Siding with the Pessimists

When it comes to making predictions about our economic and financial future, some things seem pretty clear: 1) the forecasts depend on any number of potentially wrong-footed assumptions; 2) the biases of those supplying and analyzing the data can engender a wide range of expected outcomes.

Under the circumstances, it usually makes sense to take track records, conflicts of interest, personal motives, and other such considerations into account to figure out which is more likely.

With that in mind, my immediate reaction after reading the following two commentaries, which challenge optimistic takes on the level of future federal deficits and the threat posed by current government debt loads, is to side with the pessimists, if only because they have been on the right side off things for the past several years.

The first column, "The Concord Coalition Plausible Baseline," comes from the website of "a nationwide, non-partisan, grassroots organization advocating generationally responsible fiscal policy":

Three times each year the Congressional Budget Office releases its budget projection for the next 10 years. This "baseline" makes a variety of assumptions about taxation, spending, and the economy. Some of these assumptions are reasonable and others are not because of the peculiarities of budget law. Our baseline compensates for the more unreasonable assumptions and presents a more plausible scenario. Recent CBO reports have included alternative estimates that we use in constructing our "plausible baseline". Like the official CBO baseline, it is not a prediction, but a projection of where current trends are leading.

For the underlying chart data click here. (Excel spreadsheet download)

The Concord Baseline makes some key assumption changes to the CBO baseline. CBO is required to assume that congressional appropriations continue increasing only at the rate of inflation for the 10 year baseline. They also extend emergency supplemental at their "current" level plus inflation over the duration of the baseline. For tax legislation, they assume current law will govern--so if there are tax cuts that have sunsets (as the 2001 and 2003 tax cuts have), CBO is required to project revenues assuming the tax cuts expire as written in the legislation. They also project economic growth in a very conservative fashion--they do not try to anticipate major changes in the economy, either recessions or accelerations.

The Concord Coalition takes the CBO baseline and adjusts it to assume appropriations increase at the same rate as the economy (GDP growth). This increase is closer to the historical average rate of increase. We also assume that supplemental appropriations do not continue indefinitely. For recent appropriations for the wars in Iraq and Afghanistan, we include realistic estimates from CBO about how much will be spent under a scenario where troop levels slowly decrease to about one-third of their level at the time of the estimate. For taxes, we assume that all of the major tax cuts will be extended beyond 2010. We also assume the one-year patches to the Alternative Minimum Tax will continue to be enacted, holding the level of taxpayers hit by the tax roughly constant throughout the baseline period. Finally, we include a calculation for the increased debt service (interest payments) that these policies would cause by their increasing the deficit. We do not make any changes to CBO's economic assumptions.

For more information on how CBO calculates their baseline and the alternative scenarios click here.

The second write-up, "How Big is $9 Trillion? – Willful Omissions From Paul Krugman," comes from the Political Math blog:

You may have seen the Paul Krugman post “How Big is $9 Trillion” in which he attempts to defend the Obama administration’s recent announcement that they expect that their policies will increase the national debt by $9 trillion. His tact is to “explain” that $9 trillion isn’t really all that much when you understand it in context.

it’s being treated as an inconceivable sum, far beyond anything that could possibly be handled. And it isn’t.

What you have to bear in mind is that the economy — and hence the federal tax base — is enormous, too. Right now GDP is around $14 trillion. If economic growth averages 2.5% a year, which has been the norm, and inflation is 2% a year, which is the target (and which the bond market seems to believe), GDP will be around $22 trillion a decade from now. So we’re talking about adding debt that’s equal to around 40% of GDP.

Right now, federal debt is about 50% of GDP. So even if we do run these deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II.

I defer to Paul Krugman on a lot of things because he is transparently smarter than I am. But it is precisely because of this fact that I know he is conscious of the obvious reasons his analysis is hogwash.

First of all, the national debt in WWII was initiated by an existential threat to the very continuation of our country. Mr. Krugman does not make even attempt to make the case that we have a similar crisis that justifies this kind of debt.

Second, implicit in his observation is the concept that since we did fine after WWII, we’ll do fine now. But the years after WWII saw drastic reductions in the inflation-adjusted debt driven by drastic reductions in spending. Mr. Krugman points to no similar possibility in the post-Obama world.

Third, we have something now that we didn’t have in the 1940’s. Back in the 1945, at the height of the spending that saw our national debt rise so dramatically, entitlement spending and interest on the national debt made up a meager 5% of our total budget.

By the end of President Obama’s term (if he runs two terms) we’ll be looking at a federal budget that is 70% mandatory spending. (I assume for the purposes of consistency that mandatory spending includes interest on the national debt because we don’t really have a choice in not paying it.)

Here’s a quick visual of the difference in the budgets in 1945 and 2016. (Ugly, because I did it fast… I’m on vacation.)

If you look at the 1945 budget with the single question “How are we going to reduce our debt?” you can identify the major problem. It’s the defense budget, which is almost 90% of the budget. Interestingly, reducing the defense budget is exactly what we did in order to reduce the debt, cutting it over 80% in 3 years (it helped that we won the war).

As a contrast, President Obama’s solution to reducing overall spending is… well, I don’t think he really has a plan. His projected budget in 2016 has reduced the defense budget as a percentage of the overall budget from 20% to 14%, but military spending isn’t what is killing us. The president has no plans to reduce mandatory spending whatsoever. In fact, his only change to entitlement spending is to increase it.

My problem with Mr. Krugman’s “How big is $9 trillion?” is that he is aware of all the problems I pointed out. He didn’t explain how much $9 trillion is; he obfuscated it. By comparing the debt load in the heart of a world-shaking war to a debt load that was accumulated in (relative) peacetime, he has misled his readers to the real significance of the data.

(By the way… if you would like to blame the debt load on the Iraq war, you should know that those costs have raised our debt by 5% of the GDP. Comparing this to WWII, which raised our debt by 70% of the GDP, is a pretty weak argument.)

Comments

[roger]

Capitalism is at once the greatest vehicle of
change & progress,but it is also the most savage
destroyer, World war 2 the result of mad competition
in between Nations, ended with US being on top,it was
world banker,word manufacturer,world policeman,there
was also a whole new array of new technology in the
making and the $ was all things to all people.
America was King of the planet earth.Year 2000, mission
accomplished,time to regress,time to retire.
We either understand the nature of change and become
mid-wife to deliver this new baby or.... as a Nation we die.

[nevket240]

Krugman is a political Hack.
That is why he was given the Nobel. He is a useful diversion and the Nobel tag gives him the Cred his reasoning cannot give.
Same with Gore and the IPCC. Give them a Nobel and the fraudulent science doesn't matter. They have Credibility.
regards

[Abraham]

Blah, blah, blah charts and graphs. (No offense intended Mr. Panzer.) Blah, blah, blah numbers and metrics. Blah, blah, blah models and logarithms.

None of it matters. Just ask the next ten random people you run into what their opinion of the economy is. Right or wrong perception is all that matters. In terms of economic reality perception becomes reality. Everyone I run into has the same opinion of the economy...that is sucks and is getting worse.

IMHO I think the wrong tools are being used to measure economic performance. The sands have shifted and we are still trying to use the same tools that we used in the past. It's like trying to use a thermometer to measure distance or speed.

[Alexandra]

Abraham, I think you've got it. If your personal economic situation sucks (because the economic environment sucks) then all data, graphs and experts can come up with whatever to claim that everything is back on track - it isn't.
However, the situation sucks not only for you but for the majority of people - so the reality is that the economy sucks and that has nothing to do with perception becoming reality. This is the way it is.
The graphs do point out something useful though: Wall St and the government are lying.

[roger]

Abraham: Life is not determined by consciousness,
but consciousness by life.

[jturner]

I agree that perception is reality to a certain extent. However, most people (outside of the few intelligent ones like Michael) perceived the problems in the housing market to be "contained" in 2006 and 2007, and then the markets started going down and everything changed. And everyone knows the markets can act irrational in the short and even intermediate terms, but in the long run they always reflect fundamentals. And the fundamentals are not good. However, that does not necessarily mean the average investor should run out and short the market again, because that requires very good timing. Instead, I think a safer investment is in gold related assets, since it is very clear the Fed is intent on preventing inflation at all costs, and is willing to devalue the dollar and maintain easy money policies for as long as necessary. In the long run all this money printing should benefit the gold price and gold mining companies the most due to the potential inflation problems ahead. These issues are further discussed here: http://www.goldalert.com , as well as the government's role in the economic situation we are in.

[Wil Martindale]

The problem with Krugman is his recent lebotomy--his assumptions are mutually exclusive of one another, unless you subscribe to the lunacy that leveraged fantasy paper actually adds value to the GDP. Yes, if we keep pumping the speculation bubble economy, then inflated worthless securities will continue to inflate the monetarist fantasy of growing GDP, but if real jobs which create products and services (other than high stake gambling notes) continue to collapse, we'll be eating derivatives.

[farang]

And of course, no mention on WHOM will be purchasing this $9 trillion in debt while the global economy continues to wobble along...nor the likely hefty raise in interests rates to attract said Treasury Bond investors (Inflation? What inflation??), nor the weak-footing the US dollar is on as "Reserve" currency.....yikes.

But hey, Japan and Korea thanks all of you taxpayers that forked up more debt so some of your neighbors could purchase new cars: Reuters: Japan and Korea main beneficiaries of "Cash for Clunkers", 8/27/09

And Michael, working on vacation?

This poor fella knows exactly how you feel: he "started work a week early" while at his "massive Villa overlooking the Adriatic", and he is "outraged" at Americans DARING to criticize the bonuses AIG passed out to the very "Financial Group" division that caused us to have to bail their LYING, $150 billion+ FRAUD-BASED GAMBLING LOSSES.

Chutzpah, thy name is Robert Benmosche. But he needn't worry: Fieldstein will be the US government official approving his salary/stock option/bonuses. Yes, dear Robert worries about his children, like his daughter, the Rabbi: Will she also be able to live the high-life when I am gone???" His exact words.

Read it. He calls us "LYNCH MOB AMERICANS" for having the AUDACITY to criticize the "CHOSEN FEW."

http://www.reuters.com/article/newsOne/idUSTRE57Q24J20090827

Gee, I hope when he reads this, if he does, it doesn't cause his vast grape fields to sour.

Where IS that rope, did you find a tall tree?

[Peter of Lone Tree]

Although it might be sour grapes:
"Swiss private bank Wegelin announced on Tuesday that it is to stop doing business in the United States."
http://www.swissinfo.ch/eng/news_digest/Wegelin_bank_to_pull_out_of_US.html?siteSect=104&sid=11125453&cKey=1251233629000&ty=nd

[bobn]

Krugman is the kind of idiot that writes about the Social Security Trust Fund as if it were actual assets, instead of IOUs from the government to the government. He is worthless.

[Alexandra]

farang, you mean this:
"I suspect my son has a better chance because he is in real estate. My daughter is going to be a rabbi, so as a rabbi I don't think she will ever make the kind of money CEOs make. But they were worried about how do they afford this."
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Beats me why a Rabbi would be worried about worldly things like that. Maybe she should go into real estate as well. On the other hand, real estate is not what it used to be so maybe she is good where she is.