Forget Budget Wish Lists. A Sluggish Economy Calls For Much Less Federal Spending.

Burning cashImages of Money Foter CC BYYesterday, we had President Obama's budget proposal as ideological telegram, complete with a mindboggling price tag well beyond what the U.S. government can afford to spend. To be fair, many of his opponents in the Republican Party apply just that sort of "only the best for us" to every expensive toy on which the Pentagon wants to blow a billion bucks. But not only has the federal government been spending well beyond its means for years, but the economy is expected to be uncooperative—read that as sluggish—in years to come, requring even lower levels of federal spending if the behemoth on the Potomac isn't to go completely tits-up and leave American taxpayers holding the bill.

On February 4, the Congressional Budget Office (CBO) predicted:

the deficit is projected to decrease again in 2015—to $478 billion, or 2.6 percent of GDP. After that, however, deficits are projected to start rising—both in dollar terms and relative to the size of the economy—because revenues are expected to grow at roughly the same pace as GDP whereas spending is expected to grow more rapidly than GDP.

That growing gap between what we spend and what we can afford to spend has consequences, reports the CBO.

The large budget deficits recorded in recent years have substantially increased federal debt, and the amount of debt relative to the size of the economy is now very high by historical standards. CBO estimates that federal debt held by the public will equal 74 percent of GDP at the end of this year and 79 percent in 2024 (the end of the current 10-year projection period). Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis (in which investors would demand high interest rates to buy the government’s debt).

That is, deficits build up debt, which acts as a net drag on the economy and prosperity and, oh yeah, further reduces the resources available to the politicians on their spending spree.

Revenues and outlaysCBO

But, here's the sad truth: that "restraining economic growth," for whatever reason, is already a thing. In that same report, the CBO forecast sluggish economic growth to come:

the growth of potential GDP over the next 10 years is much slower than the average since 1950. That difference stems primarily from demographic trends that have significantly reduced the growth of the labor force. In addition, changes in people’s economic incentives caused by federal tax and spending policies set in current law are expected to keep hours worked and potential output during the next 10 years lower than they would be otherwise.

Just a few weeks later, on February 28, the CBO specifically reduced expectations for potential output in 2017 by 7.3 percent.

So, the CBO itself says that federal policy is already acting as a drag on the economy on which sky-high plans for federal spending are based—and those spending schemes themselves threaten to further slow the economy.

Oh, swell.

Just last week, Reason science columnist Ron Bailey looked at predictions that the U.S. is entering an extended period of economic stagnation. He found some of the forecasts about declining technological payoffs to be unduly pessimistic, but agreed that "government debt overhang [will] slow growth," and probably by more than predicted. Ultimately, he believed we've been given "fair warning of the doleful direction in which the economic headwinds are blowing."

Not only are elected federal officials spending far more than we can afford, they're consuming the seed corn from which future economic growth must come, reducing the prosperity we all hope to enjoy as well as the resources on which officials hope to draw for their future spending schemes.

The longer this continues, the less the federal government will be able to spend in the future. And the less wealthy Americans will be.

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  • Auric Demonocles||

    Over/under on how long it takes Tony to come complain about this "misleading" chart?

    I predict it will be sooner than Tuccille finishing his second alt-text.

  • Andrew S.||

    But multipliers! Doesn't $1 of government spending turn into $5.3 million in the private sector?

  • Aloysious||

    That is known in economic circles as the 'Nancy Pelosi' effect.

    To understand it better, stand over a boiling cauldron, and chant 'bubble, bubble, toil and trouble..."

  • sarcasmic||

    Let's look up GDP and see what it has to say about federal debt.

    GDP = C + G + I + NX

    where:

    "C" is equal to all private consumption, or consumer spending, in a nation's economy
    "G" is the sum of government spending
    "I" is the sum of all the country's businesses spending on capital
    "NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)

    Nope. Nothing there about debt or inflation.

    It's almost as if government spending is... magic!

  • db||

    What they're missing is a term that looks something like:

    GDP = GDP* - kG

    Where GDP* is what GDP would be with lower government spending and k is some function of G's relationship to GDP*. Government spending is a churn, a net drain on the economy outside the effects of infrastructure spending, which could be done by private interests anyway.

    Even if you accept that there are.some minimal things government should do, you need to recognize that they are *costs* to society. the idea of a government spending multiplier relies on the lie that capital would have remained idle absent the government confiscating and spending it.

  • db||

    C+I is reduced, not enhanced, by G, in other words.

  • sarcasmic||

    I agree. Because government doesn't produce any wealth at all. It merely moves it around.

  • blondrealist||

    I'm a little slow to catch on sometimes, so I'm not sure what point you're trying to make. Your GDP equation is correct. The "G" part is important -- government spending. Of course, when the government spends more than it receives, deficit spending occurs.

    The main driver of private saving is usually private investment, but during an economic downturn the role of government spending can be more important.

    Here's an example:

    http://pragcap.com/wp-content/...../11/cp.png

    When the private sector does not invest and spend enough, then government spending becomes important. The trick, of course, is to dial back government spending once the private sector recovers.

  • sarcasmic||

    Government spending is not free.

    In the case of a balanced government budget, it takes from C and I, pays government workers who produce nothing of value, then spends G. So it's still a net drain on the economy, not a boost.

    Deficit spending is taking from future C and I to pay for current G. Still a drain on the economy.

    Government spending is not magic.

  • Jordan||

    Define "invest and spend enough." Furthermore, explain how taking someone else's money and funneling it to politicians and their cronies puts it to be better use.

  • Will4Freedom||

    Where does the government get the money from? Pass the hat in Congress?

    They take it by force from those "non-spending" people and spend it things politicians think are important. Like Solyndra.

    So in a sense... Government is spending the same money that private sector WOULD have spent, in addition to a few more hundred billion in debt.

    I'd rather the private sector... who's money it is in the first place... spend it. They evaluate risk better than government. It's their money.

  • ||

    Oh, wow... Keynes.

    Yeah, you know the Keynes model is wrong, right? It has always been wrong.

    Keynes wrote 'The General Theory...'in response to Ramsey. Unfortunately Keynes screwed up and conflated real effects with purely nominal (ie inflationary) effects. The multiplier on government spending is just not 1. It is in fact less than one.

    Actually if you trace the economic effects through the economy, to put 1 more dollar in government pocket results in $1.75 being taken from the rest of the economy. $1 actually changes hands. 75 cents of production that would have taken place is deterred because of higher taxes to raise the $1.

    This is called the 'Excess Burden of Taxation'. You can look it up on Wikipedia.

    Ramsey and those who followed in his footsteps- Solow*, Tobin*, and Sidrowski (* = Nobel Prize. Ramsey doesn't have one for his model ONLY because he died decades before the Economics Prize was created) are sadly unknown is American political discourse, though they are state of the art of macroeconomic models.

    Put simply- government spending NEVER stimulates the economy. It ALWAYS weakens it. The road government spending buys might stimulate the economy, but the spending itself does not, can not, will not, never has, and never will.

  • sarcasmic||

    Keynesian economics is nothing more than intellectual justification for cronyism.

  • Gorilla tactics||

    It's alchemy with a scientistic or a positivist spin-it has like mathematics and shiny numbers and stuff, hence people are bamboozled by it. From what I understand, the reason why it had so much credibility was because of the "Philips Curve"-which stated that inflation is fine cuz of job creation, it should have been discredited with the stagflation of the 70s...but Obama (PBUH) being a lightbringer who will bring us to a higher state of being and of relating to world, can disregard all of history and MAKE IT HAPPEN!

  • blondrealist||

    I wasn't promoting Keynes or his theories, just pointing out some operational realities of our monetary system -- we have a fiat currency. Regarding Keynesian understandings, you might enjoy this recent article:

    http://pragcap.com/keynesian-m.....ent-169498

  • Fist of Etiquette||

    Who listens to the CBO anyway? They're a bunch of hacks.

  • Auric Demonocles||

    They seem to be very good at calculating what they are told to. The problem seems to be more in the guidelines they are given than anything.

  • eyeroller||

    To be fair, many of his opponents in the Republican Party apply just that sort of "only the best for us" to every expensive toy on which the Pentagon wants to blow a billion bucks.

    Let's get past this idea that Republicans ONLY want to spend more on the military. Republicans love spending more on practically everything -- Social Security, Medicare, farm subsidies, NASA, and a whole lot more.

  • OneOut||

    "Let's get past this idea that Republicans ONLY want to spend more on the military. Republicans love spending more on practically everything"

    And also get past the idea that ONLY Republicans like to spend on the military.

    Democrats in office LOVE military jobs programs.

  • Lady Bertrum||

    I sincerely hope the repubs rollover and give Obama everything he asks for in his budget. The American people deserve the ass*ucking they're going to get. When you tolerate or embrace this kind of irresponsible spending you deserve the consequences.

  • Rhywun||

    "Ass*ucking - it's not just for New Yorkers anymore."

  • PaulW||

    I'm pretty sure you can swear here. One of the main draws to this website. :)

  • The Late P Brooks||

    NEEDZ MOAR MIDDLE CLASS MEDICAIDS

  • Matrix||

    If only we had more broken windows.... /Krugtard

  • The Late P Brooks||

    That is, deficits build up debt, which acts as a net drag on the economy and prosperity and, oh yeah, further reduces the resources available to the politicians on their spending spree.

    "Nuh-uhhhh!" says Krugabe.

  • sarcasmic||

    Opportunity cost can't be measured so it can't exist!

  • Auric Demonocles||

    But if, contrary to your projections, spending money doesn't make things better (or if things get worse) you can know for sure that things would have been sooo much worse if you hadn't done it!

  • Swiss Servator, mehr Käse!||

    MULLLLLLLLLTIPLIERZ!!!!!!!

  • Gorilla tactics||

    INFINITE MONEY! for every x amount we spend we get X back, spend our way into prosperity!

  • Gorilla tactics||

    my second x doesn't have a greater sign? fuck you squirrels

  • Jerryskids||

    Some of us are old enough to remember the stagflation we experienced under Carter which pretty much blew the Phillips Curve and its implications out of the water, yet Krugman still seems to think it's a valid model. Or not.

    Now, you can argue that the notion of a long-term usable unemployment-inflation tradeoff was never really part of Keynesian economics, that it’s a caricature of what 60s Keynesians actually believed.

    Notice, Krugman is saying you can argue that, he's not saying that he is arguing that - but it is rather convenient that whatever the outcome he can argue that he was right - the Phillips Curve either is still valid or never was valid.

  • Brett L||

    No, its different this time because these people are not only unemployed, but have completely exited the labor market!

  • Lord Humungus||

    I would be all for this kind of government spending if we could get some really cool shit out of it - moon bases, mission to Mars, a working Warty containment system... instead it's just - uh?

  • Auric Demonocles||

    As much as I love space and space exploration, the only one of those that truly falls under a public good is the Warty containment system.

  • From the Tundra||

    Didn't you read Chapter One of the new epic? Warty can't be contained!

  • Pro Libertate||

    Don't need no government space machines.

  • Auric Demonocles||

    I'm going on a date with a nuclear engineer tomorrow who wants to talk about space, sports, and voting for Ron Paul. (I'll probably focus more on the first two)

  • OneOut||

    Do you always plan ahead the approved topics of conversation on your dates ?

    Wow. You must be a barrel of fun to take on a date.

  • Auric Demonocles||

    Yeah, why would I ever plan on talking about the common interests she said she wants to talk more about?

  • Pro Libertate||

    "Louis Wu, I found your challenge verbose. When challenging a Kzin, a simple scream of rage will suffice. You scream and you leap."

  • Pro Libertate||

    Dating has clearly changed since I was college age, but I find the parallel with my life disturbing, because I briefly dated a nuclear engineer/physicist (don't remember which) who planned a career in fusion research. I don't think she's done as well as she expected, seeing as that was back in 1985.

  • Brett L||

    So all sorts of Project Orion double entendres for getting it on?

  • Dr. Frankenstien||

    I've said the same thing. If I ran a trillion dollar deficit there would be monuments to my glory lasting for the ages. On the moon.

  • OneOut||

    Too much of the space thingy is located in States that are too backward to recognize the majesty of His Awesomeness

    As long as the War on Women exists there can be no government owned monies diverted to backward and unenlightened outposts.

  • The Late P Brooks||

    Speaking of "private" space exploration, apparently Elon Musk will be testifying before Congress in an attempt to get a slice of that sweet, sweet, crony payload delivery contract.

    Forward, Stalwarts of Capitalism!

  • Auric Demonocles||

    Does asteroid protection count as a public good or cronyism? What if it's a bit... vague... why the asteroids have gotten so deadly lately?

  • Dr. Frankenstien||

    Climate change is why asteroids have gotten so deadly lately.

  • Auric Demonocles||

    That's not quite the... implication... I was going for.

  • db||

    "Distinguished Members of Congress, I have here a chart showing resource allocation within SpaceX. As you can see, our Asteroid Recovery And Earth Orbit Intersect Trajectory Injection Division is somewhat underfunded, mainly due to the requirements of funding the Sweet Government Contract Boondoggle Division. However, barring increased demands for resources in the SGCBD, the AREOIT Division will benefit from increased resources. The implications of this should be clear. I leave it to you to decide."

  • PaulW||

    I'm all for asteroid protection. That 2 seconds of watching a 5 mile high wall of fire fly at me at 10k miles per hour would royally suck.

  • Pro Libertate||

    SpaceX is at least trying to capture a broader market than just the U.S. government, and it's also trying very hard to make access to orbit much, much cheaper.

    Musk is no libertarian hero, but SpaceX is a big deal if you care about actually seeing humans permanently in space.

    Speaking of them, with the troubles with Russia, wonder how long it would be before Dragon could take astronauts to the ISS? If the Russians decided to suspend ferry services, that is.

  • Brett L||

    NASA: Congratulations you're certified human rated
    SPACEX: But we haven't even tested the couches
    NASAS: Fuckit. Can't be worse than the Mercury setup

  • Pro Libertate||

    See, that's exactly the opposite of what will happen. Instead, NASA will say it's impossible to use Dragon because it hasn't passed tests that no other manned vehicle passed either. So sorry [watches ISS plunge into Australia.]

  • Tony||

    Clearly we need to cut taxes for billionaires.

  • R C Dean||

    Best idea you've had. Get rid of the last two words, and you'd really be on to something.

  • Hopfiend||

    You forgot, cut spending.

  • Gorilla tactics||

    Tony it's amazing you haven't pulled a muscle from beating that straw man.

  • Gorilla tactics||

    is he even aware that if we were to TAKE, not tax, people with incomes over 200k we could the government for like 6-8 months or something?

  • Gorilla tactics||

    run the government*

  • PaulW||

    Progressive taxation is really targeted at the upper middle class so that they cannot compete with the rich.

    Wonder if Tony gets that? Probably not.

  • The Late P Brooks||

    Clearly we need to cut taxes for billionaires.

    By George, I think he's got it.

  • KDN||

    Look out for Captain Buzzword, smiting all of your so-called arguments about concepts he doesn't understand with ease.

  • On The Road To Mandalay||

    Anyone interested in getting a quick education of the origins of "defense spending" should read Smedley Darlington Butler's book "War Is A Racket" which he wrote in the 1930s after retiring from the Marine Corps as a General. Butler was also a two time Medal of Honor Winner. What he said then is just as true today. Simply multiple what has happened since then by the billions, which probably adds up to trillions by now. And yet the defense budget is still treated as something completely different from the rest of the national spending. The only exception I would make is World War II which the United States had no choice but to fight. However, a lot of that 50 year Cold War agony could have been avoided. And now the U.S. is in another Cold War mode with the events of the Ukraine. Obama is blasted by some moron politicians because he didn't do enough, and if he had gotten into it with Russia be would probably be basted by other moron politicians for being a "war monger". Anyway, read Butler's book and ask yourself if anything really new is happening.

  • The Late P Brooks||

    if you care about actually seeing humans permanently in space.

    A select few, anyway.

  • Pro Libertate||

    I meant living humans.

  • ElDuderino||

    Budgets won't matter much when Bitcoin takes over as the currency and tax revenues fall through the floor.

  • ElDuderino||

    I agree dude.

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