Wednesday, October 26, 2016

The biggest scandals: debt, corruption and healthcare

In his recent column for USA Today, Glenn Reynolds correctly notes that instead of sex and behavior scandals, the electorate should be talking about the monumental scandals that have impacted the entire country. He lists a variety of corruption scandals (not exhaustive, since among others he omits the IRS scandal which is still ongoing), and reminds us that Obama's signature achievement, healthcare reform, is collapsing, after rejiggering one seventh of the US economy and causing wrenching adjustments and huge costs for nearly everyone in the process. Unfortunately, he neglects to put numbers on the debt scandal, so allow me to pitch in:

Shortly after Obama assumed office in early 2009, our national debt (debt held by the public) stood at  $6.8 trillion. By the end of this year it will have reached about $14.3 trillion, having more than doubled in the space of just eight years.

A $7.5 trillion increase in our national debt in eight years is a huge number, but so is the economy, which will likely be almost $19 trillion in size by the end of this year. Only by comparing the debt to the size of the economy can we judge how big and burdensome the debt really is. By my calculations, federal debt should be about 76% of GDP by the end of this year. In the history of our country, the surge in our debt burden that began in 2008 (Bush gets a share of the blame) is exceeded only by the immense amount of debt we incurred while fighting WW II.

I should point out that the federal deficit this year will likely exceed 3% of GDP. Fortunately, that is down hugely from a peak of 10.2% in 2009. Unfortunately, the deficit is once again increasing relative to GDP, having bottomed at 2.2% of GDP a year ago.

The chart above illustrates the change in our national debt burden by presidents. Red bars stand for increasing debt burdens, green bars for declining debt burdens. The increase in our debt burden under Obama is about the same as the net increase in our debt burden for all presidents preceding Nixon. Clinton stands out for having achieved the most significant reduction in our debt burden since the 1970s, and G.W. Bush stands out for reversing all of that gain.

When as a nation we borrow money to finance our federal debt, what matters most is not how much we borrow, but what we do with the money we have borrowed. (Recall Milton Friedman's admonitions that "spending is taxation." All money spent must eventually be paid for by taxes, either directly or indirectly, even if it's financed initially by debt.) Debt that is used to finance productive investments can pay for itself by boosting incomes and creating new jobs (e.g., infrastructure, research). But debt that is used to finance consumption is money that is squandered—Greece comes to mind as a good example of what not to do with borrowed money.

By that measure, we have squandered a huge portion of the money we've borrowed in the past 8+ years. For example: Since the end of 2007, transfer payments have increased by $3.76 trillion, rising from 12% of GDP to now 15% of GDP. This is money that was taken from one person and given to another, with no regard as to whether the beneficiary has contributed anything to the economy. Call it "unproductive spending" if you will. And as I noted some years ago, only 8% of the nearly $1 trillion in "stimulus" spending under Obama was spent on transportation and infrastructure. Not a dime went to increase anyone's incentive to work harder or invest more.

We've been spending lots of money in an unproductive fashion, and that helps explain why this has been the weakest recovery ever. As bad as things are, however, this is not necessarily the end of the world. We can reverse course, and with a lot of growth we can reverse the increase in our debt burden, which is what happened in the post-war period. Unfortunately, Hillary will almost certainly attempt to double-down on the failed spending and taxation policies of the Obama administration. Only Trump is talking about pro-growth policies, with the notable exception of his complete lack of understanding of the dynamics of trade. 


steve said...

I have long said that "All Government Sucks". You start with that mantra and work backwards. Government by it's very nature is inefficient, corrupt and burdensome. Perhaps the only upside of the DT phenomena is the GOP will reinvent itself and morf into a more libertarian party. Right now, the GOP is "liberal-lite" and in DT's case on several issues such as trade and size of government-not even that.

pcpb participant said...

Question, for perspective: How much of Obama's debt, ...that tall red bar, ...went to banks after the '08 bust?

Scott Grannis said...

Whatever went to banks happened in '08 and that is included in Bush's bar. Obama's bar only includes deficits incurred after Q1/09.

Benjamin Cole said...

Call me Neanderthal, but I thought talk of Bill Clinton's sex life was worthless and I think talk Don Trump's sex life is worthless.

The lack of discussion on fiscal and monetary policy is dispiriting. Who knows what Hillary Clinton believes regarding the Fed?

I prefer balanced federal budgets. However (warning, potential heresy coming) I wonder about QE. The Bank oj Japan has liquidated 1/3 of Japan's gigantic national debt without inflationary impact.

Rather than more debt, perhaps money financed fiscal programs, also referred to as helicopter drops, should be examined.

I am retreating under my rock quickly....

NormanB said...

The level of productivity (4yr,5yr,8yr,10yr) is back to it's lows of 1980-82. Since Americans are the most productive people on the planet (China gets their productivity by just putting farmers into factories) we always have the firepower to explode. The drop by 1980 was due to super high interest rates and the oil shock which took time to attend to. Then Volcker squeezed inflation away at a big cost to those with certain payment obligations but even more we had Reagan's pro growth policies and a GOP Congress that stopped wasting money. Our latent productivity soared and so did the S&P 500.

But now where will the capitalist wildness come from? Everything that Hillary talks about works against an economic resurgence. Help from the FED? Please. While they raised asset prices on purpose it has not had the same effect on the real economy (see productivity). Maybe as Scott says we needed the money but it ain't helped. And if Russia really joins in the oil cuts (as they should) we are going to get another spike in those prices. All a GOP Congress can do, if it stays that way, is guard the gates which won't be enough.

If anyone has an answer to how productivity will expand to the +2%-+3% we are capable of please answer.

NormanB said...

An interesting chart would be GDP less transfer payments and then calculating this growth.

Fast Eddie said...

You are absolutely correct on the Debt, which is still rapidly increasing and being financed by Treasury borrowings. A 200-300 basis point increase in the cost to finance this debt will not only explode the deficit, it will force policy makers into a corner, to consider spending and taxation decisions that they are avoiding today. Who know,s maybe they'll just print money and choose the destructive road of inflation and societal instability. Nothing surprises me anymore.

Unknown said...

Scott, I love your blog and look forward to reading it each week. What I especially like is your steady straightforward view and analysis of a multitude of economic statistics and the associated charts. But, perhaps the election is getting to you as lately there is a lot of Obama bashing to sift through to read your blog. It's like reading Paul Krugman on the other side of the fence; very smart guy worth reading but have to deal with a lot of political BS.

...skip this paragraph for those who don't want to hear a more moderate position about Obama..........Presidents are just one part of the government and their affect is balanced by congress and the supreme court (both of which have been Republican majority in recent years). Also note the huge run up in debt is primarily a result of the great recession which Obama didn't cause (nor do I blame Bush); and also note that many of us are happy that Obama has provided healthcare to poor people who were suffering. I know a few and am happy to be a part of a country that cares about them even if it will cost me tax dollars under Hillary since I am fortunate to be a top 1% er like you. Also note that for the vast majority of Americans and for U.S. healthcare as a whole, healthcare costs have risen much more slowly under Obama than under Bush and previous presidents. I don't believe Obama can take credit for this just as I don't think he should be blamed for certain cherry picked bad economic stats under him.

For every statistic degrading and criticizing Obama, there is a legitimate viewpoint that takes the opposite view. The obvious reality of course is that neither side is completely correct.

I've often wondered, why it is that actors and actresses think we want to hear their political views? Why is it that Paul Krugman needs to put a politic spin and bash certain politicians when discussing economics? Scott, please don't get caught up in that. When the election is over, I hope you go back to a less biased economic and finance blog.....that's what you are good at and I truly respect your contribution in that area.


The Cliff Claven of Finance said...

To Rick Louden

I see from your post that you are an Obama lap dog.

Obama has set several economic records.
Unfortunately, none of them are good records.

In spite of the HUGE advantage of taking office near the trough of a recession -- there's nothing like a low starting point to make you look good -- the rebound from that recession was the weakest in US history.

Obama will be the first President with not one year of Real GDP growth of 3% or more.

Obama failed to address how to fully fund baby boomer "welfare" for his entire eight years -- Social Security, Medicare, Medicaid and government workers pensions, etc.. -- in fact he made the problem worse by adding a new "entitlement" ObamaCare subsidies ... which was on top of the new Medicare Part D drug coverage "entitlement" Bush added (last time I looked, Part D expenses were 85% government subsidized)

Obama has set a horrible new precedent for making "laws" with executive orders, while bypassing Congress.

His EPA bases harsh new regulations on wild guess climate model predictions ... predictions that have been wrong for the past 40 years.

And if you want to give Obama credit for expanding free Medicaid, please recall that the Supreme Court said that was unconstitutional, and then allowed individual states to make their own decisions ... leading to unequal Medicaid eligibility among people in different states = more inequality!

Not that it mattered:
- Many past studies of health RESULTS have clearly show Medicaid users had significantly worse health results than people who had no medical insurance at all, and used emergency rooms.

And that was before ObamaCare led to the expansion of Medicaid patients.

If being healthy was the goal -- throwing more people into Medicaid was not the answer -- expanding Medicare to people under age 65 would have been a much better choice.

In addition to the economic failures, Obama managed to increase racial division, and disrespect for Police, to levels not seen since the 1960s.

He instigates violence by jumping to conclusions, and taking the wrong side in black/white confrontations that make the news, almost every time!

Obama also watches as policemen are shot, and never tells Americans that when arrests for violent crimes went bad in 2015 and 2016, white non-hispanic suspects were killed twice as often PER ARREST (4 deaths per 1,000 attempted arrests for violent crimes), as black or white hispanic suspects (2 deaths per 1,000 attempted arrests for violent crimes).

And black policemen are more likely to shoot suspects than white policemen working in the same communities.

The conclusion, based on data, is that a criminal resisting arrest for a violent crime is least likely to be killed if he is black, and the policeman is white -- just the opposite of Black Lives Matter" feelings".

Data for police killings are from the Washington Post, a liberal newspaper,
and data for arrests for violent crimes are from the FBI, controlled by Obama

Obama also lost a war in Iraq, that had been won at great expense,
and in a few years we'll see he lost the war in Afghanistan too.

I was not in favor of either war BEFORE they started, and put my opinions in print
-- however even worse than starting an unnecessary, very expensive war,
is starting a war and losing it.

If Obama was a great President, or even average, all Democrats running for President
would have been talking about nothing but continuing Obama's great work
... yet both Clinton and Sanders campaigned as if the country was in terrible shape,
and a huge amount of change was needed.

I believe Obama is one of the worst Presidents in American history,
and his Administration's RESULTS should not be off limits for an economics blog,
especially considering that our economy used to grow at a 4% rate between recessions,
and now we are at only 2%.

What could be more important for a free market economics blog than discussing the 4% vs. 2% ?

Scott Grannis said...

Rick: I appreciate your comments. I do try to remain as objective as possible when it comes to the economy and politics. But in my experience (35 years of studying markets and economies around the world) I find that it is impossible to separate politics from economics. Policies can and do have enormous impacts on economics. This cannot be ignored. Obama is a socialist at heart and his policies have been very anti-growth. I think Hillary would do the same. Investors cannot possibly ignore this. Democrats and Republicans have myriad flaws and they are all responsible for the mess we're in. But Obama and Hillary stand out as being very much in favor of more and bigger government, and that is antithetical to growth. It's simply a matter of how economies work. Or don't work.

Hans said...

I agree with R Louden, that Barrocko succeeded in
his wildest dreams.

Whether domestically or foreign, he and his
radical Socshevik wife schemed and planned for years
to reduce the prosperity and America's international
influence. Bill Ayers' planning and preparations have been fulfilled.
A comfortable home is awaiting for them in Havana.


Now back to the news. According to the latest bourgeoisie publication
of Barron's, David Rosenberg of Gluskin Sheff states " estimates
that the ability to borrow money at lower rates has added five
percentage points annually to profit growth, suggesting that the S&P 500
would be trading closer to 1700 than the current 2100 without the Fed's help."

Ask yourself how much interest have you lost in the past decade because of
FedZero? Thanks to the Gang of Three - Greenspan (m), Bank of Bernank
and Yellen, to this troika, has compelled a trillion or so to be transferred from
savers to spenders, by the money planning cartel.

Our personal losses exceed 100k compounded, which we can never, never make up. And
the sad thing is - there is no end in sight.

Ben Jamin, where are you? Is your rock big enough for me?

Is it time for The Committee For Public Safety?

Grechster said...

Cliff, I liked the spirit of your comments. I too think Obama was/is a horrible president. But when you said that "Obama also lost a war in Iraq that had been won at great expense" I laughed out loud. That's crazy talk.

In a related note, I think W was just as horrible as Obama, albeit in different ways.

Hans said...

Cliff, Barrocko, in keeping his political promise
gave back all that was won in Chiraq.

Now more good men must give their lives again to restore
freedom from evil, something the Progressoes can not

Unknown said...

Lots of free time today during football commercials, so one last thought on discussing economics with or without politics. I understand your point that each party generally follows a certain economic thought process so politics and economics are linked. The problem is research shows that if someone mentions a politician or links their view to a political party, people from the other party immediate ignore them because their brain goes into the "flight or fight" part of the brain and thus they don't digest any of the information........some of which might be of benefit since often two heads are generally better than one.

I can't find the link to that study, but in another older study "Researchers asked staunch party members from both sides to evaluate information that threatened their preferred candidate prior to the 2004 Presidential election.The subjects' brains were monitored while they pondered. "We did not see any increased activation of the parts of the brain normally engaged during reasoning," said Drew Westen, director of clinical psychology at Emory University".

So, a conundrum, if you mention politics people with firm political views from the other side (roughly half the population) will not absorb what you say, but at the same time each party seems to support certain economic views. One example....when I mentioned my view of some positives from Obama, one of your readers immediately went to name definitely discouraged me from reading what he wrote and I didn't; although I will say the name "Obama lapdog" does show some imaginative thinking and I got a good laugh.


rich said...

I got so excited ranting and raving about Obama, in response to another comment here, that I forgot to comment on your column!

"Clinton stands out for having achieved the most significant reduction in our debt burden since the 1970s"

I once looked into the "Clinton surplus" in the 1990s, and didn't give him so much credit.

Clinton's first two years, with mismanaged HillaryCare that Democrats controlling Congress would not even vote on, led to a lot of Republicans in the 1994 Congress.

I believe the Republicans controlling Congress deserve most of the credit for restraining government spending growth.

But lets not give the Republicans too much credit -- I recall the "surplus" was due to a Social Security trust fund surplus, which was borrowed by the US Treasury to fund general spending.

That's why total US government debt did not go down in spite of the budget "surplus".

The Cliff Claven of Finance said...

Your comments on debt are too negative, and inflexible:

"Only by comparing the debt to the size of the economy can we judge how big and burdensome the debt really is."

How about the interest rate? And whether the interest rate is lower or higher than the average inflation rate during the life of the debt?

"When as a nation we borrow money to finance our federal debt, what matters most is not how much we borrow, but what we do with the money we have borrowed."

How much we borrow is just as important.

The easiest way for a government to grow spending as a percentage of GDP, morphing from capitalism to socialism, is to make the new spending as "painless" as possible, by borrowing the money, preferably from foreigners.

"All money spent must eventually be paid for by taxes, either directly or indirectly, even if it's financed initially by debt."

The interest on the debt will be paid, and maturing debt will be refinanced. But there's no indication US debt will ever be paid off with budget surpluses today, tomorrow, or ever.

"Debt that is used to finance productive investments can pay for itself by boosting incomes and creating new jobs (e.g., infrastructure, research)."

There are so many examples of unproductive government "investments":
- Sending a man to the moon in 1969.

- Japan's many infrastructure 'stimulus' programs in the past 25 years. The spending was often premature, or unneeded, and seemed to have no effect on the GDP growth rate.

- A September 13, 2013 US Congressional Research Service report said: “Direct federal funding to address global climate change totaled approximately $77 billion from FY 2008 through FY 2013", and that does not include green company and customer tax credits that reduce government tax revenues, but don't require new government spending.

US Government-funded "research" on climate change led to needless global warming scaremongering, and a huge negative return on the spending:

(a) We built "wild guess" computer models that have given us grossly inaccurate average temperature predictions, 97% of the time, for the past 40 years.

(b) Those inaccurate models were used to justify new EPA regulations that discourage private sector investment.

(c) The models are based on 1896 scientific research on CO2, that has never been proven outside of a laboratory, or even improved upon since 1896, believe it or not!

(d) We lost $500 million when solar panel maker Solyndra went bankrupt.

(e) We subsidized 11 electric car companies in 2009 for $2.5 billion -- 6 are bankrupt and 5 are floundering.

(f) Sun Edison, America’s largest “green energy” company, went bankrupt in 2015, costing us $3 billion.

(g) Abergeo, the largest international solar energy company, threatens bankruptcy, which could cost us $2.5 billion.

(h) We committed $3.5 billion to a $100 billion climate fund for developing nations = a total waste of money.

"But debt that is used to finance consumption is money that is squandered -- Greece comes to mind as a good example of what not to do with borrowed money."

All debt-financed consumption is not "squandered".

Let's say during a recession a government borrows money to fund a temporarily high level of unemployment compensation spending (indirect consumption).

That would increase the debt during the recession.

If the government repaid that debt during the good years after the recession ended, that temporary borrowing would not be squandering.

In fact, if a government had a balanced budget, when averaged over a WHOLE business cycle, I would call that a smart, countercyclical, fiscal policy.

My Greek American wife was looking over my shoulder, and didn't like you picking on Greece.


The Cliff Claven of Finance said...

To Mr. Grech:

"But when you said that "Obama also lost a war in Iraq that had been won at great expense"
I laughed out loud. That's crazy talk."

"In a related note, I think W was just as horrible as Obama, albeit in different ways."

I'm glad my comments had you laughing.

The purpose of the war in Iraq was regime change.

Weapons of mass destruction was the excuse.

We found lots of them -- old chemicals buried in the ground
that posed no danger for the US.

The regime WAS changed.

That means we "WON" the war.

A lot of American troops had to stay in Iraq to enforce the regime change.

We left lots of troops in Germany, Japan and South Korea.

The neo-conservatives always wanted lots of US troops living in Iraq
That didn't happen.

I was against the war with Iraq BEFORE it started ... unlike Trump.

I predicted another Vietnam ... and we'd eventually lose --
when we left the nation would be back to three different sects
who NEVER wanted to live together as one nation.

Hussein had kept them "together" with violence and threats.

I wrote an anti-war feature article in my economics newsletter ...
and almost no one renewed subscriptions for the next few months!

I had "friends" bitterly argue for the war over the dinner table AT MY HOUSE
-- and I still avoid them !

It was crazy for the US to attack a nation not involved in 9/11.

W was worse than Obama -- he grossly overreacted to 9/11.

His goal should have been to get the 9/11 mastermind(s).

It took ten years, but we eventually got bin Laden.

The other goal should have been to protect Americans from hostile Muslims.

You don't protect Americans by sending them to Iraq & Afghanistan
to drive around in Humvees like ducks in a shooting gallery.

But that's exactly what Bush did, leading to more Americans dead
at the hands of Muslims AFTER 9/11, than on the day of 9/11.

Not to mention all the "collateral" damage caused by the war.

Not a great way to make friend with Muslims.

And that's my two cents.


The Cliff Claven of Finance said...

To Mr. Louden:

"....when I mentioned my view of some positives from Obama, one of your readers immediately went to name definitely discouraged me from reading what he wrote and I didn't; although I will say the name "Obama lapdog" does show some imaginative thinking and I got a good laugh."

In my very long post, I called you "an Obama lapdog", and then never mentioned you again.

I then provided many data-filled examples of why Obama was not a good President.

You say you didn't read what I wrote.

That's sad.

You obviously think Obama was great, and your confirmation bias
prevents you from reading any contrary data.

It is impossible to present an intelligent argument on any subject
if you start with a conclusion, and then are not open to contrary facts,
data and opinions.

You can take my comments here as an insult to you, or Obama, and ignore them
... or use them as a incentive to do research in an effort to refute
what I've posted about Obama's results.

That is your choice.

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