Friday, October 16, 2009

The State of the Union is bleak (but there is still hope)

Here are my favorite charts of the Federal budget situation. Things continue to deteriorate, and they have reached levels that were never before thought possible. In the post-war period, tax collections have never been weaker as a percent of GDP. Similarly, spending has never been higher. As a result the deficit now exceeds 11% of GDP.

If there is anything good about this situation, it is this: all a smart politician needs to do is to hold these charts up to the TV cameras, much as Ross Perot did in his heyday, and show the public that we are on an unsustainable course, and that we need a major rethink about how government should be managing our economy. It shouldn't be hard for anyone to explain that it is the height of fiscal irresponsibility to proceed with a massive expansion and restructuring of our healthcare system (underwritten by taxpayers), at a time when government spending is already out of control. Moreover, embarking on a major cap-and-trade-driven increase in energy prices (in the name of saving the planet, even though this is the coolest year in the last decade) that would almost certainly weaken the economy, should at the very least be delayed several years until we can approach the problem from a position of strength and greater understanding. And of course, it would be imperative to assure the country that tax rates are not going to go up.

It is time to focus on what is left of the toothless stimulus package (to put a nice spin on it), with the objective of making those funds actually stimulate the economy instead of creating make-work projects, growing the size of government bureaucracies, and transferring trillions of dollars from top income earners to low income earners. We need to use that money to increase the incentives to work and invest, and that can happen only if we cut marginal income tax rates, corporate income tax rates, and the tax rate on capital. We need some major reductions in government spending and income redistribution efforts, and some major emphasis on helping the private sector pull us out of this mess.


fwiw imho said...

RE: Stimulus Job Creation....

All states are to report their progress by Saturday. Wisconsin announced their results Tuesday.

"The governor's report shows that Wisconsin was awarded just over $1.9 billion in stimulus money during the first reporting quarter. The report says that money helped created or save 8,284 jobs.

Doyle's office said the majority, about 6,100,
were public service jobs such as teachers, police officers and firefighters."

75% of jobs saved or created were government jobs.

It's only going to get better.

brodero said...

In the interest in fairness the
Bush administration did not include
the war in Iraq on the budget.

W.E. Heasley said...

Excellent article.

“....'toothless stimulus' package (to put a nice spin on it)” is a very good description of the stimulus plan.

Possibly a better description is 'The Spruce Goose' of all stimulus plans ever concocted.

Paul said...


This chart kept me awake last night. How on earth do we survive this?

brodero said...

Paul I have seen this chart from Ned Davis and I have a little problem with it. In that GDP is
in essence the nation's income and
the debt is a balance sheet item. It
is like comparing your mortgage to
your income.

Scott Grannis said...

brodero: all spending, even Iraq, is included in these numbers; this is not the budget.

You are right about the chart. Charts that measure stocks (debt) vs. flows (income) can be extremely misleading. It's truly an apples to oranges comparison.

krispyhoochie said...

Hi Scott,

You shared with us your view on Oil and it was very insightful. I would now like to know what your view on copper is. Is it starting to bubble.

Any information is much appreciated


Bill said...


Do you think the market's reaction to BOA is a sign of things to come, ie- that as loan defaults increase, the big banks will be in distress again and need additional bailouts?

brodero said...

Bank of America is already 8.8 billion dollars ahead of the adverse stress test. So they are
even farther away from being in distress. The Adverse stress test
had BAC losing 11.35 billion each
quarter . 3 quarters into the stress test they have had chargeoffs of 25.257 billion versus the adverse stress test assumption
of 34.05 billion.

Douglas said...

I feel compelled to wag a finger at you Scott, regarding your backhanded swipe at the idea of climate change. The science is overwhelmingly one sided indicating a long term warming trend... unless you get your science news from Fox. My guess is that if I presented you with a chart of some economic long term trend and insisted that because the current year was an outlier in the opposite direction you would be quick to point out that one year doth not a trend make.

Also, A week or so back you exhorted me to have more faith in the Market's ability to deal with the ups and downs of the oil production situation. I would suggest to you that if the information that the market has is garbage then the market cannot act in an appropriate manner to a supply situation. I present a link to a post wherein a former VP of Saudi ARAMCO points out the deficiencies in the information about oil reserves in the KSA. (for those of you who haven't read in The Oil Drum before it is probably the best informed discussion of the situation with regard to petroleum production by current and former petroleum industry insiders on the internet) Reserves info is used by the market and by governments to make decisions about the future. If the info is garbage... garbage in garbage out...

Chad said...


Stop wagging your finger at Scott long enough to Google "global temperatures since 1998." Is that trend long enough for you?

I don't know about anyone else, but I had to break out my parka and shovel a couple of inches of "global warming flakes" off my driveway earlier this week. It wasn't even October 15 for Pete's sake!

Douglas said...

Well, Chad, I do not want to hijack Scott's blog so I will say only a bit more about climate change. Here is a website which talks about the trends since 1998: and here where there is a discussion about the data and the current blogosphere meme about global warming not happening since 1998. Scott could tell you, based on our discussions elsewhere that climate change is not my primary concern, rather resource depletion is, particularly energy resource depletion.

I am always fascinated by the willingness to look at a natural phenomenon such as the depletion of global petroleum production, or anthropogenic climate change from an exclusively economic standpoint, ignoring the ideological predispositions of market players and decision-makers, and the possibility that these predispositions will inhibit the ability of those players and decision-makers to understand the signals of the natural world within which the economic world has its base. Economists seem to tend to discount signals which throw doubt on cherished notions of progress and the power of markets to solve all problems.

I started my woodstove a few days ago, and am taking a break from pressing cider while watching the snow fall outside the window, and yes, it is pretty early. Unpredictable short term fluctuations seem to be a hallmark of climate change... bad news for agriculture which prefers predictability... kind of like investors.

Paul said...

"Unpredictable short term fluctuations seem to be a hallmark of climate change..."

More like a hallmark of weather.

Douglas said...

Touché, Paul, touché.

dr. j said...

Please look at both sides of the "climate debate" if you are boing to buy into 50 years of data to predict the course of weather through infinity. A good site is The debate is not over on any "theory" unless one is trying to stamp out discussion.

This is about money, lowering our economy to "levelize" it with emerging economies. The whole agenda is about redistribution. Climate Change is called Seasons. For the left, climate change is their religion. They are using Inquisition tactics and witch drownings to accomplish their one goal: get ahold of your money and spend it their way.

Next they will be claiming that Cap and Trade will create or save millions of moderate temperature days.

Scott Grannis said...

Doug: I'm agnostic on the question of global warming. I have not seen anyone come up with a theory of global warming that has any predictive power. I have seen plenty of people with arguments against man-made global warming. I have not even seen the famous "consensus" of scientists. I have seen hundreds of intelligent scientists who disagree with the popular theory.

I believe science operates not on the basis of consensus, but on the basis of theories which are tested and then proved or not.

I don't believe that science has established the existence of man made global warming. Therefore I think it is premature for politicians to propose spending gargantuan sums of money to fight something we don't really understand. I become very skeptical of those who are urging greater regulation of the economy and our personal lives in the name of global warming.

I could go on, but you get my drift.

Public Library said...


Your descriptions of "scientists" should read the same for Economists, yet you are willing to let politicians, led by economists, including the Federal reserve, spend trillions of dollars to thwart ideals they can neither prove, nor have consensus on.

That is real rich...

Scott Grannis said...

Whoa: when did I ever endorse the idea of letting politicians spend trillions of dollars that they don't have? When have I ever endorsed the Fed's operating procedure? When have I ever said that economists get everything right?

I constantly lament the government's free-spending ways. I criticize the Fed at every turn for conducting monetary policy based on a flawed theory of inflation. I repeatedly attack the popular notions (such as the Phillips Curve) that seem to unify most mainstream economists.

I think you are absolutely right to draw comparisons between policymakers who want to take drastic action against global warming despite having no proven theory on which to base their actions, and policymakers who want to pull fiscal and monetary levers in an attempt to steer the economy despite not having a proven theory to guide their actions.

Public Library said...

Sorry, the "real rich" probably came across more strikingly than was emphasized by the stroke of my keys!

But I do not hear you talking about the need for more transparency within the Fed or a different approach to managing our financial framework.

It seems as if everyone bases their assumptions on believing the current framework is the best and only way to proceed, yet the evidence is mounting that this framework is not only volatile but downright disastrous for Americans.

Global warming policy is a footnote in comparison to the last 15 - 20 years of financial engineering by the Federal Reserve.

Douglas said...

Wow, it is easy to bring out the ideological leanings of anyone just by bringing up climate change... or actually "global warming". Scott and I have been over this many times before and we both know where the other stands on this. I disagree with him on the consensus idea, both as to whether a consensus exists in the CLIMATE science community (I believe it does) and as to whether science operates by consensus. I believe a consensus is formed when a hypothesis meets the challenge of falsification and becomes a theory recognized as explaining the facts on the ground, but which is continuously tested against new facts.

To me the issue of climate change is not a partisan issue, though deniers tend to frame it this way because, from my point of view, that is the only way they can combat the science. This does not mean I always agree with the political solutions proposed. But to label climate change as a liberal ploy to create more regulation and redistribution is a very serious error.

You don't know from nothing about redistribution if you can't imagine the "redistribution" a rise in sea level of a few meters will cause. I find it interesting that people who regularly employ a precautionary principle when assessing risk in their private investment decisions refuse to look at this issue with the same mindset.

You get my drift...

Scott Grannis said...

One thing I've learned from my years in the market is this: no matter how sure you are that you are right about something, you can always end up being wrong.

Gene Prescott said...

Two things:

Due to my interest in using genealogical DNA in family research, I have necessarily become interested in the much broader field of genetics in understanding people migrations over time. So I have been reading about much of Europe being under "a sheet of ice a mile deep," followed by a warming period that changed climate enough to support humans; followed by another deep freeze "snap" of a few hundred years. So my view on "climate change" and what mankind can do about it has a hard time factoring in "urgency."

Second thing, I notice that AICPA CEO Barry Melancon, thinks economic recovery will ride upon small businesses concurrent with the globalization of things economic:

Scott Grannis said...

Gene: excellent point. To me, those who urge urgency in addressing climate change must have an ulterior motive.

Douglas said...

OK, my last comment on climate change.

Why is it not possible that people who perceive a serious threat, based on the science, to the wellbeing of their children and their children's children, are expressing their concern and urging action from that concern alone and not some other "ulterior" motive. Is that not motive enough?

From the point of view of those who feel that there is an urgent need for concerted action in remedying climate change the people with ulterior motives are those who place short term profit above the wellbeing of the human race.(I am not one of those. I believe it is already too late to prevent catastrophic effects from anthropogenic climate change and a host of other limits which we have ignored for all too long) I would suggest that there is a fundamental problem here because there is entirely too much distrust and ideologically-driven talking past each other. As long as we continue to refuse to understand the other viewpoint because it is politically uncomfortable we will never make any progress in a synthetic solution to these problems... oh, I think we're beyond that point anyway, don't I?