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Comment by anigbrowl | Hacker News Reader

An interesting argument (as always from zerohedge) but one that seems to be predicated on the idea that the government has no intention of reducing the deficit. Opponents of Keynesian policies always argue as if fiscal stimulus is meant to function as a new normal rather than a temporary corrective.

By analogy, this would be like alternative health folks pointing out the downsides of permanent antibiotic consumption, although antibiotics are usually only administered long enough to overcome the progress of disease. The Fed will certainly put up interest rates, almost certainly during 2010; I just think they're trying to hold off doing so to any substantial degree until growth hits a steady 3% and unemployment falls below 10%.

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> the idea that the government has no intention of reducing the deficit.

Close. How about this: reducing the deficit would be extremely painful and therefore postponed as long as possible, and then undertaken in a half-hearted manner.

How much of our current financial stability relies on banks having access to zero percent interest rates and being paid interest on the reserves they hold? How much of the apparent recovery is based on stimulus/deficit spending?

I hope the answer is "not much", but I'm afraid the answer is "a lot". Banks are sitting on reserves, not lending. The P/E ratio for the stock market is somewhere up in bubble territory. Unemployment may have bottomed, but it is still at terrible levels. We have states in the U.S. and nations in the Eurozone that are hinting at defaults.

I think with continued signs of instability, we'll continue to run high deficits (financed in part by Fed purchases). We'll undertake austerity measure when the living-off-debt chickens start coming home to roost. Not before.

I appreciate your analogy, however, I believe the author is saying that discontinuing the use of the antibiotic at anytime in the next year, will lead to a detrimental relapse.

I don't necessarily agree, but the argument is predicated on, amongst other things, the Fed not being able to raise interest rates and maintain steady 3% growth.

History indicates that running at a deficit did indeed become the new normal.

"There is nothing so normal as a temporary government program."

Does your history include the Clinton Administration, which ran a surplus?

The Clinton "surplus" was created by raiding the Social Security trust fund. While every administration in the history of Social Security has raided the trust fund, nearly every administration in that period also ran a deficit, so the problem didn't really come up before. The president who continues running a surplus while leaving the trust fund alone (say, in a "lock box") would get full credit for running a true surplus. That may have been Gore, had he been elected. Or maybe he would have gone apeshit over 9/11 too and spent us into a deficit again.

In any case, the best we can reasonably hope for is kind of a seasonal surplus, where the government runs a surplus during boom times and a deficit during recessions. That might average out to a roughly balanced budget over the course of 10-20 years. What really happens is that in boom times, the government rushes for ways to spend all their new tax revenues, and in recessions, the government looks for ways to run up spending in order to fix the recession.

Nobody "raids Social Security" -- please stop perpetuating this silly meme. Social security and other entitlement surpluses are automatically loaned to the government in exchange for non-marketable debt.

The alternative would be a larger deficit, for which you'd sell more UST bonds, which the entitlement programs would then buy since they need a safe place to park their surplus. Voila, you're basically right back where we are now - entitlement surpluses funding a portion of the deficit.

We don't need a lock box, we just need a more accurate definition of deficit.

> The alternative would be a larger deficit, for which you'd sell more UST bonds, which the entitlement programs would then buy since they need a safe place to park their surplus.

It's not clear that UST bonds are a safe place....

SS has made a lot of promises. It's unclear that they'll be satisfied. And, to be fair, there's no legal obligation to satisfy them.

The whole "we lent the money to the federal govt" angle will make it harder to fix SS.

The alternative would be to actually balance the federal budget before taking into account entitlement surpluses, something that not even Clinton ever accomplished.

It's a huge violation of the idea of a trust fund to invest that trust fund in loans to oneself.

> The alternative would be to actually balance the federal budget before taking into account entitlement surpluses

That's what I meant by a more accurate definition of deficit. You could call it "gross deficit" for instance, just like "gross debt" includes intra-government debt.

> It's a huge violation of the idea of a trust fund to invest that trust fund in loans to oneself.

Not if you're the most stable investment. I can't envision a future where the US government decides it won't meet its debt obligations but SS and Medicare survive because they were prudently invested elsewhere.

> Does your history include the Clinton Administration, which ran a surplus?

Yes, it does.

Clinton benefitted from the end of the cold war and a repub congress. They couldn't figure out how to spend the "savings" fast enough. (A Repub president with a dem congress might have had the same problem.)

What "war" do you see ending that will produce comparable savings? (Obama is winding down Iraq on Bush's schedule.)

Clinton benefited from the end of the Cold War and having a Republican Congress, but he benefited a lot more from the surge in government tax receipts caused by the contemporaneous economic boom. In constant 2000 dollars, in 1992, the US took in 1.2 trillion. In 2000, we took in 2 trillion. You presumably didn't remember the 150 billion added in yearly expenditures over the same interval because it got swallowed by the boom-fueled taxes.

Then, the boom ended, as boons are wont to do...

Clinton's deficit also benefited from passing in 1993 "the biggest tax increase in American history"(http://www.factcheck.org/treasury_tax_expert_to_bush_clinton...) The economy then proceeded to have the longest expansion in American history thus disproving all Republican tax-cut theories, though no one seems to have told them.

> The economy then proceeded to have the longest expansion in American history thus disproving all Republican tax-cut theories, though no one seems to have told them. reply

You use "disprove" in a very odd way.

No one has said that tax increases necessarily kill economic growth. The claim is that tax increases hurt economic growth.

A dollar taxed (or borrowed) and spent by govt accomplishes something. A dollar left in the private sector accomplishes something else. Do you really think that the average govt spending is more valuable than the average private spending?

"The claim is that tax increases hurt economic growth." You still have to square that claim with the fact that the 1993 tax hike was followed by the longest expansion in US history.

As far as the value of "average govt spending" vs "average private spending", it obviously depends. When the markets decided that the best use of capital was to build a massive oversupply of houses and condos that was not very valuable, when the government decides to fund more college tuition that's a pretty good investment in society's future. When private money decided to fund Brin and Page that was very valuable, when the government decides to spend billions on unneeded fighter jets that's not valuable at all.

> You still have to square that claim with the fact that the 1993 tax hike was followed by the longest expansion in US history.

There's no inconsistency.

We had the dot-boom, the cold war ended, and we'd thrown a lot of underpriced real-estate onto the market. Any one of those three would have produced significant economic growth. All three at once was a bonanza.

> As far as the value of "average govt spending" vs "average private spending", it obviously depends.

Yup, it does. However, you're asserting that it doesn't, that govt spending is better. That's what it means to say that tax increases are good.

> When the markets decided that the best use of capital was to build a massive oversupply of houses and condos that was not very valuable

Not so fast. Fannie and Freddie and govt regulation etc had a huge role in that. I mention regulation because banks that didn't play were punished. Also, govt regulation was behind much of the securitization and "insurance". Fannie and Freddie was a double-hit - regulations basically forced banks to hold their stock, which pretty much guaranteed that they'd all have solvency problems when Fannie and Freddie hit the skids.

> when the government decides to fund more college tuition that's a pretty good investment in society's future.

Oh really? Do we have a shortage of women's studies majors? A significant fraction of college degrees are dead-weight.

The bulk of financial aid goes to tuition increases that it causes.

I never said that tax increases are good in general, Republicans are the ones that claim that every tax increase is going to result in the end of the republic. My personal belief is that at the margins taxes have little effect on overall economic growth, especially when they are targeted at the upper income levels, and they are generally a better way of paying for government than financing it with debt which seems to be Republican's preferred way of paying based on the trickle down theory that tax cuts to the rich will pay for themselves by stimulating the economy and thus increase tax receipts. When I look at the economy that resulted from Bush's tax cuts (i.e. a slow jobless recovery) vs Cliton's tax increase my conclusion is that there's very little correlation between taxes and growth and that we are very far on the left side of the Laffer curve.

On the housing issue, we disagree very much on the cause of the problem. I believe the problem was the deregulation that allowed the creation of entities like AIG Financial Products which was probably the major sink of risks that drove the bubble, and also there was a catastrophic market failure that allowed Wall Street to run their companies into the ground for short term gain. But there's no way to deny that a LOT of private capital was directed at the building of useless condos.

> I believe the problem was the deregulation that allowed the creation of entities like AIG Financial Products

AIG Financial Products sold products "encouraged" by regulators.

Regulators realized that there was some risk in securitized mortgage pools. However, they really wanted to be able to call them "no risk" investments so they could push them onto asset sheets and make them more popular among folks who they couldn't bully. (They were pushing cheap housing.)

The regulator's solution was "insurance", which they defined (regulators define what's acceptable for banks to hold as assets) and AIG (among others) sold.

Since "everyone" believed that the securitized mortage pools were "no risk", folks saw selling insurance as "free money". AIG did a lot of middleman work in this area as well as writing its own contracts.

> But there's no way to deny that a LOT of private capital was directed at the building of useless condos.

"free money" pushed by govt policy (through loans and the like) isn't private capital.

> My personal belief is that at the margins taxes have little effect on overall economic growth, especially when they are targeted at the upper income levels

The median worker in the US pays almost no federal income taxes. (They do pay SS and medicare, but the former is an okay investment for such people and the latter will be a train wreck for everyone.) As a result, they have no incentive to get value for money.

Note that the income of "the rich" is somewhat voluntary and fairly portable - that makes it quite volatile. That's why CA gets hammered every so often.

Will the repayment of the TARP loans fix anything?

Well, like 50 billion in TARP funds were paid back in the past few weeks and in response the government is looking for ways to spend the money. So I think the answer to your question is no it won't because the government is apparently dead set on squandering the money one way or another.

That's some quality snark there, but as the Fed does in fact routinely increase interest rates, I think your comment is basically content-free.

> That's some quality snark there, but as the Fed does in fact routinely increase interest rates, I think your comment is basically content-free.

The question is not whether the Fed increases interest rates, it's how close the budget is to balanced.

Hard to argue with the data. The norm is deficits.

http://en.wikipedia.org/wiki/File:US_annual_federal_deficits...

Of course, I meant "There is nothing so permanent..."

Are they talking about the long term though? I think they are mainly discussing the situation the government is committed to in the 2010 fiscal year.

Indeed, but I took it to read that the market would be valuing bonds on the basis of permanent deficits. If they're expecting a combination of reasonable growth and a stabilizing of the debt load then rather than treating the recent increases as a trend, then I don't think we'll see bond spreads widen very dramatically. ZeroHedge seems to be assuming a kind of late bull market complacency that's blinding everyone everyone else to what the federal government is at, whereas in reality the Fed and the treasury are under close scrutiny worldwide.

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