I prefer to consider it optimism, but delusion is possible. The adults left the room decades ago, and it was never going to be fixed until a crisis arose. The sooner, the better. Plus, it is a good form of entertainment provided you only read about it. Watching him is too uncomfortable for this supporter.
Jeff, I am sorry for the insult. I can understand, given the way things have gone this century, why someone might vote for Trump, or against his opponents. Perhaps this is an overstatement, but I think every president and Congress since 2000, has made things worse rather than better.
I'm glad you still have optimism and can see the humor in the current craziness. An optimistic outlook is important.
Having lived longer than I care to think, I feel more pessimistic now than I did during the Cold War, the Vietnam War, stagflation, sky-high interest rates, 9/11, the Great Recession, and COVID. I see my country destroying the very institutions that made us great, not perfect but great. I see a pervasive nihilism among the populace, an attitude of burn it all down, which I have never seen before.
Oh I didn't take it as an insult. I thought your post was funny and went with it.
I'm old enough to remember all that stuff, too, although I was a child during the Vietnam War. I remember stuff really being burned down and seeing on the news about explosions around 1970. I had never known anything different, so I didn't really worry about it, but looking back, at least we got rid (largely) of racism, which was evident to me as a kid, even if it baffled me.
I had a good time even in the '70s, which were supposed to be so bad. Knew Japan was going to have hyperinflation and while they may ultimately have it, it still hasn't happened. Just so many unknowns and difficulties in life that I've gotten through that I have just gotten to the point where I assume it will work out somehow.
My wife tells me I'm ridiculously optimistic, and I guess I am, but I worry I'm just out-of-touch, too.
The shootings that happened over in Racine a few years ago did bother me, but the Madison riots a few years ago were not so bad. I hated the broken glass, which was so pointless, State Street being boarded up for a while, but setting a fire in a dumpster? I was like, it must not be too bad if that is what the local news is showing.
Capital is as beautiful as ever. Badger games are still fun. Students and everyone pay tribute to soldiers. It could be much worse, but I might be stuck in my little world.
I have to share one more thing. When the Capital was occupied, I'd take my son's down because I thought it was a festive atmosphere. Some people were really angry, but for the most part, it was just a giant party. Everyone was friendly and went back to work soon enough.
I've only lived here since '99, but what a great place.
FWIW - Demonstrators burned down the ROTC building when I was in college in 1970. The Kent State shootings touched off a lot of turmoil on college campuses.
The Weather Underground did quite a bit of bombing in 1970, but the Wisconsin bombing was someone else.
"sooner the better" is a curious sentiment. Say our friend here is overweight, and should really cut down on cholesterol and maybe exercise regularly. Let's induce a cardiac arrest (since it's likely to happen in a decade or two anyway, and "sooner the better"...) and that will force him to change his ways.
Maybe, but he's now got to live the rest of his life in the aftermath of a cardiac arrest.
There are many more examples of people, nations, societies (especially open societies with robust feedback loops and correction mechanisms) where renewal happens without a great crisis. It does not make for a compelling story, so novels or movies may focus on a few "dramatic turnaround after hitting rock bottom" stories. But there are routine course corrections all over the world all the time.
Recall President Clinton's first inaugural. "There is nothing wrong with America that cannot be cured by what is right with America."
I agree with everything you said, but I still stand behind my statement, even though, as the article said, perhaps something like AI will improve things so much in the future that it is unnecessary. I can't explain the reason with certainty. Might be impatience, might be that I think Trump is lucky and skilled at dealing with self-imposed problems, and I have said I do not want another President willing to take risks like I think he is willing to take.
A shocking and alarming event, like a cardiac arrest, can be beneficial. Most of us know people who have emerged from bad events and become better and more resilient, even if permanent damage resulted. I'm not so foolish as to say it always or usually works that way.
I disliked President Clinton when he was elected and for at least a few years after he left office, but I later changed my mind, once again, for various reasons. Perhaps it comes back to correction mechanisms. I always thought Habitat for Humanity was an inefficient method of building homes, as it uses untrained labor, but I decided I was wrong when Clinton explained that people were happier to participate in such a program, and therefore it was more successful. I can still argue that it is inefficient. Still, I think of a builder I knew who had an alcohol problem, and participating in the program as a volunteer helped him dry out, and I decided I'm willing, at least about that program, to defer to others. It depends on what kind of mood I'm in.
Sorry for the fluff here; I know I do not know with certainty the best path forward, nor do I know that a mistake will not work out for good. What tips me over on the current tariff kerfuffle is that I worry about China on a geopolitical level. I want to do something, but I'm unsure what is best, so I trust Trump's good luck.
I wonder for how much longer we'll have a Fed composed of generally sensible people. A Trumpian Fed could do some really interesting and irresponsible things. One outcome is a Turkish style currency crisis. A worse outcome is probably an Argentinian version. Either could be a best case scenario compared to other historical precedents.
Argentine here. Not really, we've been locked out of debt markets for years on end due to high rates. It's why we keep going to the IMF, who acts as a lender of last resort.
But their loans have conditions attached (ie "in order for us to pay this you must achieve these debt rations, deregulate these industries, etc"), and populists hate these. So we actually end up borrowing from "friendly" states like Venezuela at even higher rates - or just print money. Which is why in 2023 inflation was 220%.
As a non-Argentinian (my loss, given your nation's food), I will defer.
But there is this:
"When Milei took office in December 2023, Argentina owed over $400 billion. Of that, $44.5 billion—more than 10% of all outstanding debt—is due to the International Monetary Fund, making Argentina by far the largest debtor.Mar 22, 2568 BE"
So...somebody lent Argentina the other $350 billion. Am I mistaken?
The Argentine default cycle goes something like this
1. We borrow too much
2. Some external shock happens, people reassess risk and stop lending to us (or rather, charge us usurious rates that no one would accept)
3. We ask the IMF for money
4. The IMF agrees, but asks us to reform
5. We don't reform, the IMF cuts off the money flow, and we default
6. Years go by of no foreign debt market access in the midst of lawsuits and other scandals. We use other forms of financing like friendly states and printing money.
7. Eventually a new president comes along, promises to end the default and deficit, clears all the lawsuits, and regains access to foreign debt markets
8. Go back to step 1
So yes, we do borrow from the market, but there are important gaps where we don't. The most recent one lasted for 10 years.
The numbers you're looking at probably include internal market debt borrowing (which is a form of theft due to inflation imo) and other sources.
Importantly the above wouldn't work for the US just because of your size. A friendly petro state wouldn't be able to cover your spending.
I don’t understand the functions of the US political system very well, so I always find it a bit strange that one person has the kind of executive power to make what appears to be endless “captain’s calls”, often directed at very particular things (in this case, a university’s enrolment practices). It’s unclear to me if this is a product of presidential systems (I guess it could happen in a parliamentary system too), or if it’s just the product of the broader political culture of the country (c.f. Hungary, which had a parliamentary system). If the president’s power can be curtailed by Congress, why doesn’t Congress do so? Is it because for a majority of its members opposing the president would be detrimental to their own re-election prospects? If that’s the root of the problem, it points to a problem with American voter’s beliefs and values, with Trump just an outcome of that. What’s changed in the American population that means it wants to make NATO less effective and inflict economic self harm?
It all boils down to Trump's personality cult. Congress would love to limit his powers, but they are terrified to go against him. The few Republicans with an ounce of integrity have all been forced out of the party.
I've come to believe Trump wants the tax on imports for the revenue more than to reshore jobs. Of course, there won't be enough revenue or jobs generated to offset the damage to the economy at large.
When reading Gibbon I was incredulous at the comical self sabotage by the likes of Commodus, Caracalla, Domitian, ... the squandering of state resources, the destabilizing of government, the loss of civic virtue. Less incredulous as I get older.
A sober and true post. I have long been in favor of cleaning up the tax code by getting rid of all the preferences for both individuals and corporations. Doing so would lead to lower tax rates as all the deductions would vanish. We would not have to worry about not taxing tips and OT as those making under $50K (single) or $100K (married) would have no Federal tax liability at all. Corporate taxes could probably be 15% or so. I'm actually pro-VAT as it is self-executing and can also help in lower rates for income taxes.
Only thing you missed is the wanton crypto criminality, a ponzi development that even Minsky would be impressed by -- about which, see Henry Farrell's NYT op-ed today and accompanying Substack @ Programmable Mutter -- and a Kindlebergian AI mania soaking up investment.
(Kindleberger's thoughts on hegemonic functions are also very much in line with the overall thrust of this post.)
Legally? In the sense that Trump (through the DOJ) has decided not to enforce laws against bribery and corruption. I'm old enough to remember the provision that the President shall take Care that the Laws be faithfully executed. Plus the Supreme Court inventing presidential immunity out of thin air. Oh, and the House GOP passing a provision eliminating contempt penalties for violating an injunction.
So glad to see somebody else consider tariffs to be a (braindead) consumption tax. (Progressive) consumption taxes and LVTs are the way to protect the economy while raising some money, and possibly helping growth.
The AI bit is above my pay grade, but it certainly looks like it is in the process of completely upending all of our now quaint notions of the economy. Whether it's robotaxis, robots, or South Korean lawyers, literally everything is now up in the air. We have no clue (or leaders) to help us manage what appears to be a much bigger transformation than steel, oil or computers, to pick a few. The only asset whose value looks secure is land (can't make more of it).
Scott Sumner: I may be a troll and dim-witted, but I largely agree with large parts of this commentary.
I also agree it is hopeless; the US Congress is not designed to balance budgets. Every Representative or Senator wants spending in their district/state, and taxes are unpleasant.
OK, what to do, given the reality.
1. A national sales tax?
2. Higher national gasoline taxes?
3. Moderate tariffs?
4. A national property tax?
5. Fed builds its balance sheet?
6. Adopt the Reserve Bank of Australia's 2% to 3% inflation target? The People's Bank of China has a 3% target, and the Reserve Bank of India a 4% target.
Numbers 3, 5 and 6 seem like the only politically possible options.
Yes, yes, yes, I would prefer a balanced federal budget. I would also prefer a 10-year national moratorium by federal diktat on all property zoning, and nationwide legalized push-cart vending. I would do this, that and that, and blah, blah, blah. I would also be Elon Musk in a better life. Or Shohei Ohtani.
On interest rates in Japan...interesting topic. The BoJ has slowed its JGB buying...and interest rates are creeping up.
Surely one reason we're seeing higher deficits in the developed world is because countries are (implicitly) trying to achieve 4–5% NGDP growth against a backdrop of much lower real growth than the historical norm. They need to paper over the gap between real and nominal growth somehow!
You emphasize that NGDP growth can be achieved with monetary policy rather than deficits. That's true, but is the monetary approach actually -better-? Deficits versus easy money ultimately hurt you in the same way — inflation. Is the monetary approach less inflationary in the long term, at a given level of NGDP growth?
(I'm genuinely curious to hear your take, not just asking rhetorical questions.)
It's a complete waste to try to achieve nominal growth through fiscal stimulus, as the Fed will offset whatever Congress does. The Fed's already targeting aggregate demand, so deficit spending just leads to higher interest rates.
Fiscal stimulus is several orders of magnitude more costly than monetary stimulus, as it leads to higher distortionary taxes in the future. The ideal path of the budget deficit is the one that minimizes the long run deadweight cost of taxes.
If the political branches increase the deficit, the Fed counters with higher interest rates — sure.
The increased deficit is net inflationary (though it may take a long time for the inflation to be felt).
Conversely, the higher interest rates corresponding to the particular deficit increase are net deflationary in the long term, right? Could they be deflationary enough to offset the inflationary effect of the deficit increase?
When you squint, isn't it -possible- that there's some kind of "conservation of inflation" going on? Where the inflationary effect of looser fiscal policy is exactly offset by the deflationary effect of the corresponding higher interest rates?
I acknowledge that this possibility probably isn't really true. But I think the explanation needs to be a bit more nuanced.
EDIT: One point of confusion here — I think your assumption is that fiscal deficits will paid for with future taxes, while I tend to think they will eventually be inflated away, or directly monetized.
Because central banks target inflation, they'll try to prevent fiscal policy changes from influencing inflation. Obviously, they won't always succeed, but they are equally likely to fail in either direction, so as a first approximation fiscal policy would be expected to have almost no impact on inflation.
It's similar to the effect of wind on the path of a ship. A good captain will adjust the steering to offset the effect of wind, but will not perfectly succeed each and every time. Even so, if the captain is skilled you should not be able to forecast the direction of any error.
You might google one of my posts on monetary offset.
That's fair, my comments here probably are more confused than lucid.
That said, I do think I'm trying to gesture at some kind of valid point — I will give it a bit more thought.
Are there any recent developed economies that have maintained full employment (and healthy NGDP growth) via monetary policy while running surpluses or small deficits?
A stable debt/GDP ratio during an economic expansion is an unsustainable fiscal policy.
I guess this statement is meant to say that you can’t keep the debt ratio stable during expansions and increasing during recessions indefinitely.
A trend increase in the debt ratio has been a feature common to all large industrial economies (Germany being a relative exception) since the early 1980s. This suggests that fiscal policies are deficit biased. However, over the same period real interest rates have been trending downwards. This highlights how difficult is to judge the sustainability of fiscal policies. The reversal of the secular decline in real interest rates would therefore be a remarkable development.
That's true, but the current budget proposal is being done in the face of dramatically higher real interest rates---suggesting that low rates were not the decisive factor.
Yep, this was what I thought. Over my lifetime - since the 1980s - there has been a constant drumbeat of warnings that this level of debt isn't sustainable. And I agree that it can't possibly go on forever. But it's not clear that this post, any more than any other argument in the last forty years, has nailed down why the debt has to stop *here*.
The ability of countries - and companies, and consumers - to successfully handle increasing levels of debt is the hallmark of the economy I grew up in. I guess one day it will all come tumbling down, but every warning I see just looks like, "this time it's different..."
“But it's not clear that this post, any more than any other argument in the last forty years, has nailed down why the debt has to stop *here*.”
Scott has a good post on this. While I think he is too kind to Obama and so I don’t agree with him on the exact timing, prior to [pick your favorite year between 2007 and 2019, I say about 2011/2012], the debt and deficits were NOT so large as to be a major problem, given a rich country with a growing economy.
But now the amounts are beyond way too high for safety and are sure to cause problems. As will the related unfunded entitlement deficits, especially Medicare.
“The US is facing an interest expense problem approaching 5% of GDP – by far the largest of any other major economy.”
As the interest expense becomes the largest component of the deficit, the increase becomes exponential.
The CRB commodity index is up 16 percent since September 10, 2024. Inflation expectations are high. The supply side shock in oil is holding rates down and the inevitable change in SLR will keep rates masked.
Sure. And when the crunch comes, I guess this is what it will look like. But what if Trump backed off his threats to the Fed, and the markets started believing that we will have competent Fed officials going forward? It seems to me at least possible that news like that could calm the markets and restore the status quo.
Which is to say, I don't know. I'm just saying, I've seen news cycles with rising bond rates before, and I've seen them settle down before.
They decided that reducing the tax labilities of high income people was more important than anything else: economic growth, fiscal responsibility, Constitutional niceties.
I've been trying to think through what happens if some future catastrophe forces the US into ww2 level of spending, if debt to GDP is already at 200%. Would deficit spending still be possible? Maybe in an emergency the federal government "nationalizes" tax advantaged retirement accounts similar to Argentina grabbing private pensions?
Migration is very relevant to the fiscal problems mentioned in the post for, as George Borjas, points out in ‘We Wanted Workers: Unraveling the Immigration Narrative,’ (W.W.Norton, 2016), the welfare state transfers income from high to low income earners, so low skill migrants increase the fiscal pressure on the welfare state, an effect that it now well-documented. See:
M.F. Hansen, M.L. Schultz-Nielsen,& T. Tranæs, ‘The fiscal impact of immigration to welfare states of the Scandinavian type,’ Journal of Population Economics 30, 925–952 (2017), https://link.springer.com/article/10.1007/s00148-017-0636-1
For me, TDS stands for Trump's Delusional Supporters.
I prefer to consider it optimism, but delusion is possible. The adults left the room decades ago, and it was never going to be fixed until a crisis arose. The sooner, the better. Plus, it is a good form of entertainment provided you only read about it. Watching him is too uncomfortable for this supporter.
Jeff, I am sorry for the insult. I can understand, given the way things have gone this century, why someone might vote for Trump, or against his opponents. Perhaps this is an overstatement, but I think every president and Congress since 2000, has made things worse rather than better.
I'm glad you still have optimism and can see the humor in the current craziness. An optimistic outlook is important.
Having lived longer than I care to think, I feel more pessimistic now than I did during the Cold War, the Vietnam War, stagflation, sky-high interest rates, 9/11, the Great Recession, and COVID. I see my country destroying the very institutions that made us great, not perfect but great. I see a pervasive nihilism among the populace, an attitude of burn it all down, which I have never seen before.
Oh I didn't take it as an insult. I thought your post was funny and went with it.
I'm old enough to remember all that stuff, too, although I was a child during the Vietnam War. I remember stuff really being burned down and seeing on the news about explosions around 1970. I had never known anything different, so I didn't really worry about it, but looking back, at least we got rid (largely) of racism, which was evident to me as a kid, even if it baffled me.
I had a good time even in the '70s, which were supposed to be so bad. Knew Japan was going to have hyperinflation and while they may ultimately have it, it still hasn't happened. Just so many unknowns and difficulties in life that I've gotten through that I have just gotten to the point where I assume it will work out somehow.
My wife tells me I'm ridiculously optimistic, and I guess I am, but I worry I'm just out-of-touch, too.
"I remember stuff really being burned down and seeing on the news about explosions around 1970."
In 1970, my mom was woken up by a truck bomb that occurred 2 miles away (in Madison.)
Things did start to deteriorate after 2000, but the last 10 years have been a whole lot worse.
The shootings that happened over in Racine a few years ago did bother me, but the Madison riots a few years ago were not so bad. I hated the broken glass, which was so pointless, State Street being boarded up for a while, but setting a fire in a dumpster? I was like, it must not be too bad if that is what the local news is showing.
Capital is as beautiful as ever. Badger games are still fun. Students and everyone pay tribute to soldiers. It could be much worse, but I might be stuck in my little world.
I have to share one more thing. When the Capital was occupied, I'd take my son's down because I thought it was a festive atmosphere. Some people were really angry, but for the most part, it was just a giant party. Everyone was friendly and went back to work soon enough.
I've only lived here since '99, but what a great place.
Yes, I have fond memories of the city Life magazine called the best place to live back in 1948.
Hope you are right about things working out.
FWIW - Demonstrators burned down the ROTC building when I was in college in 1970. The Kent State shootings touched off a lot of turmoil on college campuses.
The Weather Underground did quite a bit of bombing in 1970, but the Wisconsin bombing was someone else.
"sooner the better" is a curious sentiment. Say our friend here is overweight, and should really cut down on cholesterol and maybe exercise regularly. Let's induce a cardiac arrest (since it's likely to happen in a decade or two anyway, and "sooner the better"...) and that will force him to change his ways.
Maybe, but he's now got to live the rest of his life in the aftermath of a cardiac arrest.
There are many more examples of people, nations, societies (especially open societies with robust feedback loops and correction mechanisms) where renewal happens without a great crisis. It does not make for a compelling story, so novels or movies may focus on a few "dramatic turnaround after hitting rock bottom" stories. But there are routine course corrections all over the world all the time.
Recall President Clinton's first inaugural. "There is nothing wrong with America that cannot be cured by what is right with America."
I agree with everything you said, but I still stand behind my statement, even though, as the article said, perhaps something like AI will improve things so much in the future that it is unnecessary. I can't explain the reason with certainty. Might be impatience, might be that I think Trump is lucky and skilled at dealing with self-imposed problems, and I have said I do not want another President willing to take risks like I think he is willing to take.
A shocking and alarming event, like a cardiac arrest, can be beneficial. Most of us know people who have emerged from bad events and become better and more resilient, even if permanent damage resulted. I'm not so foolish as to say it always or usually works that way.
I disliked President Clinton when he was elected and for at least a few years after he left office, but I later changed my mind, once again, for various reasons. Perhaps it comes back to correction mechanisms. I always thought Habitat for Humanity was an inefficient method of building homes, as it uses untrained labor, but I decided I was wrong when Clinton explained that people were happier to participate in such a program, and therefore it was more successful. I can still argue that it is inefficient. Still, I think of a builder I knew who had an alcohol problem, and participating in the program as a volunteer helped him dry out, and I decided I'm willing, at least about that program, to defer to others. It depends on what kind of mood I'm in.
Sorry for the fluff here; I know I do not know with certainty the best path forward, nor do I know that a mistake will not work out for good. What tips me over on the current tariff kerfuffle is that I worry about China on a geopolitical level. I want to do something, but I'm unsure what is best, so I trust Trump's good luck.
Are you confusing Clinton with Carter?
"I want to do something, but I'm unsure what is best, so I trust Trump's good luck."
Not sure if you're joking . . .
Yes, I was in a '70s mindset. I was surprised a younger person quoted Carter, but he wasn't.
I am serious.
"I am serious"
Was Covid-19 lucky?
I wonder for how much longer we'll have a Fed composed of generally sensible people. A Trumpian Fed could do some really interesting and irresponsible things. One outcome is a Turkish style currency crisis. A worse outcome is probably an Argentinian version. Either could be a best case scenario compared to other historical precedents.
OTOH...Argentina seems to be able to renege on its debt...and then borrow again.
Not sure that would work for the US. Or the global economy.
The US needs to reduce debt to GDP ratios.
The Fed buying back Treasuries is about the only route forward I see.
Sure, let's balance the federal budget. President Clinton did it.
Seems like a miracle now.
Argentine here. Not really, we've been locked out of debt markets for years on end due to high rates. It's why we keep going to the IMF, who acts as a lender of last resort.
But their loans have conditions attached (ie "in order for us to pay this you must achieve these debt rations, deregulate these industries, etc"), and populists hate these. So we actually end up borrowing from "friendly" states like Venezuela at even higher rates - or just print money. Which is why in 2023 inflation was 220%.
As a non-Argentinian (my loss, given your nation's food), I will defer.
But there is this:
"When Milei took office in December 2023, Argentina owed over $400 billion. Of that, $44.5 billion—more than 10% of all outstanding debt—is due to the International Monetary Fund, making Argentina by far the largest debtor.Mar 22, 2568 BE"
So...somebody lent Argentina the other $350 billion. Am I mistaken?
The Argentine default cycle goes something like this
1. We borrow too much
2. Some external shock happens, people reassess risk and stop lending to us (or rather, charge us usurious rates that no one would accept)
3. We ask the IMF for money
4. The IMF agrees, but asks us to reform
5. We don't reform, the IMF cuts off the money flow, and we default
6. Years go by of no foreign debt market access in the midst of lawsuits and other scandals. We use other forms of financing like friendly states and printing money.
7. Eventually a new president comes along, promises to end the default and deficit, clears all the lawsuits, and regains access to foreign debt markets
8. Go back to step 1
So yes, we do borrow from the market, but there are important gaps where we don't. The most recent one lasted for 10 years.
The numbers you're looking at probably include internal market debt borrowing (which is a form of theft due to inflation imo) and other sources.
Importantly the above wouldn't work for the US just because of your size. A friendly petro state wouldn't be able to cover your spending.
I don’t understand the functions of the US political system very well, so I always find it a bit strange that one person has the kind of executive power to make what appears to be endless “captain’s calls”, often directed at very particular things (in this case, a university’s enrolment practices). It’s unclear to me if this is a product of presidential systems (I guess it could happen in a parliamentary system too), or if it’s just the product of the broader political culture of the country (c.f. Hungary, which had a parliamentary system). If the president’s power can be curtailed by Congress, why doesn’t Congress do so? Is it because for a majority of its members opposing the president would be detrimental to their own re-election prospects? If that’s the root of the problem, it points to a problem with American voter’s beliefs and values, with Trump just an outcome of that. What’s changed in the American population that means it wants to make NATO less effective and inflict economic self harm?
It all boils down to Trump's personality cult. Congress would love to limit his powers, but they are terrified to go against him. The few Republicans with an ounce of integrity have all been forced out of the party.
The Republicans have wanted a VAT to replace the graduated income tax for years.
Replacing the name "national sales tax" for "tariffs" is just a marketing scheme
The problem is we'll get both, and we'll be in the same boat as Europe.
I've come to believe Trump wants the tax on imports for the revenue more than to reshore jobs. Of course, there won't be enough revenue or jobs generated to offset the damage to the economy at large.
At least replace the wage tax that (under) funds SS Medicare and unemployment insurance and throw in Medicaid, too.
A national sales tax IS the equivalent of a VAT but tariffs are not.
When reading Gibbon I was incredulous at the comical self sabotage by the likes of Commodus, Caracalla, Domitian, ... the squandering of state resources, the destabilizing of government, the loss of civic virtue. Less incredulous as I get older.
I recall that when I read Suetonius it seemed like he was portraying a country run by teenagers.
A sober and true post. I have long been in favor of cleaning up the tax code by getting rid of all the preferences for both individuals and corporations. Doing so would lead to lower tax rates as all the deductions would vanish. We would not have to worry about not taxing tips and OT as those making under $50K (single) or $100K (married) would have no Federal tax liability at all. Corporate taxes could probably be 15% or so. I'm actually pro-VAT as it is self-executing and can also help in lower rates for income taxes.
Corporate taxes should be zero. Why a separate rate on some part of some people's income?
Yes, 100%. You get it.
Only thing you missed is the wanton crypto criminality, a ponzi development that even Minsky would be impressed by -- about which, see Henry Farrell's NYT op-ed today and accompanying Substack @ Programmable Mutter -- and a Kindlebergian AI mania soaking up investment.
(Kindleberger's thoughts on hegemonic functions are also very much in line with the overall thrust of this post.)
Crypto seems to allow people to legally bribe Trump.
Seems?
Legally? In the sense that Trump (through the DOJ) has decided not to enforce laws against bribery and corruption. I'm old enough to remember the provision that the President shall take Care that the Laws be faithfully executed. Plus the Supreme Court inventing presidential immunity out of thin air. Oh, and the House GOP passing a provision eliminating contempt penalties for violating an injunction.
Yes, it is probably illegal, but the Supreme Court has ruled he's above the law.
Sure does. Not that he really needed any more than the ones he already had.
So glad to see somebody else consider tariffs to be a (braindead) consumption tax. (Progressive) consumption taxes and LVTs are the way to protect the economy while raising some money, and possibly helping growth.
The AI bit is above my pay grade, but it certainly looks like it is in the process of completely upending all of our now quaint notions of the economy. Whether it's robotaxis, robots, or South Korean lawyers, literally everything is now up in the air. We have no clue (or leaders) to help us manage what appears to be a much bigger transformation than steel, oil or computers, to pick a few. The only asset whose value looks secure is land (can't make more of it).
Scott Sumner: I may be a troll and dim-witted, but I largely agree with large parts of this commentary.
I also agree it is hopeless; the US Congress is not designed to balance budgets. Every Representative or Senator wants spending in their district/state, and taxes are unpleasant.
OK, what to do, given the reality.
1. A national sales tax?
2. Higher national gasoline taxes?
3. Moderate tariffs?
4. A national property tax?
5. Fed builds its balance sheet?
6. Adopt the Reserve Bank of Australia's 2% to 3% inflation target? The People's Bank of China has a 3% target, and the Reserve Bank of India a 4% target.
Numbers 3, 5 and 6 seem like the only politically possible options.
Yes, yes, yes, I would prefer a balanced federal budget. I would also prefer a 10-year national moratorium by federal diktat on all property zoning, and nationwide legalized push-cart vending. I would do this, that and that, and blah, blah, blah. I would also be Elon Musk in a better life. Or Shohei Ohtani.
On interest rates in Japan...interesting topic. The BoJ has slowed its JGB buying...and interest rates are creeping up.
Maybe some financial repression is in order.
We are just lucky we have a supply side oil shock. Just think when the Treasury has to refill the TGA.
Surely one reason we're seeing higher deficits in the developed world is because countries are (implicitly) trying to achieve 4–5% NGDP growth against a backdrop of much lower real growth than the historical norm. They need to paper over the gap between real and nominal growth somehow!
You emphasize that NGDP growth can be achieved with monetary policy rather than deficits. That's true, but is the monetary approach actually -better-? Deficits versus easy money ultimately hurt you in the same way — inflation. Is the monetary approach less inflationary in the long term, at a given level of NGDP growth?
(I'm genuinely curious to hear your take, not just asking rhetorical questions.)
It's a complete waste to try to achieve nominal growth through fiscal stimulus, as the Fed will offset whatever Congress does. The Fed's already targeting aggregate demand, so deficit spending just leads to higher interest rates.
Fiscal stimulus is several orders of magnitude more costly than monetary stimulus, as it leads to higher distortionary taxes in the future. The ideal path of the budget deficit is the one that minimizes the long run deadweight cost of taxes.
Ok, but let me think this through...
If the political branches increase the deficit, the Fed counters with higher interest rates — sure.
The increased deficit is net inflationary (though it may take a long time for the inflation to be felt).
Conversely, the higher interest rates corresponding to the particular deficit increase are net deflationary in the long term, right? Could they be deflationary enough to offset the inflationary effect of the deficit increase?
When you squint, isn't it -possible- that there's some kind of "conservation of inflation" going on? Where the inflationary effect of looser fiscal policy is exactly offset by the deflationary effect of the corresponding higher interest rates?
I acknowledge that this possibility probably isn't really true. But I think the explanation needs to be a bit more nuanced.
EDIT: One point of confusion here — I think your assumption is that fiscal deficits will paid for with future taxes, while I tend to think they will eventually be inflated away, or directly monetized.
Because central banks target inflation, they'll try to prevent fiscal policy changes from influencing inflation. Obviously, they won't always succeed, but they are equally likely to fail in either direction, so as a first approximation fiscal policy would be expected to have almost no impact on inflation.
It's similar to the effect of wind on the path of a ship. A good captain will adjust the steering to offset the effect of wind, but will not perfectly succeed each and every time. Even so, if the captain is skilled you should not be able to forecast the direction of any error.
You might google one of my posts on monetary offset.
That's fair, my comments here probably are more confused than lucid.
That said, I do think I'm trying to gesture at some kind of valid point — I will give it a bit more thought.
Are there any recent developed economies that have maintained full employment (and healthy NGDP growth) via monetary policy while running surpluses or small deficits?
Singapore.
Yeah, but they can only do that because of their immense natural resources… 😏
A stable debt/GDP ratio during an economic expansion is an unsustainable fiscal policy.
I guess this statement is meant to say that you can’t keep the debt ratio stable during expansions and increasing during recessions indefinitely.
A trend increase in the debt ratio has been a feature common to all large industrial economies (Germany being a relative exception) since the early 1980s. This suggests that fiscal policies are deficit biased. However, over the same period real interest rates have been trending downwards. This highlights how difficult is to judge the sustainability of fiscal policies. The reversal of the secular decline in real interest rates would therefore be a remarkable development.
That's true, but the current budget proposal is being done in the face of dramatically higher real interest rates---suggesting that low rates were not the decisive factor.
Yep, this was what I thought. Over my lifetime - since the 1980s - there has been a constant drumbeat of warnings that this level of debt isn't sustainable. And I agree that it can't possibly go on forever. But it's not clear that this post, any more than any other argument in the last forty years, has nailed down why the debt has to stop *here*.
The ability of countries - and companies, and consumers - to successfully handle increasing levels of debt is the hallmark of the economy I grew up in. I guess one day it will all come tumbling down, but every warning I see just looks like, "this time it's different..."
“But it's not clear that this post, any more than any other argument in the last forty years, has nailed down why the debt has to stop *here*.”
Scott has a good post on this. While I think he is too kind to Obama and so I don’t agree with him on the exact timing, prior to [pick your favorite year between 2007 and 2019, I say about 2011/2012], the debt and deficits were NOT so large as to be a major problem, given a rich country with a growing economy.
But now the amounts are beyond way too high for safety and are sure to cause problems. As will the related unfunded entitlement deficits, especially Medicare.
“The US is facing an interest expense problem approaching 5% of GDP – by far the largest of any other major economy.”
As the interest expense becomes the largest component of the deficit, the increase becomes exponential.
The CRB commodity index is up 16 percent since September 10, 2024. Inflation expectations are high. The supply side shock in oil is holding rates down and the inevitable change in SLR will keep rates masked.
Sure. And when the crunch comes, I guess this is what it will look like. But what if Trump backed off his threats to the Fed, and the markets started believing that we will have competent Fed officials going forward? It seems to me at least possible that news like that could calm the markets and restore the status quo.
Which is to say, I don't know. I'm just saying, I've seen news cycles with rising bond rates before, and I've seen them settle down before.
True enough. There is still an excess of savings over real investment outlets.
Any time is a good time to reduce deficits with low DWL taxes.
Thanks for the uplifting post Scott. The future sounds wonderful. Can’t wait.
Seriously, what happened to the republican party? Happy Memorial Day weekend
They decided that reducing the tax labilities of high income people was more important than anything else: economic growth, fiscal responsibility, Constitutional niceties.
Ok, this can’t be real.
I've been trying to think through what happens if some future catastrophe forces the US into ww2 level of spending, if debt to GDP is already at 200%. Would deficit spending still be possible? Maybe in an emergency the federal government "nationalizes" tax advantaged retirement accounts similar to Argentina grabbing private pensions?
Yes, that's one possibility--hyperinflation is another.
It wasn't "necessary" in WW2. The government could have just raised taxes more. At some rates, adding an inflation tax becomes optimal.
Migration is very relevant to the fiscal problems mentioned in the post for, as George Borjas, points out in ‘We Wanted Workers: Unraveling the Immigration Narrative,’ (W.W.Norton, 2016), the welfare state transfers income from high to low income earners, so low skill migrants increase the fiscal pressure on the welfare state, an effect that it now well-documented. See:
Jan van den Beek, Hans Roodenburg, Joop Hartog, Gerrit Kreffer, ‘Borderless Welfare State - The Consequences of Immigration for Public Finances, 2023. https://www.researchgate.net/publication/371951423_Borderless_Welfare_State_-_The_Consequences_of_Immigration_for_Public_Finances
European Commission, Projecting The Net Fiscal Impact Of Immigration In The EU, EU Science Hub, 2020. https://migrant-integration.ec.europa.eu/library-document/projecting-net-fiscal-impact-immigration-eu_en
M.F. Hansen, M.L. Schultz-Nielsen,& T. Tranæs, ‘The fiscal impact of immigration to welfare states of the Scandinavian type,’ Journal of Population Economics 30, 925–952 (2017), https://link.springer.com/article/10.1007/s00148-017-0636-1