Oh, conservatives made noise about sovereign debt risk and inflation, and then they let the liberals take over for a while under the Bush administration, but this remained very much a fringe issue. US government debt is still used as the "risk free" rate, and few governments of industrialized countries have much problem borrowing.
But the financial crisis is making developed-world sovereign debt risk a more worrisome problem. As this article in the New York Times points out, Japan's massive debt is finally starting to become a really worrying problem, especially as they need to borrow more money to stimulate their sodden economy.
Tokyo's new government, which won a landslide victory on an ambitious (and expensive) social agenda, is set to issue a record amount of debt, borrowing more in government bonds than it will receive in tax receipts for the first time since the years after World War II.
"Public sector finances are spinning out of control -- fast," said Carl Weinberg, chief economist at High Frequency Economics in a recent note to clients. "We believe a fiscal crisis is imminent."
One of the lessons of Japan's experience is that a government saddled with debt can quickly run out of room to maneuver.
"Japan will keep on selling more bonds this year and next, but that won't work in three to five years," said Akito Fukunaga, a Tokyo-based fixed-income strategist at Credit Suisse. "If you ask me what Japan can resort to after that, my answer would be 'not very much.' "
How Japan got into such a deep hole, and kept digging, is a tale of reckless spending.
The country poured hundreds of billions of dollars into civil engineering projects in the postwar era, marbling Japan with highways, dams and ports.
The spending initially fueled Japan's rapid postwar growth and kept the Liberal Democratic Party in power for most of the last half-century. But after a spectacular asset and stock market boom collapsed in 1990, the country fell into a long economic malaise.
The Democratic Party, which swept to victory in August, promises to rein in public works spending. But the party's generous welfare agenda -- like cash support to families with children and free high schools -- could ultimately enlarge budget deficits.
Japanese officials say that okay, it's not great, but at least they're not as bad as . . . us:
Still, officials insist that Japan is better off than the United States by some measures.
One hugely important difference is that Japan is rich in personal savings and assets, and owes less than 10 percent of its debt to foreigners. By comparison, about 46 percent of America's debt is held overseas by countries such as China and Japan.
Moreover, half of Japan's government bonds are held by the public sector, while government regulations encourage long-term investors like banks, pension funds and insurance companies to buy up the rest.
All of this makes a sudden sell-off of government bonds unlikely, officials argue.
Of course, it also means a default will have catastrophic repercussions on their economy and the living standards of their citizens--much worse than a US default would be. But they're right to say that we're not looking so hot either. Ratings agencies have been warning for a while that the US AAA bond rating isn't some sort of divine ordinance, and could change if we don't get our fiscal house in order. Now those warnings are getting a little louder, a little more specific:
The White House has forecast deficits of more than $1 trillion through fiscal 2011."The Aaa rating of the U.S. is not guaranteed," said Steven Hess, Moody's lead analyst for the United States said in an interview with Reuters Television. "So if they don't get the deficit down in the next 3-4 years to a sustainable level, then the rating will be in jeopardy."
I totally agree that the White House should be borrowing a lot of money this year. But we're getting to the point where we need to start hearing about how we're going to close these gaps. Much has been made of Obama's fiscal responsibility, based on his promise that the health care bill will not add one dime to the deficit. Well, here are our projected deficits, with and without the health care bill
They get a little lower in the middle, then they go a little higher towards the end, but really, they are all nearly identically gigantic. What's our plan to pay for them? Remember, the "current law" deficit already includes the expiration of all the Bush tax cuts, not just the ones on rich people. Yet we'll still need to find new revenues that will equal somewhere between a fifth and a third of all current Federal tax revenues.Meanwhile, of course, a lot of people think that the "automatic" spending cuts which balance the Baucus bill will be rescinded, the way they have been in the past. If that happens, the deficit gets even bigger. And don't get me started on the $300 billion we're going to need to pay for "fixing" Medicare's doctor reimbursements over the next 10 years; as far as I can tell, the current brilliant plan for this is . . . passing it separately so that the new deficits don't get credited to the health care bill.
Yet Obama is still telling everyone that taxes won't rise on the middle class.
I think we've finally hit the wall on deficit spending. There is no more room for tax cuts, or new spending, or anything else government wants to do. Unless the budget picture improves dramatically, there is but one inevitable course, which is whacking great tax hikes to pay, not for any new program, but for the spending we're already doing. Obama's trying to put off that discussion for as long as possible, because once it starts, there isn't going to be much appetite for $100 billion worth of new annual spending, whether or not it's "paid for". All "paying for it" means is that we have to raise other taxes even further.
Bondholders are still going along with our apparently reckless spending plans on the assumption that we'll have to do something, eventually. I'm sure we will. But that "something" is going to be pretty ugly, and almost certainly done at the worst possible time, as Japan's case may end up illustrating. It may even be default, if we don't start acting like adults relatively soon. Sovereign debt risk seems to be back--and the debt is literally bigger than ever.
http://www.mof.go.jp/jouhou/soken/kenkyu/ron164.pdf
Before anyone claims the Japanese have a high domestic savings rate - that was true 20 years ago but it's not true now. There savings rate is about the same as ours.
The government in Japan has been holding interest rates effectively below zero for almost two decades. It doesn't pay the Japanese to save any more than it pays Americans. I'm not surprised the Japanese public noticed.
It may even be default, if we don't start acting like adults relatively soon.
In Japan's case the BOJ could just buy up the JGBs and retire them. That would cause inflation you say! Well, when you're experiencing deflation and have been for years, that's not really a problem now is it?
Also, Japan is being hurt by a strong yen. What would be the effect on the Yin if the BOJ and MOF decided to buy up and retire the bonds? Consumer prices would finally start to rise and the yen would weaken.... perhapse it's the best thing Japan could do.
So you literally want them to inflate their way out of debt. It might conceivably work, to some extent, but...eep. You're playing with fire.
So, to balance the budget after the recession ends with increases in the income tax - what kind of rates would be necessary?
If Income taxes are around $1 Trillion, and the projection for deficits is at least $500 Billion for the foreseeable future - then income taxes would have to go up 50% across the board to pay even for the present level of government spending.
Wow.
Pretty astounding. I'm sure the voters would support that. It's just "spreading the wealth around" and "being neighborly."
Oh, and don't forget, Obama promised that he wouldn't raise taxes on any family making under $200,000/year (or thereabouts). So I imagine that the math is more like "120% marginal tax rate on any earnings over $250,000," or some other magical multiplier.
It's nice to see a centralized economy doing what it does best - destroy freedom AND prosperity at the same time.
If Income taxes are around $1 Trillion, and the projection for deficits is at least $500 Billion for the foreseeable future - then income taxes would have to go up 50% across the board to pay even for the present level of government spending.
IMHO, pay-as-you-go is the only way to get people's attention.
Obama is still telling everyone that taxes won't rise on the middle class.
But does anyone really believe it? I don't. I ignored "no new taxes" talk in the last election because I knew that whoever won was going to have to raise taxes. The same is true in the election here in VA. Whoever wins will eventually have to raise taxes.
Yes, but you're a big enough nerd to be a regular poster on an economics blog. How many voters think like you do?
Megan: By what standard is it going to be "very ugly?" I'm quoting from memory, but I think Krugman reckons we're going to eventually need tax increases equal to something like 4% of GDP (maybe his numbers are off, but they seemed pretty plausible to me when I read his explanation a few weeks back). I don't like paying taxes any more than the next person, but if I'm not mistaken, an extra four points worth of taxation would still leave the United States a middler among rich countries in terms of tax burden. Also, the second part of your assertion seems particularly off base. The "worst" possible time to raise taxes would be, er, now, when the economy is very, very weak. It seems to me more likely than not that the time frame for a general, broad-based tax increase (hopefully a VAT if God is, as I suspect, a Democrat) -- ie Obama's second term -- will coincide with the middle of an expansion. It seems to that's precisely when one does want to raise taxes.
Taxes currently consume around 20% of GDP. Therfore a 4% GDP increase in taxes is a 20% increase in taxes. Can you afford a 20% increase in taxes?
Can you afford a 20% increase in taxes?
Yes.
I'll go ahead and let the IRS know that you will be paying them 20% more next April.
It is my opinion that if you do not mind paying more in taxes, then you do not deserve the money you earn. If you had to work hard, you would feel that the current rates are already way too high. Especially compared with what you get for your money.
I suspect that the large number of commenters across the web who claim no difficulty (philosophically or financially) with paying 20%, 30% or more in federal taxes are already beneficiaries of our highly progressive tax code.
In other words, they're paying such a negligible amount of federal taxes that any increase (short of doubling) doesn't appear oppressive. The combination of increasingly generous exemptions, standardized deductions and low rates means that an individual with $40,000 per year in W-2 income will pay barely $4,000 in federal taxes. And that's about as bad as it gets — someone married, with children, a mortgage, a 401(k) and any of dozens of other fairly common situations would see their federal tax fall to zero — or less (yes, they would get a check from the government).
So it's pretty easy for many people to agree to significant increases in their taxes. Sadly, these favorable effective rates disappear quickly (and brutally) as one's income increases.
I suppose I could, in the sense that I could change my lifestyle, curtail spending etc. But of course I would be generating a lot less economic activity for others. And if my clients do the same thing, I could lose my job, and then I couldn't pay my mortgage. But at least I'd be in a lower tax bracket.
Now I ain't the smartest guy around, I know. But a day or two ago there's a post which started out:
"...resurgent worries about the dollar's decline are mostly ridiculous..."
And now here's a post about soon-to-be-unsustainable debt levels, losing our AAA bond rating (!) and possible default, all of which could be less than a decade away. Can someone explain to me how any of these things happening (or even a significant threat that any will soon happen), will leave the dollar unscathed?
will leave the dollar unscathed?
Japan is in far worse shape than we are the the yen is very strong.
Explain that?
Umm, well that doesn't really answer my question. My answer to your question would be that the only thing the yen's been strong against is the dollar. After a big rise during last years financial crisis (I assume in the same force of habit "flight to quality" way that made the dollar suddenly surge) it has been losing ground for most of 2009 against the euro, canadian dollar and australian dollar (and I assume others, I don't watch daily currency movements much, I couldn't find a yen/pound chart before I tired of googling). The Japanese may be in worse shape than us, but the dollar, being the reserve, probably has greater heights to fall from.
Now help me out. Why would something on the order of a ratings cut or a default not hurt the dollar? People who know more about the currency markets might have a good reason, but to this guy it sure seems like an event that big would, you know, cut dollar demand.
(Oh and please forgive my awkward syntax in my previous post.)
And it is my opinion that you are a crazy person with eccentrically extreme views. I believe the valuable services we get from the public sector are a good value for the money, especially when Democrats are running said public sector, hence my willingness to pay more taxes.
Then pay more. The tax you are levied annually is a floor, not a ceiling. If you want to pay more, not take deduction owed you, etc... you can. The treasury will not return your check.
Then pay more.
But that won't get me more or better government services.
You actually think that if you pay more taxes you will get more government services?
Derek
The previous post was claiming that the dollar weakening is not a problem. The current post is claiming that it is indirectly likely. The two seem to work together.
Fair enough. I'm probably not on the same page as the Glenn Beck-ish dollar worrywarts. My worry is a true dollar crisis not a the concern that over the next two years the dollar will go slowly and in an orderly manner from $1.50 per euro to $1.85/euro. I'm worried about large sudden moves disrupting business and the financial system. A reevaluation of the T-Bond and it's place in the global system seems, especially if such a thing happens suddenly, like the kind of thing that could bring on such a crisis.
I would love to be wrong.
Yes, the worst time to do something is in a recession. Which is also usually when debt problems become a crisis, because tax revenues fall off.
Why would a U.S. default be such a horrible thing since it would make it much harder for all types of governments to borrow in the future?
Palin's 2016 Campaign slogan: The U.S. should repudiate the Obama debt, or the Democrats, not the American people, should pay off the Obama debt.
Actually, countries that default on their debt are usually able to borrow again. E.g., Russia is shopping a new sovereign debt offering now (it helps that it still has the equivalent of about $200 billion in oil revenues held as foreign exchange reserves). If we defaulted, we'd probably be able to borrow again, but the dollar would probably be wrecked as a reserve currency, which -- in addition to making it more expensive for us to borrow -- would probably have a bunch of calamitous economic effects around the world. It's one thing if the dollar were gradually phased out in exchange for something else, but if that happened all at once I imagine it would be a big mess.
Palin's 2016 Campaign slogan: The U.S. should repudiate the Obama debt, or the Democrats, not the American people, should pay off the Obama debt.
You are truly an idiot. Most of the deficit was thanks to George W. Bush. So bugger off until you get your facts straight.
You are truly an idiot. Most of the deficit was thanks to Lyndon B. Johnson. So bugger off until you get your facts straight.
1) Do you even know the difference between debt and deficit?
2) With the deficits that Obama is running and projected to run, his accumulated debt will utterly dwarf Bush's by 2016 (assuming a 2nd term, Gaia forbid).
If foreign investors get skittish about U.S. debt, why not issue equity -- something like a massive, master limited partnership that would invest in revenue-generating infrastructure projects, and pay dividends to shareholders from those revenue streams?
Megan, I think the idea that the obvious and inevitable course will be tax hikes is wrong.
The most likely repercussion is actually (as implausable as it sounds now) spending cuts. Even dramatic ones.
California is the perfect case study. Here, we have an unquestionably liberal gerrymandered legislature in a 60-40 Dem state, but when faced with the reality of hitting the budget wall, the legislator was forced, in the end, to cut spending.
The voters demanded it. Even the liberal ones. The proposition that everyone (both Dems and Repubs) floated on the ballot to raise taxes only passed in one county in the entire state: San Francisco.
People here have become radically accepting of spending cuts, despite all the threats of cuts to vital services. Frankly, we need more cuts, and they'll come without a penny more in extra taxes.
Now, it's true that California has a 2/3 requirement for tax hikes and a proposition system that the national government doesn't have, but the national electorate is far to the right of California on tax and spend issues.
When we hit the final wall of this fiscal car wreck, the people will not just tolerate heretofore unthinkable spending cuts; they'll demand them.
Here, we have an unquestionably liberal gerrymandered legislature in a 60-40 Dem state, but when faced with the reality of hitting the budget wall, the legislator was forced, in the end, to cut spending.
There's no super-majority requirement, though, operative in the national legislature, when it comes to raising taxes. From what one reads, it's next to impossible to raise state taxes in California, given simple constitutional hurdles and rules. But although the politics of raising taxes is always tricky, there's frankly very little in the historical record to speculate that it can't be done at the national level.
The voters demanded it. Even the liberal ones.
It's possible Californians won't feel the same way after living through several years of the effects of draconian spending cuts. But even if they do, people depend on the Federal government for very different things. The person who favors college faculty layoffs, say, or the cancellation of road repairs, might not be so keen on the idea of watching his elderly mother go without adequate retirement checks or medical care.
You're assuming that most people get anything from the state government.
They don't, at least not directly, because CA state government spending has been incredibly wasteful for years. Specifically if a prison guard making $130,000 a year has to take a 30% pay cut (like i have) he'll still make $95,000 a year, still way over paid for the qualifications and it won't effect me one bit. If the local pd has to cut back, that means they'll have 6 cops show up for a traffic accident instead of 8 like they do now, I couldn't care less. The Public education system spends more that 50% of its money on administration - just exactly how does that help my kids? And those examples are public safety and education the only areas of government that middle class people actually want. The rest of State Government? Kill all of it and nobody wuold care.
I hope you aren't from Huntington Beach. If so, you give Surf City, U.S.A., a bad name.
You're assuming that most people get anything from the state government.
And you're assuming the cuts won't be very painful. I don't live in California, so you could be right. If the cuts are as pain-free as you indicate, then California is home free. But color me skeptical.
I guess time will tell.
The only citizens seriously interested in high government revenue are those working for government. Others just want to pay less in taxes. Money they could use for other useless things like fixing their teeth or sending their kids to a better school.
Derek
Now, it's true that California has a 2/3 requirement for tax hikes and a proposition system that the national government doesn't have, but the national electorate is far to the right of California on tax and spend issues.
Proof?
Except that state government spending in California hasn't been cut. Here are the total expenditures by the State of California for the past five years:
2005-2006: $173B
2006-2007: $183B
2007-2008: $194B
2008-2009: $209B
2009-2010: $213B
California is already seeing the effects of too much borrowing. Interest payments — along with mandated social services payments such as unemployment compensation — are crowding-out other spending. University and K-12 funding has been cut, but other budget categories continue to grow.
And this is with $6B more state revenue projected in 2009-2010 vs. 2008-2009.
It's funny how 4% doesn't sound like a lot, except that it's $2400 off a $60K annual salary, and most people I know who make $60,000 consider that to be really quite a lot of money.
A better way to look at it is as a portion of the federal tax burden. Basically, just to break even--not do health care, or any other new programs, and after the expiration of the Bush tax cuts--we'll still have to raise taxes by about 20-30%. Obviously, you can play around with the distribution, but not as much as you think, because by that time, just the federal marginal rate on top incomes will be 40%, and raising it by another 10% or so would leave you with the wealthy having total marginal tax burdens (including state, local and sales) in the 55%-60% range. That's assuming a proportional increase--if you try to increase the the proportion they pay, you're pushing their taxes up to levels where even European welfare states started to see serious problems with compliance/renunciation of citizenship/capital formation.
So think about the typical earner, who maybe sees 25% of a paycheck disappear to various government locations. He's now keeping 75% of his income. Increase his tax burden by 25%, and he's keeping about 68.5% of his income. That's a drop in his weekly paycheck of almost 10%. Most people would feel very hard pressed to deal with a 10% drop in income.
And of course, all of this assumes no deadweight loss from the taxation, which is a heroic assumption. When you factor in more realistic deadweight loss assumptions, you get much bigger declines.
MEGAN:
This sovereign debt stuff is a lot of nonsense. Really.
No country that has a floating fiat currency regime, and debts denominating in its own currency, has EVER, nor need EVER default. NEVER NEVER NEVER. The chance is ZERO.
Just think for a moment -- why does a monopoly currency issuer need to BORROW its own currency from anyone else? I don't need to borrow my own signature from anyone else.
When the US, or any currency issuer runs a deficit, it is merely paying equity out to the non-govt sector.
This really is voodoo economic nonsense.
Right, as long as you can print your own money, there's no chance of defaulting in nominal terms. But for all intents and purposes, what's the difference, as far as a foreign investor is concerned, between you not paying him back and you paying him back in Zimbabwe-like dollars?
I suspect the reason why we are still able to borrow at such low interest rates is because the bond market assumes that the dollar will not become worthless but will eventually strengthen. Investors seem to be assuming that, as Megan suggested above, that which can't continue indefinitely won't, and we will get a handle on our fiscal situation sooner rather than later.
There is a very real difference. One triggers a CDS. The other does not. More importantly, the Fed Govt can, and should, simply stop issuing Treasuries altogether. The consequence of this would be to have excess reserves pile up, and thus setting the FFR at zero, which it is anyway.
The reason we can "borrow" at such a low interest rates is because the interest rate is set by the Fed, and they can set it to whatever they want, and right now they are setting it low.
Has Japan gotten its "fiscal house in order"? It's had zero interest rates now for over a decade, and a fiscal deficit that is about 200% of GDP. None of that looks like it is changing. This is completely opposite of what conventional Macro would predict.
If we actually did default, do you really think the CDS holders would all get paid off? I'm just thinking back to the scenario with AIG last year, which didn't seem like it was in a position to settle up its CDS without the US Government bailing it out.
The yield on Treasuries (the interest rate at which the U.S. borrows) is not set by the Fed. It's set by the market. If the government stopped issuing Treasuries, how would we cover our budget (without immediately raising taxes or cutting spending significantly)? And where do you imagine reserves would pile up?
You are right that the Japanese experience appears counter-intuitive -- that the developed country with the highest debt as a percentage of GDP can borrow at such low interest rates. I've wondered about that myself on occasion.
Winterspeak, how exactly do you propose that a government spending a trillion dollars a year more than it earns can stop borrowing money?
And sure, the interest rate is "set by the Fed". The Fed buying all the Treasuries because nobody else will is going to prop up the US economy for about as long as it takes for the news to break.
DAVE: Your question is immaterial because the US need never default on any dollar denominated obligations it has.
Also, I recommend you look into exactly how the Federal Fund rate is set. I assure you, it is set by the Fed, and then operationalized by the Treasury through its active involvement in the overnight interbank lending market.
You are on the right track re: Japan.
ALSADIUS: The US does not borrow in order to spend. It simply issues currency and spends. It taxes to reduce aggregate demand, and thus control inflation. It issues Treasuries to drain excess reserves, and thus create an overnight interbank lending market (which keeps the FFR above zero -- obviously not a concern right now).
Just ask yourself -- if the US can create its own currency, and I'm sure you agree that it can -- why does it need to "borrow" something it has an unlimited supply off from people who have an all too limited supply of it?
Winterspeak:
The Fed Funds rate is not the rate at which the U.S. government borrows to finance its deficits, it is the rate at which commercial banks lend their excess reserves to each other. The rates at which the U.S. government borrows money are the yields on U.S. Treasury securities.
The Fed can affect these yields by buying Treasuries itself (an example of quantitative easing, which it has been engaged in recently), but its power to do so is limited in practice to periods of deflation. Otherwise, the dollars the Fed creates to buy the Treasuries will lead to inflation. If bond investors believe this inflation will persist or get worse, they will demand higher yields to compensate them for that risk, and the purpose of the Fed's purchase of Treasury securities will be defeated.
Winterspeak, you're confusing the map with the territory. The US never needs to borrow US dollars, this is true. What they need to borrow is the productive capacity to churn out the highways, aircraft carriers, pensions, medical treatments, and other such things that they provide. They tax to appropriate that capacity, and they borrow to acquire what capacity they're not willing to simply outright take. Your point that they can just print the money instead of doing either of those is technically correct, but that's the worst kind of correct. Yes, they could, but it'd damn near destroy the country. They won't.
Alsadius: Glad we agree that a currency issuer does not need to "borrow" the currency it can issue any more than American Airlines needs to "borrow" American Airline air miles. Obvious stuff when you think about it really.
I'm afraid I do not follow you when you say the US has to "borrow" productive capacity. All those things you list are made by people, and you pay people a wage in exchange for their labor. The US Govt does an awful lot of this.
You are correct in saying that the US Govts ability to tax creates the end demand for US$. The end of the dollar will come when the US Govt can no longer tax.
US taxes impoverish the Non-Govt sector, making it unable to afford its own output, which lets the US Govt buy that that extra output without causing inflation. Maybe that is what you meant. This is what I meant when I said taxes were about inflation control -- maybe we are on the same page here too. As you point out, $ taxes also create demand for $, and they redistribute too.
Govt deficit spending also funds net private sector saving. This is what is happening now, primarily via automatic stabalizers. Far from destroying the country, the deficit is the only thing keeping us from falling into a Depression. I wish it had been implemented in a better way than the combination of unemployment and handouts to favored cronies.
The currency that the US prints is worth only what people think it is worth. If they print too much, people think it is worth less, and demand more in return for goods or services. If foreigners don't think it is worth as much, they demand more of it, or as the case of other nations, another currency in return for the goods and services that it sells.
The US has had a trade deficit for years. Foreigners have accepted US currency in return since they felt it had real value. So they sold the US oil for example, in return for US dollars. If the dollar is worth less, they will ask for more dollars / barrel. Or maybe even demand Euros or something else in return.
A fiat currency allows flexibility on the amount of currency, but what value that currency has is out of the government's hands, except indirectly. People in the country or outside decide what it is worth.
People are deciding right now that the US currency isn't worth as much as it was a little while ago.
Derek
Dave: The FFR is the rate at which banks lend to each other overnight -- and it is also the short term of the Treasury yield curve set by the Fed. The Fed creates this overnight market, sets a FFR target, and then the Treasury intervenes in the market, as necessary, to hit it. The FFR is what sets the anchor rate that then influences the rest of the yield curve.
There are Treasuries of longer duration, as you say, but if the Fed wanted they could set the interest rate for them and then let the quantity vary as they chose. The Fed has the ability to set any and all point in the yield curve, and currently it chooses only to set the shortest end (and goes about it using a convoluted process).
The Federal Reserve bank cannot create dollars. All it can do it change the composition of financial assets, ie. move money from a non-interest bearing account (a reserve account) to an interest bearing account (a Treasury account), much as you can move money from a checking account to a savings account. Dollar creation is entirely in the province of the Treasury, which does it whenever it spends.
Whether or not this causes inflation depends on what is done with the dollar. If it is spent, then whatever it is spent on might start to go up in price. If it is saved, then it has no impact on prices at all. Remember -- inflation is caused by too many dollars CHASING too few goods. If they aren't chasing, they aren't inflationary.
That's a drop in his weekly paycheck of almost 10%. Most people would feel very hard pressed to deal with a 10% drop in income.
Megan: Depends on how we raise the revenue. I'm not a fan of raising income/payroll taxes on the non-wealthy (and, as you said, there are limitations on how much we can get from the wealthy due to, among other reasons, volatility). But I think most middle income people would deal satisfactorily with, say, a 5% VAT, once they'd grown accustomed to it. And one reason for this is that they could shield themselves from some of the tax increase by curbing consumption. And yes, that means a modest cut in living standards -- at least a cut from the living standard enjoyed in the absence of the VAT. But, let's face it, Americans in general need to save more money in any event. And a lot of the pain implied by the shrinkage in the percentage of income going to consumption would be eased by, you know, expanding those incomes (admittedly income growth is something a lot of Americans don't have a very good memory of).
And anyway, the expansion of government spending into the healthcare sector should have the effect of boosting the living standards of most people in the bottom half or so of the income distribution. It's not only about who we get the money from. It's also about who the money go to.
So because the tax is hidden, instead of reducing your disposable income, it'll just reduce your standard of living directly. Sounds like a vast improvement to me. But never fear, the magical nominal income growth fairies will return for their vacation to bless us with their gifts once more. And of course, it's all okay, because income redistribution benefits the poor.
I literally don't have the words.
So because the tax is hidden, instead of reducing your disposable income...
Alsadius: It's not hidden. This is one of those tired right wing falsehoods that's invariably trotted out at the mere suggestion that -- heaven forbid -- the US, too, should join most other rich countries in shifting the tax code a bit toward the consumption side of the ledger. I've traveled abroad enough to distinctly recall the unmistakable labeling of VAT on various goods and services I've purchased. It's all quite clear. And the thing I like about it -- and I'm surprised this doesn't appeal more to righties such as yourself -- is that there's an element of "voluntary-ness" to value added taxation. One can, after all, eschew (or delay) purchasing this or that good or service in favor of a bank deposit. But one can't avoid the IRS's gulp out of one's paycheck.
I literally don't have the words.
You don't have the correct words, 'tis true.
The way I've always seen the terminology defined, "VAT" = hidden, "sales tax" = open. My country(Canada) has a 5% national sales tax, but it's open, and I've never heard anyone call it a VAT. The places I've heard it called a VAT, e.g. the UK, I've never visited but always thought had it hidden
As for income taxes vs consumption taxes, I actually much prefer consumption taxes. They're a bit more regressive, but they've got far lower deadweight and compliance costs. The transition can be a bit of a bear, since you're basically double-taxing anyone who saved in the past, but that's fairly minor, all told and can be ameliorated without too much agony.
The reason why I was poking fun is that my preference for low taxes is much stronger than my preference for consumption taxes. You're saying that we should just throw a 5% sales/VA tax at the problem, without any hint of cutting other taxes or curbing the obscene spending levels of the last couple governments. I'm hardly going to defend a tax hike the size of the one you propose simply because it's a better kind of tax than the ones we'd have to pay in addition to it.
>It's not only about who we get the money from. It's also about who the money go to.
I'm amazed at this discussion. It harkens back 20-30 years when Canada hit the wall. The arguments were almost word for word what we hear now.
The one question no one has even brought up: Is the US tax rates, fed and state, at the apex of the Laffer curve? If not, how far away?
It was amazing to see the reactions in government when raising tax rates DECREASED revenues.
Derek
I'm amazed at this discussion. It harkens back 20-30 years when Canada hit the wall. The arguments were almost word for word what we hear now.
You're quite right. The Canadians smartly decided to introduce a VAT, and, although it was quite unpopular at the time, it was the centerpiece of the country's return to a sound fiscal policy. And sound fiscal policy, I would argue, is the cornerstone upon which broad-based prosperity is built.
I suppose a GTS/VAT, combined with a lower tax on cap gains would be good for investments and stimulate the stock market, but it would be very hard on the consumer economy - especially when levied on things like [new] houses.
The GST replaced a manufacturers tax that penalized exports. As for revenue, it $15 or so billion in '92. The deficits were around $40 billion or so, and it replaced an existing tax with it's level of revenue. The difference between the two I don't know.
In British columbia they are going to change the provincial sales tax, a 7% tax on goods sold, to HST, or a 12% GST, goods and services tax, for similar reason. Business investment in equipment is taxable, whereas under the HST, it won't be. A business pays GST on any goods or services purchased, collects on any sold within the country, and pays or gets refunded the difference.
So the GST wasn't a major revenue generator. The government did all kinds of things like raise payroll taxes, stop indexing tax deductions creating bracket creep. The fed stopped transferring money for programs such as education, health and welfare, forcing the provinces to raise taxes and fees. The 'rich' provinces in Canada are the ones with natural resource extraction that is ripe for royalties.
And the GST puts every business into the business of tax collection. I had a business before the GST was brought in, and two government agencies collected taxes from me, income tax and workers comp. I am about to go into business, and now am going to be collecting taxes from my customers. My customers are businesses, who don't have any issue with paying GST since it is a credit against their collections, but when working for homeowners, collecting 12% on top of my price is difficult. This fact has driven very large sectors of the economy underground. The largest business sector in BC is illegal.
Derek
It's funny how 4% doesn't sound like a lot, except that it's $2400 off a $60K annual salary, and most people I know who make $60,000 consider that to be really quite a lot of money.
A better way to look at it is as a portion of the federal tax burden...
CBO has projected that just to stay even with the rising cost of Medicare/Medicaid/Social Security (nothing else, and there's a lot else to consider) will require an across-the-board 50% increase in income taxes by 2030, or the equivalent.
That is, income tax will have to increase by 50% in GDP terms -- and of course, that's just for starters.
But just a few days ago you were posting on how the Yen was going to displace the Dollar as the worlds reserve currency because the Japanese were such a much more prudent long term risk.
But I should know better than to ask you to remember a right wing talking point for several days.
...what? I don't recall reading anything even close to that. The only mention of reserve currencies on this blog recently was a dismissal of the Euro as a replacement reserve currency, and a statement that the dollar would probably keep that status. I hope you're thinking of some other blog, because otherwise you're either incoherent or delusional.
Spencer,
Who are you replying to? If it is the blog hostess, then you are misremembering at best.
If you had to come up $2400 dollars today to settle a debt - or it could financed at 4.2 pct over 30 years - which would you take?
If you are referring to the US govt in an analogy, unfortunately the great bulk of the debt it is incurring is being financed with very short-term borrowing. Because they don't want to drive up long rates.
Of course the long rate will go up, as will the short rates (we hope!) -- then all this debt will have to be rolled over.
"The country poured hundreds of billions of dollars into civil engineering projects in the postwar era, marbling Japan with highways, dams and ports.
The spending initially fueled Japan's rapid postwar growth and kept the Liberal Democratic Party in power for most of the last half-century. But after a spectacular asset and stock market boom collapsed in 1990, the country fell into a long economic malaise."
So spending on infrastructure paid off and reckless financial speculation did not? Whodathunkit.
Infrastructure spending pays off only to a point that it facilitates growth. Japan is far past that point, and is littered with underused roads, bridges, airports and rail lines. The maintenance of all that extra stuff will add to ongoing expenses unless it's just abandoned (making it all a waste of money). This is going to be a particular problem given the implosion of the country's population.
You really can't equate the infrastructure spending in the '40s and '50s with what's happening today.
The huge debt results in large part from massive public works projects, aka infrastructure spending . . .
They have a famous bridge that cost about $2.3B iirc.
The twelve people who use it every day really like it.
You mean like that "Bridge to Nowhere" that Sarah Palin and Ted "King of the Intertoobez" Stevens championed?
Yep, except it was twice as expensive, half as useful, and actually got built.
Some people seem to think this is a great model for our economy.
(To be fair to Palin, she later opposed the BTN, and refused the money provided by Congress.)
Moody's and S&P have both projected the credit rating of the US would start falling in 2017, if judged by the same standards applied to other nations.
S&P projected the US rating would fall to "junk" by 2027 . (Both projections were made before the recession and the arrival of Obanomics).
Megan: By what standard is it going to be "very ugly?" I'm quoting from memory, but I think Krugman reckons we're going to eventually need tax increases equal to something like 4% of GDP
That depends which Krugman you are talking about. It's very much Krugman versus Krugman on this one!
That depends which Krugman you are talking about. It's very much Krugman versus Krugman on this one!
Jim Glass: that blogger's post is deeply disingenuous. The first Krugman quote was pulled from a column he did in 2003 -- during the presidency of a man who apparently bought into the fantasy that tax cuts pay for themselves. The more recent column was written during the presidency of a man who understands the grim budget outlook (grim, that is, unless we raise taxes), and clearly wants to do something about it.
That said, I join every other sane person in holding the opinion that the "only folks making $250K+" promise can't be kept indefinitely. Still, I don't recall reading that Obama promised this course of action for both terms. I think he'll be able to keep his promise (he'd better, because the economy can't withstand broad tax increases any time soon) this term. And I predict Obama won't make any such promises about his plans for the second term.
Your evidence that he "understands the grim budget outlook"--to the extent of being willing to actually giving up some of his budget priorities to close it--is . . . ?
Pointing out that Krugman felt differently about Bush's much smaller budget deficits is not really an argument for the defense . . . only about a quarter of the change from surplus to deficit was due to tax cuts. Mostly, it was the same thing that's confronting Obama: secular revenue decline, and programs he wanted to spend money on.
I will bet substantial money that Obama does not campaign on middle class tax hikes.
I will bet substantial money that Obama does not campaign on middle class tax hikes.
He's a skilled politician, so no, he obviously won't make tax hikes the centerpiece of his reelection bid. But my sense is Obama possesses enough integrity -- and enough lawyerly caution -- not to box himself into promising to shield the middle class from the taxman's covetous glances in his second term. And no, I don't think when his campaign's economic advisers formulated his program way back when they correctly anticipated the shitstorm we'd be in by now -- so I don't think they (he) lied about their intentions with respect to taxes in the first term. I think they honestly reckoned they wouldn't need to hit the middle class between 2009-2013. Given our current predicament, I think they'll back into being right on this. But yes, they'll have to change their tune if they win a term II, there's no doubt about it.
But my sense is Obama possesses enough integrity
Hahaha! Good one.
Hey, remember when he promised to be bi-partisan and reach out to his opponents? Ahh, good times.
Jim Glass: ... The first Krugman quote was pulled from a column he did in 2003 -- during the presidency of a man who apparently bought into the fantasy that tax cuts pay for themselves. The more recent column was written during the presidency of a man who understands the grim budget outlook (grim, that is, unless we raise taxes), and clearly wants to do something about it.
Ha! And what Obama is doing about it, as per CBO, is setting course to run up deficits as a % of GDP over his eight years far larger than Bush AND Reagan did COMBINED over their 16 years!
Which puts Krugman solidly in the post-modernist camp: the objective quality of fiscal policy depends on the name of the party in power, and upon our own subjective belief regarding its "wants".
Time #1 Krugman: "Terrified" about the "looming threat to the federal government's solvency." Yes, deficits then were "only 2, make that 3 percent, maybe 4 percent of G.D.P. But that misses the point ... because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest ... Without the Bush tax cuts, it would have been difficult to cope with the fiscal implications of an aging population. With those tax cuts, the task is simply impossible." Doom!
Time #2 Krugman [as every measure of the projected fiscal future has worsened, and the end point of fiscal crisis is eight years closer, and Obama and the Dems are counting on renewal of the bulk of the very same Bush tax cuts (!!)]: He's "sanguine", hey, things won't be any worse in 2019 than for Ozzie and Harriet 1950. What's to worry about in that?
Now, verily, the Bush tax cuts are effectively endorsed by Krugman in Obama's entirely reasonable fiscal policy, while the "fiscal implications of an aging population", formerly "simply impossible" to meet with those tax cuts in place are ... forgotten ... ignored.
And all this, you say, is because Krugman realizes Obama "wants to do something" about deficits -- as he smashes the Bush/Reagan 16-year total for deficits. (And remember, Reagan started out with a huge recession too.) Well, he's doing something there!
I really enjoy Krugman fans -- they can never see any conflict between any two things he says, even when as blatant as this. It's always somebody else being unfair to the poor guy. A true example of "this is your brain on politics".
I'd like for them to explain one thing for me though: After Krugman spent eight solid years damning the Bush tax cuts, over and over, as the fiscal spawn of the Satan himself, how come he's now so happy & OK with renewing the great bulk of them as the Obama-Democratic tax cuts? No problem! Happy 1950s all over again!
There's a circle worth squaring.
After Krugman spent eight solid years damning the Bush tax cuts, over and over, as the fiscal spawn of the Satan himself, how come he's now so happy & OK with renewing the great bulk of them as the Obama-Democratic tax cuts?
Gee, I don't know. Perhaps because he wants to avoid a repeat of 1937?
Ha! And what Obama is doing about it, as per CBO, is setting course to run up deficits as a % of GDP over his eight years far larger than Bush AND Reagan...
Jim Glass: do you by any chance live in an isolated monastery? We've been going through this rather nasty patch folks have taken to calling "The Great Recession" because, er, it actually does resemble the great '29-'33 downturn in many respects. So, yes, OF COURSE massive deficit spending is required right now, and yes, OF COURSE, it's not sustainable indefinitely. Which means your and my taxes are going to be increased in the fullness of time. I mean, are you in a hurry for that to happen?
while the "fiscal implications of an aging population", formerly "simply impossible" to meet with those tax cuts in place are ... forgotten ... ignored.
That's not true, either. Krugman is on the record as favoring a VAT. Like most responsible adults, er, like most Democrats, he's aware of the need for more tax revenue. It's the OTHER GUYS who think the closer you push tax rates to zero, the more revenue you get.
Jasper, you keep making my points for me...
Gee, I don't know. Perhaps because he wants to avoid a repeat of 1937?
Gotcha. After damn-, damn-, damning the Bush tax cuts for eight years, Krugman endorses their permanent renewal in 2010 as a temporary recession-fighter for today.
That makes sense!
~~~
**...what Obama is doing about it, as per CBO, is setting course to run up deficits as a % of GDP over his eight years far larger than Bush AND Reagan...**
Jim Glass: do you by any chance live in an isolated monastery? We've been going through this rather nasty patch folks have taken to calling "The Great Recession" ...
Reminder again: Reagan's recession was worse than this one (so far), 10.8% unemployment. (I was out of the monastery and in the work force even back then and remember it first-hand.)
Obama the-deficit-fighter's own projections show him running deficits for years long after the recession ends, and after the economy returns to full employment (5% unemployment), that will be fully 50% larger than Bush's deficits (at the same 5% unemployment). To run up in eight years more debt as a % of GDP than Bush AND Reagan did in 16!
This is tough deficit fighting to you and Krugman, eh?
~~~
**while the "fiscal implications of an aging population", formerly "simply impossible" to meet with those tax cuts in place are ... forgotten ... ignored.**
That's not true, either.
Really? After saying the economy was doomed by same in the first column, literally -- "simply impossible" -- in the second column things are no worse than in 1950, because the debt as he counts it, excluding entitlement obligations will be no worse than in 1950. All we have to do then, he said, is grow the economy faster than the debt as after 1950, he emphasized. Which is flatly, absurdly, impossible if counting entitlements.
(No mention there of "We'll be doomed as I reported before, unless the 'simply impossible' task is solved with a VAT!", eh?)
~~~
It's the OTHER GUYS who think the closer you push tax rates to zero, the more revenue you get.
Jasper, considering the OTHER GUYS to be crazy lunatics is easy in politics.
The key to mature, reasoned political judgment is realizing when your own side is spinning, deceiving, and selling a bill of goods. It does happen, you know!
Really, it does!!
The interesting thing about "Your Brain on Politics" is the brain physiology, the addictive endorphins, that kick in to make partisans like, oh ... you ... literally incapable of realizing such a simple fact, and of seeing the most obvious cases of it.
Which puts Krugman solidly in the post-modernist camp: the objective quality of fiscal policy depends on the name of the party in power, and upon our own subjective belief regarding its "wants".
Yep, you nailed it. Same goes for the filibuster.
And Moody's and S&P have how much credibility any more? Given that that they both aided and abetted the current meltdown.
So your argument is that two agencies with a history of being too optimistic are getting more and more doubtful about something, and thus we should ignore their doubts?
Jim Glass:
I have no idea why you think Krugman wants marginal rates on the wealthy to remain permanently at where Bush's legislation put them, but if you've gotta cite, I'm all eyes. And even if this were the case, it obviously doesn't mean Krugman doesn't favor raising other taxes (payroll, consumption) etc at some point. Gotcha!
That's a good one. This statement alone tells me you're not worth debating in the future.
Of course that's what the projections show. Because he hasn't proposed or enacted much in the way of tax increases as of yet. I believe we've already established this.
Of course it's not "impossible." As the example of the post-war period shows, holding the growth of the public debt to a number lower than GDP growth will, over time, reduce the debt/GDP ratio. This is basic math.
Well, in the US politics of 2009, that's certainly the case.
>That's a good one.
I would suggest you look it up. It was far worse than what we have seen so far. Different in it's manifestation, but very nasty.
This one has all the smell of something far worse, but time will tell.
Derek
Why are you clicking reply to a comment unrelated to the one you are actually replying to?
Moody's and S&P
Now that's something you can bank on!
They have recently tended to be over-optimistic and over-generous in handing out their AAA ratings.
I'm not sure we should draw comfort from that.
For all their issues, and I agree with you on that level, if Moody's or S&P say that the US debt is AA, all hell will break loose.
Canadian provinces have been forced to cut spending and borrowing when even threatened with a downgrade. The cost of their debt would increase substantially.
And interestingly, it always is S&P or Moody's fault. But they nonetheless change their policies. They are forced to.
Derek
The singular "good" thing about the US debt trajectory is that several other countries are well ahead of us on it.
If Japan or France goes "off the cliff" first, it may serve as an object lesson we will heed.
Or not.
If Japan or France goes over the cliff they could very well drag us down with them. The world economy is too interwoven these days for a financial crash in one part of the world not to reverbrate throughout the rest.
Today and this post brings a time to celebrate tentatively the good and the bad of your voting for Obama. The good is that we may have avoided a war with Iran; and they may have avoided, for the foreseeable future, getting nuclear weapons. That will save us a huge amount of money and from killing people we don't really want to kill. The coming, presumably, Chancellor of the Exchequer in Britain has talked of reducing debt there in part by somehow keeping public pensions below $ 40K a year. That would seem to be a good idea. One of the faults of our current income tax situation is that 'good folks,' those that work, if not exactly tirelessly, for the government and universities have a lot of their compensation in deferred compensation which flattens out their compensation for tax purposes.
The coming, presumably, Chancellor of the Exchequer in Britain has talked of reducing debt there in part by somehow keeping public pensions below $ 40K a year.
We'll see how well that flies. My guess is not very well, if the U.K. is anything like here.
Agreed. Public sector unions have had trouble getting any pay increases in the last few years. So they have pushed (and gotten) improved pension benefits.
This would be like rolling back wages.
I wonder if any of the British politicians have the guts to pull a Reagan over this.
Derek
I think this is a problem, but ultimately it's a solvable problem. Not by a single approach, but by a set of really obvious policies that, in the grand scheme of things seems a heck of a lot better than a round of significant and deadweight loss inducing tax hikes.
1. Index Social Security benefits to the CPI, which reflects a truer cost of living, than to wage growth.
2. Consider relatively moderate levels of means testing in both Medicare and Social Security.
3. Fight like hell against an increased government centralization of the health care system. We aren't going to get anywhere close to cost control until we at least consider not laughing a guy like John Mackey out of the room.
4. Understand that tax revenues will significantly exceed current projections if we actually get the economy rolling. Generally speaking, there are a lot of folks waiting out there for the other shoe to drop, and the other shoe is a combination of potentially unsustainable current government policies (spending, FHA, auto takeovers, the conversion of the Fed to a policy arm of Goldman Sachs, etc and proposed government policies (card check, cap and trade, corporate taxes, health care reform) that frankly scare the shit out of people contemplating their productive futures. I don't buy that there will be a massive "Going Galt" effect, even moderate reductions in the incentive to create new business ventures and redirect efforts into dividing up rents could result in cumulatively large reductions in economic growth and hence, tax revenues. Especially when the tangible benefits of most of these policies seem dubious, the cost is going to be terrible to behold.
5. Really and truly, it's about time we bring home about 100,000 troops from Western Europe. Keep the remainder we need to provide logistical support in Iraq (also demobilizing) and Afghanistan (don't know... that's a wild care we might have to pay for), but we don't need to be protecting from Soviet invasion anymore. I'd be pretty open to consider significant draw downs in Japan as well.
6. Along the same lines, consider economy friendly policies like attempting to untangle the mess we've made out of nationalizing air travel security and the TSA and getting the various free trade agreements we've got in the hopper.
Contra a poster above, I expect to get little to no value out of the policies I've mentioned here. And I'm due to pay a lot for them. And so are my kids. So how about we do something really crazy and just get rid of this spending instead of taxing us more to pay for it. If we even get most of this, it'll reduce amount of necessary tax increases amounts to more tolerable levels. Hell, I might even support a tax increase if it gets us to a sustainable and non-crazy level of government.
Bonus: This will never fly but recognize that about 50-75% of the stimulus bill was pure pork that will be doled out to secure Democratic votes in 2010 and not create any jobs. We can't afford that. I think "stimulus" made some sense in the form of backstopping states and individuals, but we need to recognize that the government's basic operation was already, effectively, a stimulus. Tax policy and the safety net already exist as our basic stabilization tools in a recession and they work. Adding too much on top of it, however, seems to be counterproductive.
Megan had a thoughtful post on a good NY Times article. The comments here can almost all be summarizied as "see this proves exactly what I've been saying." Sort of like the predominant response from the punditocracy and our [corporatist] political overlords to any piece of new information. I don't have any suggestions or anything to add on the substance of the debate, but I am coming to the conclusion that our (USA) decline is unavoidable in the short term and deservedly so, since we as a society seem not only devoid of ideas but unwilling to consider anything that might puncture the vacuum.
I wonder how much of this deficit was the TARP/AUTO/CashForClunkers/HomeRebate costs? TARP, while a one time occurrence, resulted in a massive debt whose servicing is swallowing up a big chunk of our revenue.
I had the same thought about 'bring the boys back home', although I hadn't thought of Western Europe. Thats a really excellent point. If we are really having an economic crisis, we might consider NOT being the worlds policeman anymore. At least until somebody offers to pay us for it.
Might I also suggest NOT pouring billions down the rat hole of drug interdiction/incarcerating millions? Or at least scale back to the drugs with REALLY pernicious effects.
Sounds good to me, though that effort appears to be well under way, at least Federally.
Yet Obama is still telling everyone that taxes won't rise on the middle class
A lie from the get-go. Unless the "rich" harvest their money from trees every penny they earn comes from the Middle Class. Raise a rich guy's taxes and he passes the cost along as well as a small fee for playing tax collector. Either he charges more for his services/products or he retires, moves to the Carribean, closes his business, and puts all his employees out of work. Income tax brackets have always been a scam to hide that fact.
I know it's trivial and beside the point, but no one ever thinks out the implications of what would happen if money really did grow on trees.
Growing an orchard of money trees would still be a costly undertaking. You have to spend money to take care of the trees.
Not a big deal. You just have to make sure your ROI > 1.
@ Jim Glass:
If Japan or France goes "off the cliff" first ?
Then we agree they are headed for a cliff ?
How many young, angry, riot-prone, Arab/Islamo-
Fascist males are there in Japan ?
If Japan falls on hard times, its people will
support their government, literally to the point
of mass starvation, as was shown during the Pacific War.
Yes, I know what the US history books say; The records
of the Imperial Japanese Government say different.
Yes, I know the US history books say that MacArthur
adjusted the Japanese attitude to 20th century
democratic; Believe that if you will.
To me, the most worrying news out of Japan is that
the women have started addressing the men using the
insulting suffix -chan, for "boy" or "baby";
Perhaps the men will decide to rediscover their
Samurai/Bushido Imperial Expansionist patrimony,
and prove the women wrong. Perhaps in alliance
with the Chinese.
If the US cuts military spending to the point
that it can no longer project power globally,
who will stop them ?
Gold will not always get you good soldiers,
but good soldiers can always get you gold.