DEBT: OTHER LIE from DILUSIONAL
TRUMP
...the end-game cometh!
I wrote a series of articles discussing the fallacy that tax
cuts would lead to higher tax collections, and a reduction in the
deficit. TO
WIT:
“Given today’s record-high levels of debt, the country cannot afford a
deficit-financed tax cut. Tax reform that adds to the debt is likely to slow, rather
than improve, long-term economic growth.
The problem with the claims that tax cuts reduce the deficit is
that there is NO
evidence to support the claim. The
increases in deficit spending to supplant weaker economic growth has been
apparent with larger deficits leading to further weakness in economic growth. In fact, ever
since Reagan first lowered taxes in the ’80’s both GDP growth and the deficit
have only headed in one direction – higher.”
See Chart:
Mind the process of deficit from
1947 to 2020
That was the deficit in September
2017.
HERE IT IS TODAY.
See Chart:
As opposed to all the promises made, economic growth failed to get stronger. Furthermore, federal revenues as a
percentage of GDP declined to levels that have historically coincided with
recessions.
See Chart:
Tax Receipts as a % of GDP
WHY
DOES THIS MATTER?
President Trump just proposed his
latest $4.8 Trillion budget, and
not surprisingly, suggests the deficit will decrease over the next 10-years.
Such is a complete fantasy and was derived from mathematical
gimmickry to delude voters to the contrary. As Jim
Tankersley recently noted:
The White House makes the case that this is affordable and that the deficit will start to fall, dropping
below $1 trillion in the 2021 fiscal year, and that the budget will be balanced
by 2035. That projection
relies on rosy assumptions about growth and the accumulation of new federal
debt — both areas where the administration’s past predictions have proved to be
overconfident.
The new budget forecasts a growth rate for the
United States economy of 2.8 percent this year — or, by the metric the
administration prefers to cite, a 3.1 percent rate. That is more than a half percentage point
higher than forecasters at the Federal Reserve and the Congressional Budget
Office predict.
It then predicts growth above 3 percent
annually for the next several years if the administration’s economic policies
are enacted. The Fed, the budget office and others all
see growth falling below 2 percent annually in that time
Past administrations have also dressed up their budget forecasts with
economic projections that proved far too good to be true. In its fiscal year 2011 budget, for example,
the Obama administration predicted several years of growth topping 4 percent in
the aftermath of the 2008 financial crisis — a number it never came close to
reaching even once.
Trump’s budget expectations also contradict the
Congressional Budget Office’s latest deficit warning:
“CBO estimates a 2020 deficit of $1.0 trillion, or 4.6 percent of GDP.
The projected gap between spending and revenues increases to 5.4 percent of GDP
in 2030. Federal debt held by the public is projected to rise over the coming
decade, from 81 percent of GDP in 2020 to 98 percent of GDP in 2030. It continues to grow thereafter in
CBO’s projections, reaching 180 percent of GDP in 2050, well above the highest
level ever recorded in the United States.”
See Charts:
“With unprecedented trillion-dollar deficits
projected as far as the eye can see, this country needs a serious budget. Unfortunately, that cannot be said of the one the President just
submitted to Congress, which is filled with non-starters and make-believe
economics.” – Maya Macguineas
DEBT
SLOWS ECONOMIC GROWTH
There is a long-standing addiction in Washington to debt.
Every year, we continue to pile on more debt with the expectation that economic
growth will soon follow.
It would seem that after nearly
40-years, some lessons would have been learned.
See Chart:
Such reckless abandon by politicians is simply due to a lack
of “experience” with the consequences of debt. In 2008, Margaret Atwood discussed this point in
a Wall Street
Journal article:
“Without memory, there is no debt. Put another
way: Without story, there is no debt.
A story is a string of actions occurring over
time : how you got into
debt, , how you got out
of debt, or else how you got further and further into it until you became overwhelmed by it, and sank
from view.”
The problem today is there is no “story” about the consequences of
debt in the U.S.
This lack of
a “story,” is what has led us to the very doorstep of “Modern
Monetary Theory,” or “MMT.” As Michael
Lebowitz previously explained:
DEFICITS
ARE NOT SELF-FINANCING
The premise of MMT is that government “deficit” spending
is not a problem because the spending into “productive investments” pay
for themselves over time.
But therein lies the problem – what exactly
constitutes “productive investments?”
For government “deficit” spending to be effective, the “payback” from investments made must yield a higher
rate of return than the interest rate on the debt used to fund it.
The problem for MMT is its focus on spending is NOT productive investments but rather social welfare which has a negative rate of
return.
Of course, the Government has been running a “Quasi-MMT” program
since 1980.
According to the Center
On Budget & Policy Priorities, roughly 75% of every current tax dollar goes to non-productive
spending. (The same programs the
Democrats are proposing.)
See Chart:
Most of Budget Goes Toward Defense,
Social Security & Major Health Programs
To make this clearer, in 2019, the Federal Government spent
$4.8 Trillion, which was equivalent to 22% of the nation’s entire nominal GDP. Of that total spending, ONLY $3.6 Trillion was financed by
Federal revenues, and $1.1
trillion was financed through debt.
In other words, if 75% of all expenditures go to social welfare and interest
on the debt, those payments required $3.6 Trillion, or roughly 99% of the total
revenue coming in.
The problem today is there is
no “story” about the consequences of debt in the U.S.
This lack of a “story,” is what has led us
to the very doorstep of “Modern Monetary Theory,” or “MMT.” As Michael
Lebowitz previously explained:
“MMT theory essentially believes the government spending can be funded
by printing money. Currently, government spending is funded by debt, and not
the Fed’s printing press. MMT disciples tell us that when the shackles of debt and deficits are
removed, government spending can promote economic growth, full employment and
public handouts galore.
Free healthcare and higher education, jobs for
everyone, living wages and all sorts of other promises are just a few of the
benefits that MMT can provide. At least, that is how the theory is being sold.”
What’s not to
love?
Oh yes, it’s
that it creates the deficit thing.
DEFICITS
ARE NOT SELF-FINANCING
The premise of MMT is that government “deficit” spending
is not a problem because the spending into “productive investments” pay
for themselves over time.
But therein lies the problem – what
exactly constitutes “productive
investments?”
For government “deficit” spending
to be effective, the “payback” from investments made must yield a higher rate of return than the interest rate on
the debt used to fund it.
The problem for MMT is its focus on spending: is NOT
productive investments but rather social welfare which has a negative rate of return.
Of course, the Government has been running a “Quasi-MMT” program since 1980.
According to the Center On Budget & Policy
Priorities, roughly 75%
of every current tax dollar goes to non-productive spending. (The same
programs the Democrats are proposing.)
See Chart:
To make this clearer, in 2019, the Federal Government spent
$4.8 Trillion, which was equivalent to 22% of the nation’s entire nominal GDP.
Of that total spending, ONLY $3.6 Trillion was financed by Federal
revenues, and $1.1
trillion was financed through debt.
In other
words, if 75% of all expenditures go to social welfare and interest on the
debt, those payments required $3.6 Trillion, or roughly 99% of the total
revenue coming in.
There is now clear evidence that increasing debts and
deficits DO NOT lead to either stronger economic growth or increasing
productivity. As Michael
Lebowitz previously showed:
“Since 1980, the long term average growth rate
of productivity has stagnated in a range of 0 to 2%
annually, a sharp decline from the 30 years following WWII when productivity
growth averaged 4 to 6%. While there is no exact measure of
productivity, total factor productivity (TFP) is considered one of the best
measures. Data
for TFP can found here.
The graph below plots a simple index we created based on total factor
productivity (TFP) versus the ten-year average growth rate of TFP. The TFP
index line is separated into green and red segments to highlight
the change in the trend of productivity growth rate that occurred in the early
1970’s. The green dotted line extrapolates the trend of the pre-1972 era
forward.”
See Chart:
PRODUCTIVITY Trends
“The plot of the 10-year average
productivity growth (black line) against the ratio of total U.S. credit
outstanding to GDP (green line) is telling.”:
See Chart:
DEBT :
GDP vs. 10Y avg . Production Growth
The larger the balance of debt has become, the more economically destructive it is by diverting an
ever-growing amount of dollars away from productive investments to service
payments.
Since 2008, the economy has been
growing well below its long-term exponential trend. Such has been a
consistent source of frustration for both Obama, Trump, and the Fed, who keep expecting higher rates of economic only to be
disappointed.
See Chart:
GDP Grows Below Long Term Trend
The relevance of debt growth versus economic growth is all
too evident. When debt issuance exploded under the Obama administration, and
accelerated under President Trump, it has taken an
ever-increasing amount of debt to generate $1 of economic growth.
See Chart:
Debt growing faster than GDP
https://www.zerohedge.com/s3/files/inline-images/GDP-Debt-Cumulative-Growth-021320.png?itok=GcBX1QbS
IF YOU SUBTRACT THE DEBT, THERE HAS NOT BEEN ANY ORGANIC ECONOMIC GROWTH
SINCE 1990.
See Chart:
THE ECONOMIC DEFICIT
What is indisputable is that running
ongoing budget deficits that fund unproductive growth is not economically
sustainable long-term.
THE END
GAME COMETH
Over the last 40-years, the U.S. economy has engaged in
increasing levels of deficit spending without the results promised by MMT.
There is also a cost to MMT we have
yet to hear about from its proponents.
The value of the dollar, like any commodity, rises and falls
as the supply of dollars change. IF the
government suddenly doubled the money supply, one
dollar would still be worth one dollar but it would only buy half of what it
would have bought prior to their action.
This is the flaw MMT
supporters do not address.
MMT is not
a free lunch.
MMT is paid for by reducing the value of the dollar and ergo
your purchasing power. MMT is a hidden
tax paid by everyone holding dollars. The problem, as Michael
Lebowitz outlined in Two
Percent for the One Percent, inflation tends to harm the poor
and middle class while benefiting the wealthy.
This is why the wealth gap is more
pervasive than ever. Currently, the Top 10% of income earners own nearly 87% of
the stock market. The rest are just struggling to make ends meet.
See Chart:
Richest American account for more than
half of household equity wealth
As I stated above, the U.S. has been
running MMT for the last three decades, and has
resulted in social inequality, disappointment, frustration, and a rise in calls
for increasing levels of socialism.
It is all just as you would expect from such a theory put
into practice, and history is replete with countries that
have attempted the same. Currently, the limits of profligate spending in
Washington has not been reached, and the end of this particular debt story is yet to be written.
But, it eventually will be.
….
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