The continuing economic crisis in the U.S. and Europe is quickly sharpening the debate over public finances. Several countries have budget deficits around 10 percent of national income or larger, and their governments must show their publics and the financial markets that they have a plan for dealing with these unprecedented peacetime imbalances.
In the wake of the financial panic in late 2008, most economies adopted fiscal stimulus packages of spending increases and tax cuts in keeping with Keynesian ideas (which I cautioned about in my March 2009 column). Because consumer spending was falling, offsetting the decline through higher government spending or by stimulating private spending by tax cuts was considered necessary. Keynesian thinking presumes that the financial markets will readily buy government bonds to finance the stimulus.
It proved overoptimistic for many smaller European countries, most recently Greece. Potential investors looked ahead skeptically to governments’ ability to service those debts through some combination of higher taxes and lower spending in the future. Consequently, the bond markets slammed the door on new financing by Greece early in 2010 and threatened to do the same for various other European countries, including the U.K.
So far the U.S. has not been similarly touched. Unlike Greece, the U.S. borrows in its own national currency: whereas the Greek government can run out of euros, the U.S. government cannot really run out of dollars as long as the Federal Reserve provides them. Of course, the fear in that case is not bankruptcy but that central bank financing of future deficits will stoke inflation.
Yet even if the markets agree to finance deficit spending, large-scale borrowing might not be wise. Large deficits today mean that the public debt will rise sharply as a percent of national income. The ratio of U.S. debt to GDP will roughly double between 2007 and 2011, from around 37 percent to 70 percent. Even if the budget deficit is then reduced through spending cuts and tax increases, the costs of servicing the extra debt will remain and will distort the economy. Furthermore, awareness that today’s budget deficits will eventually require spending cuts and tax increases at least blunts the short-term stimulus effects of the deficits. Households may save rather than spend any tax cuts on the grounds that future taxes are rising. And higher interest rates caused by budget deficits may dampen any boost in private investment spending.
America’s budget deficit challenge is worsened by the country’s deep political division over the role of government. Tax increases are anathema, but contrary to common belief, there are few easy cuts in the budget for removing simple waste.
The biggest waste, I would suggest, lies in the Pentagon budget, which now stands at around 5 percent of GDP and finances two expensive wars, hundreds of overseas military bases, and overpriced service contracts and weapons systems. Yet no public consensus on a sharp reduction of military outlays exists.
Still less will there be an agreement on cutting civilian spending, the bulk of which is on Social Security, Medicare, Medicaid, food stamps and other mandated programs. Many categories of discretionary civilian spending—sustainable energy, R&D, infrastructure, higher education, global development and more—are chronically underfunded rather than laden with waste. The much disparaged earmarks, which do distort the budget, constitute only perhaps 1 percent of total budget spending or even less.
We need to look again at higher taxation of the superrich. The wealthiest 1 percent of U.S. households now take home more than 20 percent of all household income, more than double their roughly 10 percent share around 1980. The richest 0.01 percent of households brings home around 5 percent of total household income.
The superrich households have also enjoyed repeated tax cuts during the past 30 years. Their increased tax contribution will not be sufficient to balance the books. We will also need to look at higher gasoline taxes, carbon-emissions levies and perhaps even a national value-added tax. Yet the superrich households are the right place to begin to get our public finances back in order.
This article was originally published with the title Get Serious about Budget Deficits.
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16 Comments
Add CommentStimulus spending by governments, when the banks defrauded the nation states was necessary. The only nation that did not do it was Ireland - look what happened to their economy, luckily for the people, Ireland is part of the EEC, almost 60% of its workforce moved overseas and now remit money home.
Reply | Report Abuse | Link to thisIf you did not stimulate the economy you would have had to imprison all your bank and financial institution executives. If not they would have been hanged or burned by the masses. Most of these executives are psychopaths and would not have considered suicide. The bloodbath would have got rid of some of the greediest and most unethical of our societies, but their families would pay a dear price.
When you point at Greece and the UK, you ignore your own issues (you accept you spend 37% of your income to pay interest on debt-very sustainable?) and don't mention Japan the bogeyman in the room. Japan borrows to line her rivers with concrete, to build bridges used by one vehicle per week. Perhaps you should invest in Japanese bonds.
Banks got to be banks nothing else, if they build informal alliances with other institutions punish those involved - strip them off their citizenship and send them to a UN refugee camp for resettlement.
Ban outright selling financial products you do not own, neither should you be allowed to bet on your own products. If I sell your house I end up in jail, if I sell your shares and cause their price to drop I become a millionaire at your expense. Gamblers and psychopaths rule.
"We need to look again at higher taxation of the superrich. The wealthiest 1 percent of U.S. households now take home more than 20 percent of all household income, more than double their roughly 10 percent share around 1980. The richest 0.01 percent of households brings home around 5 percent of total household income."
Reply | Report Abuse | Link to thisThis argument forgets that the top 1 percent already pays over 36% of the total tax revenue. So if they make 20% of the money, and pay 36% of the taxes, and you want to tax them more? New Jersey and Maryland tried this and ended up with huge shortfalls as the only effect the taxes had was to give incentives to make the "Super Rich" leave. So unless you advocate forcing them to stay and pay the taxes, they will move their money elsewhere.
"The biggest waste, I would suggest, lies in the Pentagon budget, which now stands at around 5 percent of GDP and finances two expensive wars, hundreds of overseas military bases, and overpriced service contracts and weapons systems. Yet no public consensus on a sharp reduction of military outlays exists."
The issue with this is that Military spending is nowhere near the level of entitlement spending. So you advocate reducing money to a smaller program while letting much larger ones continue to grow? Thats not how you reduce spending. Also, unlike many entitlement programs the DoD budget actually provides jobs and training and funds an enormous amount of basic research. While entitlement programs tend to pay people to NOT do anything.
So we disagree on budget cutting, and more than likely on everything political. I can accept this with no qualms. However I would say it is crass of you to push a political view in SciAm instead of in a newspaper where it belongs. If your article was a factual report on spending and deficits that would be acceptable, but you are pushing an agenda. Please do the Scientific community a favor and push your agenda in an appropriate forum and I shall no longer have to push mine here in rebuttal.
While I don't agree with what seems to be kanisea's implied ideology any more than I agree with the implied ideology of the article, I agree with his/her opinion about the role of SciAm.
Reply | Report Abuse | Link to thisI don't think it is appropriate for a science magazine to have economic opinion pieces. However, I think it would be appropriate for a scientific magazine to provide analyses of economic data without economic ideas about what to do about it, such as the ideas of Keynes, Marx, Schumpeter, Friedman, et. al.
William Domhoff's website is a good example of a website which provides data and tries to present it in an intelligent way, but does not provide economic solutions.
In fact, I would welcome such an article because these facts are not well enough known by Americans: http://sociology.ucsc.edu/whorulesamerica/power/wealth.html
I don't agree with the implied opinions of kanisae any more than I do those of the article but I do agree with his/her opinion that SciAm should not indulge in economic editorial pieces.
Reply | Report Abuse | Link to thisI think it is appropriate for a science magazine to analyze and present economic data, however.
This presentation by William Domhoff is a good example: http://sociology.ucsc.edu/whorulesamerica/power/wealth.html
This data is not well enough known by Americans
I was somewhat surprised find myself reading an article on economic policy here at Scientific American.
Reply | Report Abuse | Link to thisRecent events (particularly the raft of "scandals" relating to climate change), have highlighted the importance of communicating effectively with the broader public, and the shortcomings of the scientific community in that regard. I take it the introduction of opinion pieces like this one is an attempt at a step in that direction.
However, while I believe it is necessary for the scientific community to become more savvy in communicating with the broader public; persons making comments should try to avoid venturing beyond their area of expertise.
While espousing a simplistic solution of "taxing the rich" may generate populist appeal, it fails to impress those who have a better grasp of economics.
Choice of topic aside, I will say that providing opinion pieces represents a step forward for the SCIAM magazine/site. I would however clearly distinguish opinion pieces and informative articles. I might suggest taking a look at how The Economist has addressed this.
Nice try at applying science to the problem, but this article needs to be 10 times longer to really address the issues. For one, I would contest the claim that there is relatively little waste in the budget. Just because something is delivered for the money spent does not mean that it was well spent. Military spending provides easy examples.
Reply | Report Abuse | Link to thisSince WW2 the cost of a car has pretty much increased with the average income: 20x. The cost of a fighter plane however, has gone up by a factor of 2000x, two orders of magnitude faster. Nor is because of the cost of aviation technology: the price of a Boeing Dreamliner is only 10x the price of a 1947 Boeing 367. I also see no evidence that the increased cost is actually buying us anything. Insurgents have been successful using weapons that cost a tiny fraction of US ones. Soldiers fighting in places from Vietnam to Iraq have been using weapons taken from the enemy because they were more effective than the ones provided. They were also buying their own body armor (until it was forbidden) because it was better than what was provided. Apparently the modern military system is better at providing corporate profits than useful equipment to the soldiers.
Not that the military spending is necessarily the worst culprit, just the easiest to examine. My bet is that similar examination of any other type of government spending from infrastructure to welfare would show similar decreases in benefits per inflation-adjusted dollar spent. I guess the next step is to attempt to apply the scientific method to determining a solution to the problem.
World's worst economies are home grown
Reply | Report Abuse | Link to thisMost of their injuries are self-inflicted by corrupt, arbitrary leadership
http://www.msnbc.msn.com/id/37603745/ns/business-forbescom/
Forbes screened IMF data for countries that have low and declining per-capita GDP, high trade deficits and high inflation, all indicators of bad economic management regardless of the country's inherent wealth.
All have at least one trait in common: Their governments discourage private investment — and economic growth — through policies of crony capitalism, expropriation or arbitrary enforcement of the laws. That makes it hard to generate hard currency to pay off government debt and discourages citizens from investing in education to improve their own economic lot.
Sixth-place Burundi, like many of the countries on this list, has another big problem: bloated government payrolls.
There is a pervasive modern prejudice against government in favor of business.
Reply | Report Abuse | Link to thisIn Russia, in 1980, 90% of the population thought communism was superior to capitalism and during the same period in America 90% of the American population thought capitalism was superior.
In 1950, 90% of Americans thought homosexuality should be punishable with a prison sentence and in 2o1o, 90% of Americans favor gay marriage.
These things are not based on evidence and logic but on the prejudices of the zeitgeist.
If I were writing in German, from Germany in 1935 I would find it appropriate to end my comment with 'heil Hitler' and 90% my German readers would find it appropriate to respond in kind.
SciAm should find a way to transcend local and temporary prejudices and argue from a much longer historical, philosophical and political perspective using logic and evidence.
A number of other commentators such as Paul Krugman of Princeton and Robert Reich of Univ of Cal at think that some further deficit economic stimulus could really help. A look at Krugman's recent "That '30s Feeling" illustrates this as do several others of his recent NYT columns. Robert Reich has written recently that unless we stimulate the economy soon again we may well be headed to a double dip recession.
Reply | Report Abuse | Link to thisInterest rates are quite likely to remain low for awhile. The Fed is unlikely to raise them for some time to come. We have just had a decrease in U.S. wholesale prices for two months in a row, and home construction is down too.
The interest paid on debt is not likely to rise soon and some deficit spending might well lift the economy now as well as helping the morale and confidence of the public. Not spending a bit more now could really cause a lot of economic pain domestically.
So what's the problem with short term spending? What's wrong with having some debt if everybody owes everybody else anyhow? Or is it that the tiny rich and super rich minority holds most of the debt which it finds is not being paid back? Nor perhaps is it getting much income on its debt because of the current low interest rates.
I'm not an economist and I might be conflating different kinds of debt but it seems to me that not paying back the super rich might be a beneficial economic stimulus in itself.
Also it might lower the gap between super rich and relatively poor thus ultimately bringing the economy (at least of the U.S.) into better balance and making everybody better off. Please see for example this month's issue of the "New Internationalist" for more on the topic.
Must read:
Reply | Report Abuse | Link to thisWho should be sac(k)ed?
http://bilbo.economicoutlook.net/blog/?p=10178
Budget deficit will NOT require spending cuts and tax increases:
"The orthodox conception is that taxation provides revenue to the government which it requires in order to spend. In fact, the reverse is the truth."
"The private sector has no currency until the government issues it. "
"Public debt doesnt finance anything and doesnt constrain the capacity of the sovereign government to spend in the future."
No inflation either when the biggest threat is depression.
Even A. Greenspan recognize this :
" Despite the surge in federal debt to the public during the past 18 months-to $8.6 trillion from $5.5 trillion-inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued.
Really disappointed by Scientific American.
I was disappointed to read such a weak opinion article in an otherwise fine magazine as Scientific American.
Reply | Report Abuse | Link to thisAs someone else mentioned, if raising taxes on Millionaires was the answer, States like New Jersey wouldn't be having the trouble they are. When you tax the "super rich", the super rich have options - John Templeton and John Dorrance III come to mind. They can simply leave. Those who don't leave just shift their operations and assets to avoid the tax-man.
I would suggest that Mr. Sachs searches out more facts before he writes his next article, which I think might otherwise be titled: "Gates and Buffet should each adopt 50 million Americans".
As usual Jeffrey D. Sachs does not mention where the budget deficits come from. Nor that they are intimately linked to the problem he rightly pinpoints of the excessive and totally unjustifiable, take-home income of the wealthiest small fraction of the population.
Reply | Report Abuse | Link to thisThe equation:
Hundreds of billionaires = billions of hundredairs
is becoming daily more obviously true.
The problem of the deficits and National Debts is an artefact. It is caused by governments borrowing fiat money from the central banks at interest. This allows the people running the banking system to cream off huge amounts of the nations' wealth for absolutely minimal effort. At the same time it allows the same people to create a "crisis" which gives their fellow plutocrats an excuse to cut wages and welfare payments to the "ordinary" people to the bone and deeper, to worsen working conditions, to increase unemployment thus enabling them to feel even more advantaged compared to their "inferiors".
The path being pursued by this plutocracy is unsustainable and will, I fear, not end well.
That the budget of the Pentagon is overblown ( Is it not bigger than the rest of the World's military budget?) is no accident. The Super-rich also control military expenditure and feel threatened by the people they are oppressing. This expenditure is by way of being an insurance policy for them.
All the value that money has, depends on what it will buy. What it will buy is made by people working. That is the only source of wealth. Taxes are all paid, ultimately, by the people who make, catch grow things, mine minerals and provide services, because they are the only people who add value to the economy. This means that it is impossible effectively, to tax the idle, even the idle rich, because they do not add value to the economy. If you do tax them they have to get the money from people who do something useful.
There is a difficulty in taxing the super-rich. These are the people who set prices. If you tax them, (and I am not saying you should not) they will merely raise the prices of e.g. foodstuffs and in a few weeks the people who do add value to the economy will be paying the new tax. This needs to be taken into account.
"Still less will there be agreement on cutting civilian spending the bulk of which is on Social Security, Medicare..." Quite right too! Why should there be any such agreement?
Can it be that the USA, with its enormous economic power, its collossal GDP, "cannot afford" a proper health service and Cuba can? Clearly any country that is genuinely short of wealth, can only remedy the situation if it puts more of its citizens to work. The only source of wealth being work. However, the USA has millions of people out of work. How can any one not see that this is ridiculous?
In order for people to work, money is needed to "oil the wheels" of the economy. Money is easy to make, is potentially (and should be!) costless. (M0 is.) Of course, costless money would not suit the super-rich who depend on the banks, but they are a tiny minority and the USA is supposed to be a democracy. Isn't it?
National debts and buget deficits are contsructs that grow out of the "Divine Right" of bankers to manufacture money. They are designed to confuse and frighten the credulous, the naive, the lazy and the stupid. It's time they went the same way as the "Divine Right" of Kings.
When biologists get labelled "Darwinian", it usually refers to their focus on natural selection, reproductive fitness, species niches, etc -- all of which were central to Darwin's own thesis.
Reply | Report Abuse | Link to thisKeynes, like Darwin, wrote a "General Theory". But when Sachs uses the label "Keynesian thinking", it refers to policy makers use of economic stimulus via deficit spending. I urge Dr. Sachs to re-read Keynes, because this is using the term "social Darwinism" to describe naked capitalism. Evolutionary biology and social Darwinism has little in common, and neither does "Keynesian thinking" and Keynes.
Economists of Dr. Sachs generation might have read Keynes in a graduate seminar, but by then they had been inculcated with Samuelson's "synthesis" of Keynes and classical economics, and its many critiques. Keynes pushed beyond the supply and demand theory that Dr. Sachs expresses (supply being the credit markets, in this case), and this proved too controversial for American economists.
Keynes never assumed "financial markets will readily buy government bonds to finance the stimulus." This is the kind of trite thinking he overcame. Keynes theory turned on the concept of "expectation", and he was careful to show the devastating limits of forecasts.
As to the US budget deficit, Dr. Sachs offers a "supply side" analysis strangely reminiscent of Reaganomics, then goes on to critique the super-rich's favored tax status. Does he not see the irony? Today's Hooverites can use the first half of Sachs' essay like it's their own.
Dr. Sach's is certainly well-informed and worldly, so it's too bad he squandered an opportunity to advance economic theory. I suppose that's why those who seem wedded to right-wing ideology take offense - Dr. Sachs' piece is a mish-mash of political views. Much would be gained by discussing Keynes' actual theory, because it remains a tremendous theoretical construct.
Incidentally, America's future deficits require adjustments in social security, rescission of Bush tax cuts, and getting health care costs in line with international norms. The reason the rest of the world buys US bonds? They know this, and despite all the political theater, America will end up doing what's necessary.
Apart from disagreement with the author's views on budget, and regarding his solution to further target those who appear to pay the majority of taxes today, my real concern is that you've blurred the line between experimental science and opinion, causing one to ask how policy bias affects SA content more broadly. I'd prefer in-depth exploration of economic science over the author's monthly drivel. Really quite disappointing.
Reply | Report Abuse | Link to thisDr. Sachs:
Reply | Report Abuse | Link to thisGet serious about budget deficits: elect U.S. senators and house representatives who exhibit fiscal responsibility.
I can see November from my house.
I want to echo several comments here:
Reply | Report Abuse | Link to this1) Dr. Sachs' logic is self-contradictory and flawed. Paraphrasing his last paragraph yields, "It will be an ineffective token gesture, but we should tax the super rich anyway."
2) Dr. Sachs' explanation of the economics is weak and incomplete. A full article on Keynesian theory might interest Sci Am readers while this limp piece is an insult.
3) Dr. Sachs' fails to follow his own advice. A few month back, he wrote how the current Administration seems to be lacking in policy formation and then the thoughtful debate on policy points that ensues. Given that, it's quite disappointing to see Dr. Sachs' draw the conclusions he draws so rapidly.
4) Sci Am really needs to work more on informing people and less on editorializing. Stick with what you're good at. If I want to read poorly constructed political essays, I'll subscribe to Newsweek. Oh wait, they are going out of business.... Hmmm. Editors of Sci Am, that should give you pause.