We have looked at enough stupid. Let’s look at SMART for a while.
I like Warren Buffett. Anyone that rich or who has a fund that functions like Berkshire Hathaway deserves to be listened to. I listened to him last fall when our country sat on the brink of financial disaster. Now he has posted some strong words in the op ed section of the NY Times. I don’t think Buffett is political–he is just old, wise and rich.
IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.
The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.
They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.
The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.
To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.
Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.
An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.
The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.
Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).
Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.
IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.
Slowing them down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.
Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt. The United States remains by far the most prosperous country on earth, and its debt-carrying capacity will grow in the future just as it has in the past.
But it was a wise man who said, “All I want to know is where I’m going to die so I’ll never go there.” We don’t want our country to evolve into the banana-republic economy described by Keynes.
Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.
Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.
I think Buffett just mapped out some fairly strategic political thinking. Do we have congress-folk with the integrity to step up to the plate and heed Buffett’s words of wisdom?
“Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.”
duh
““whatever it takes” still makes sense.”
to a fool
This is very interesting, in light of how much the healthcare reform is projected to add to the national debt.
@MH
When you’re talking about economics, you’re much better off listening to someone that knows about the subject:
A ‘Stimulus Package’?
By Thomas Sowell
Both political parties seem determined that the federal government should create a “stimulus package” of things designed to cushion a downturn in the economy.
That alone should be enough to make us remember that “the devil is always in the details,” because things that are bipartisan are often twice as bad as things that are partisan.
A bipartisan intervention is virtually guaranteed to be a grab bag of inconsistent policies thrown together in order to get the votes of people with contradictory ideas of what ought to be done.
The idea of a stimulus package is based on the general notion that there are things the government could do to make things better in the economy.
Unfortunately, there is a vast difference between what the government could do and what it is likely to do.
Economists can give you all sorts of scenarios in which government intervention could make things better, whether when fighting off a recession, regulating domestic markets or controlling international trade.
Some people even believe that whenever there is “market failure,” the government ought to step in.
Of course markets can fail. Everything human can fail. But if Alex Rodriguez strikes out, do the Yankees take him out of the game and send in a pinch hitter for him?
No one would dream of suggesting such a thing. We are far more rational when discussing sports than when discussing politics.
The fact that the market is not doing what we wish it would do is no reason to automatically assume that the government would do better.
There are too many examples of government interventions that made things worse, the Great Depression of the 1930s being the most tragic.
Those on the left love to believe that the stock market crash of 1929 showed the failure of the free market and that the New Deal interventions in the 1930s saved the day.
But the stock market crash of 1987 was just as big and Ronald Reagan resisted loud calls for him to intervene. The result was not another Great Depression but the beginning of a decades-long period of prosperity.
Before Presidents Herbert Hoover and Franklin D. Roosevelt came along, there was no expectation that the federal government would intervene when the stock market crashed or when there was a downturn in the economy.
Previous stock market crashes and previous downturns in the economy worked themselves out faster and less painfully than the Great Depression of the 1930s, just as the 1987 crisis did.
The track record of government intervention is far less impressive than its rhetoric.
One of the biggest problems with government intervention in the economy is that politicians usually have neither the knowledge nor the incentives to intervene at the right time.
Bruce Bartlett has pointed out that most government intervention in an economic downturn comes too late. That is, the problem it is trying to solve has already worked itself out and the government intervention can create new problems.
More fundamentally, markets readjust themselves for a reason. That reason is that people pay a price for their misjudgments and mistakes.
Government interventions are usually based on trying to stop them from having to pay that price.
People who went way out on a limb to buy a house that they could not afford are now being pictured as victims of a heartless market or deceptive lenders.
Just a few years ago, people who went out on that limb made money big-time in a skyrocketing housing market. But now that they have been caught in the ups and downs that markets have gone through for centuries, the government is supposed to bail them out.
Solving short-run problems, especially in an election year, often means creating long-run problems. Pumping money into the economy can help many problems, but do not be surprised if it also leads to inflationary pressures and financial repercussions around the world.
Mando, I will read when I can concentrate. Just know that I NEVER talk about economics. That is way over my head. I have had one course and I worked my tail off. I just like Buffett. Snart guy.
Interesting read, Mando. So is the bio on this guy.
I know nothing about econ save one course I took years ago. So in other words, I know nothing.
Buffett isn’t an economist but he is filthy rich. He thought the govt needed to intervene last fall because of the credit situation. When Buffett speaks, people listen, especially if he mentions the stock market. Here is another op-ed from last fall, after the fall.
http://www.nytimes.com/2008/10/17/opinion/17buffett.html
FYI- If you made a dollar per second nonstop, you would make
$1,000 every seventeen minutes. After 12 days you would acquire
$1 million. After 31.7 years you would become a billionaire.
But not until after 31,709.8 years would you count your
trillionth dollar. Uncle Sam is now spending 1.8 trillion a year.
You know what Mando, I am as Republican as it gets but I think the “market side” economics and the free wheeling free markets got us where we are today. To put a hole in your comments of 14:03, it was George Bush touting his administration’s increasing the number of home ownership by the “free market”. Yeah, Republicans taking credit for what doomed us two years later. I don’t trust anyone involved in the markets or the process to “do the right thing”. Some regulation is necessary.
All I hear from the free market Republicans like Eric Cantor and John Kyl is “no”. In fact, Cantor has now called the Co-op health care proposals (originally a compromise)another “government option” and came out against them and yesterday Kyl stated that we should drop everything done so far on health care and should start all over. Where do these guys come from? What lands do these guys represent? Republicans (myself included) will be in the hinterlands for years to come if our party members don’t see the light. Unemployment is high, Virginia has to cut another 1.3 billion in services and we still hear “no” from the free market people.
Let me ask you this Mando, the health care industry has been free market since the early 1970’s when the Nixon Administration changed the laws. Has anyone ever told you that your health care costs have gone down one year because of free market competition? If so, let me know, because mine go up every year. So much for competition.
Free markets got us where we are today and some government intervention is necessary. The Republicans, the voice of “no” just don’t seem to get it.
It is hard to top Lucky Duck’s post. While I am an independent, I agree with everything he says.
Wow Lucky Duck, I am really impressed with that post!
This blog has offered a lot of learning opportunities for me. And the Buffet and Lucky Duck one two punch is one of the all time great ones. Thanks everyone for contributing. Even those who are always pro-Bush and anti-Obama (or always pro Letiecq/Stewart and anti Chief Deane). Because even the off-the-deep extremists add something to chew on intellectually. Without you all, our county would be stuck with the old blog which was grossly manipulated, censored opposing comments, and was without regard for truth. With you, and also a host of moderate Republicans and independents, a progressive like me feels comfortable adding my voice from time to time too. I didn’t feel that way on the old blog. And here I can rest assured that there are still good and reasonable people out there from all political persuasions, even though the extremists can be so darn loud and frightening.
But I digress. Lucky Duck that was really a great post!
GR,
What is the cost to the country of NOT doing Healthcare Reform??
1936 – In a radio speech on the newly proposed Social Security
plan, Republican national chairman John Hamilton annouced that
workers would have to wear metal dog-tags carrying their social-security
numbers; and the Hearst newspapers (the FOX news of the period)
ran pictures of a such a tag with the caption “YOU”.
Republicans fought Social Security and Medicare with lies and
fearmongering – same tactics they are using on healthcare reform.
And where does this all end? People who want to discuss the issues can’t. They are simply drowned out.
Poor Richard, that is a great piece of trivia. I sure don’t see anyone giving back their social security.
“Free markets got us where we are today”
Do you actually believe this? Do you believe that govt. meddling wasn’t what caused the housing market to overheat to the point of melt down? Do you actually believe banks would’ve made all those super risky loans without being prodded and backed by the fed govt?
If you do, you’re a fool.
The free market punishes those actions.
“More fundamentally, markets readjust themselves for a reason. That reason is that people pay a price for their misjudgments and mistakes.”
The simplest and most succinct way of putting it. That’s how it works people.
“the health care industry has been free market since the early 1970’s when the Nixon Administration changed the laws.”
The health care industry is heavily regulated. There’s an entire industry out there specializing in training and deciphering statutes.
You’ve made my point for me Mando…the Republicans, the heroes of the “Free Market” were the ones who “prodded” and “backed” the banks who made those risky loans…the administration(s) of Republican George Bush.
It was Republican Phil Gramn who inserted legislation to allow “derivatives” to go unregulated by law. Well look where that got Wall Street and the rest of us.
Yes, you’re right, your people, the free market gurus and the actions of the Republicans who used the government (by not regulating or pulling back on regulations) to allow the free market philosophy is what put us in the hole we’re in today. And the likes of Cantor and Kyl who still espouse that failed philosophy and use the term “no” for everything else will put the party in the dark for years to come.
I’d love to hear Cantor’s and Kyl’s answers for health care reform. I’ll bet it has the phrase “let the markets decide”…well, like I said, the “markets” have never decided to rein in my health care costs yet.
You never did answer me, have your “free market” health care costs ever gone down? I’m a lot of things, but I am not fool enough to trust the free markets without some type of government regulations backed up by tough sanctions for violations.
“the Republicans, the heroes of the “Free Market” were the ones who “prodded” and “backed” the banks who made those risky loans…the administration(s) of Republican George Bush.”
Regardless of political affiliation, govt. meddling is govt. meddling. That IS NOT the free market in action. MY argument isn’t which side of the middle is doing it.
“You never did answer me, have your “free market” health care costs ever gone down?”
Yeah I did. Health care is heavily regulated. You can’t blame the free market.
The one thing I will give you is with health care, we may never get efficiency on par with other industry. It’s a complicated industry with astronomic start-up costs. It’s premise is being able to weed out risky users from healthy. That’s why group health care is much cheaper then individual.
Evil holds no party affliation. The crooks that allowed the banking mess were equally distributed on both sides of the aisle. The men who cheat on their spouses are on both sides of the aisle. The men who took large campaign donations and then helped out special interests are on both sides of the aisle. I am starting to think every one of them should be led to the nearest exit and then we just pick 500 or so people out of the phone book to govern.
Term limits seem like a good idea.
Anona, we probably would not be in any worse shape, especially if we went across all the states.
Term limits is a fabulous idea. However, those in favor of term limits usually get disenchanted with the idea once they get in office.