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The good news about the Federal budget data recently released for February is that the deficit continues to shrink (albeit modestly) relative to the size of the economy, and the growth of revenues—which has been about 10% per year for the past year or so—continues to outpace the growth of spending, which is rising about half as fast. This is as it should be in the early years of a recovery.
The bad news is that the deficit is still huge, at $1.3 trillion in the past 12 months, and represents about 9% of GDP. That's big and bad by any standard. Keynesians have preached for years that big deficits like this are stimulative, but we have now proven beyond a shadow of a doubt that big deficits that are driven by lots of spending and transfer payments act only to slow the economy's growth. That's because they consume a significant portion of the economy's resources in a very inefficient manner. In short, they reduce the economy's overall productivity, and that results in a slowdown in the rise of living standards.
3 comments:
Hello Scott, I used to read you when you first started this blog. You may remember me as FilmFlam, my frequent moniker.
I was rather bearish then and you were not, but you will remember me most likely as the uber-Apple fanboy, long before you came to see the light. I was driving my son down to legoland today and passed the Calafia exit and that reminded me to look you up. I occasionally pop in to see if you are still a perma-bull.
Now I see you are re-enacting my honeymoon from almost exactly 6 years ago. We took that same picture on that same rock at Mirador and spent the other half of our trip in Buenos Aires. If you also visited Region X (the lakes region) of Chile, then I would have to claim plagiarism.
I have to warn you, if you are going to keep leading my life with a 6 year lag, you have a very rough transition to perma-bear coming up on you. I just wanted to give you a heads-up.
Otherwise, it is probably just all coincidence, and low-probability randomness. But, just thought you should be prepared.
=)
Martin: not sure all the parallels work. I first went to buenos aires in 1970 and lived in the southern part of Argentina for four years in the latr 1970s, but you did beat me to Fitz Roy and Torres del Paine. I bought the bulk of my Apple position about 10 years ago and have been a Mac fanatic since 1987.
I'm sure I will be bearish someday, but with valuations so cheap that would be a low probability event right now.
It would be nice to hack down federal outlays to 16 percent of GDP, which I think could be done by all but eliminating the USDA, cutting Defense Department by 75 percent, eliminating Labor, Commerce and HUD, privatizing the VA, and clamping down on Social Security outlays, perhaps by an across the board 10 percent cut in benefits.
However, I see no will at all for this approach.
The Tea Party is making speeches, but when they realize that a state like North Dakota pays $6k per capita a year in federal taxes, but receives back $10k per capita in outlays, if just gets so tough to do anything. I mean, the typical family in North Dakota has $16k of federal money at the table. The state would blow away without federal subsidies. Depopulate.
What rural Senator (and there are 24 farm state Senators) is going to vote for depopulation? And what inner city representative is going to vote to cut urban welfare? Enter logrolling.
We can only hope to get the federal budget back into rough balance, and then run inflation in the 3 percent to 4 percent range to "pay off" the national debt.
An aggressive monetary policy is needed to get us there. The worst thing is the Japan solution--tight money and fiscal deficits. The Japanese economy has suffocated from a monetary noose around its neck.
The Bank of Japan has been feeble and dithering. Hopefully, with the tragic events of late, the Bank of Japan will realize there are actually other goals in the world aside from deflation, including prosperity.
Through most of the 1980s and 1990s we prospered with such inflation rates, so I am hardly proposing something strange.
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