers and there’s a lot of (justified) grass route anti-government anger to be tapped into.

    The fact that Obama seems to have surrounded himself by all the same people (with their same vested interests) responsible for much of the current predicament can really only add to that on the ground frustration.

    It seems to me this is exactly what the Republicans *are* aiming to tap into – the mood against government. Sadly for moderates on both sides anger thrives on easy unthinking sloganeering hence the unprecedented partisanship*. But the mood against government (and hence spending) I think is a strong one.

    Now you don’t get where Obama is without being a brilliant politician. He reminds me very much of Blair and almost as disappointing. So he’s now just making the noises he thinks are needed to take out some of that anger.

    Well that’s my guess.

    * and opportunity for dunderhead politicians.

    1. Edward Harrison says

      You could be right. What I can’t figure out is how Obama could so elegantly crystallize the problems with pro-cyclical fiscal policy one time and then go off the rails about deficit spending at other times. These mixed messages undermine his credibility even if it purely for political purposes.

      You look at a guy like Ron Paul and he has a consistent message. That resonates.

      The Obama Administration has been a wishy washy muddle of ideas that I called a middle road to nowhere from the very start. We are in a serious crisis and you need much more bold action both in tone and policy where Obama has tried to finesse his way through. It’s maddening to watch.

    2. David Lazarus says

      Keynesianism does work. The only problem is that for an economy to right itself takes time and politicians want to appeal to their voters. If they think that the problem is over no need for stimulus so cut the deficit. That was the problem in 1937. The current crisis was because of too much debt and unless 40% of the population have gone bankrupt then there still is too much debt hanging around. It will take many years for it to be brought under control. Mortgages will take many years to get under control even if you can afford the payments. Also politicians have too short a time frame to be able to be effectively impotent for the duration of their term. Japan maintained deficits on and off for twenty years to allow their economy to adjust. Every time they cut the deficit they went back into recession. So for Japan it took twenty years to get the private debts down.

      Obama’s biggest mistake was not clearing out all those responsible. He should have excluded all the Goldman Sachs insiders from every wing of government. That would stop a repeat of AiG bailout of Goldman Sachs. Keeping Bernanke as well was the biggest mistake, as he learnt the wrong lesson from the depression. Saving the banks this time has not saved the economy.

      If the Tea Party get their way and slash taxes and spending the US economy will implode. Ultimately if you do not touch defence spending you will need to practically eliminate every other non medicare social security program to balance the books. No wonder americans are their own worst enemy.

  2. David Lazarus says

    Government Deficit = Non-Government Surplus. Though that depends who gets the non government surplus. For most of the last 30 years it has been going more and more up the income scale. So that leaves less and less for the working population to survive on. Getting teh population back to work through fiscal measures alone will allow the fed to raise interest rates to kill off the last of the bubbles. Though this will make the dollar stronger short term the US also needs to cut the trade deficit substanially. This could done relatively easily with a huge oil tax and using the funds to reduce the deficit to avoid any spending cuts and tax increases. It could be used to fund a work program and as unemployment falls reduce the deficit instead. As Keynes also pointed out when the economy gets too strong you have to raise taxes to take some of the wind out of the economy to keep it stable. Though I suspect that as soon as that the country was back in surplus they would cut taxes again creating a whole new bubble cycle.

    1. Edward Harrison says

      Aggregates have their place but they also have only limited utility, based on what you’re saying. If you look at the non-government you have a number of distinct groups by class in the household sector, the financial and non-financial business and the foreign sector. So far, yes the way flows are moving in the US (and the UK), there is the same pre-recession skew which makes it hard for all those sectors with leveraged balance sheets to deleverage except the financial sector. I am not optimistic about the strategy Obama has chosen. I think that the next recession will be bad and he will be blamed. It’s only then that we will see the next sizable household sector deleveraging.

      On the oil tax, since I am more of a Libertarian I don’t like government reaching into specific sectors in the upcycle to distort revenue and investment. My preference is for a steady hand bolstered by the countercyclical nature of fiscal spending’s automatic stabilisers. That means no subsidies for big oil, big pharma or the ag complex but also no windfall profit taxes either.

      1. David Lazarus says

        I suspect that the next recession will be a lot sooner than anyone else realises. I think this year or next year at the latest. Though I seriously doubt that a republican could even solve such a recession. Their policies will be to bankrupt the nation before it recovers.

        As for taxes I do see benefits of few unavoidable taxes instead of lots of avoidable taxes. A gas tax would have additional bemefits of cutting usage. Which would immediately reduce the trade deficit, and so lower the amount of government spending to fund that deficit. As for automatic stabilisers the US has probably the worst designed that I have come across. They cut off after two years or are lifetime limited so are not really effective. It is like having a car with brake cables that someone has been tampering with. They are there but are so weak you could not use them,

        As for taxes if they are all at the same level across household, dividend and capital gains then it eliminates some bad incentives. Also have progressive scales of capital gains so that the wealthy have a basic rate of capital gains and a higher level, again in line with incomes. That would raise billions of taxes from the rich without hurting the majority.

        Scrapping oil and agricultural subsidies would also be very good. Though there should scrapping of many allowances and subsidies if it simplified the tax code and raised money in some cases. The gas tax would not be targeted at the oil industry but the inefficient use of that oil. It would eliminate the need for a windfall tax. Also never write off a potential tax, because if you do the industry will make sure that they get around any other tax to benefit from a loophole.

        Social security could be saved by raising the retirement age, to reflect life expectancy. Also tie it to life expectancy so that congress does not need to meddle again. Make it changeable every 5 years, so that people know when they will retire, long before they do.

        1. Jason Frey says

          Gas tax is very regressive.

          1. David Lazarus says

            Yes but the US is hit very hard when gas prices rise. Japan and Europe can cope far better with the same increase in oil prices. I would use some of this tax as a give away to lower incomes in the form of a grant, or things that would benefit those at the bottom more. Longer term the US needs to have more efficient transport and industry. You also ignore the benefits of reducing the trade deficit significantly which also means that government can substantially lower the deficit without throwing the economy into another tailspin. That was the purpose of the tax.

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More