The Obama vs Ryan Budget = Fiscal Tightening Either Way
By now you’ve probably read plenty of stories about how the Ryan budget plan would turn us into Greece via austerity or result in massive cuts in various important programs. And now Goldman Sachs analysts are out with a pretty comprehensive analysis comparing the Ryan and Obama budget proposals. The difference is noticeable, but actually very similar in terms of their overall effects (via Zero Hedge):
“Both proposals would reduce the deficit significantly relative to current policy. The President’s would bring the budget nearly to primary balance (i.e., spending excluding interest expense would be nearly equal to revenues). Rep. Ryan’s budget resolution goes well beyond this, proposing to bring the deficit to primary (ex-interest) balance by mid-decade. Assuming that the Treasury’s average borrowing rate is roughly equal to nominal GDP growth, bringing the budget into primary balance should be enough to stabilize the debt-to-GDP ratio, with the primary surplus the Ryan plan proposes in the second half of the decade enough to reduce it.”
Exhibit 1: President’s budget would nearly eliminate primary deficit, while Ryan proposes a primary surplus
The scare mongering about becoming the next Greece is certainly steering the ship here. As Warren Mosler likes to say, “because we’re afraid of becoming Greece, we’re turning ourselves into the next Japan”. Let’s hope the “extend current policy” scenario plays out so that we can continue to heal the remaining devastation caused by the balance sheet recession. But the worst part of all this is the sense of hopelessness knowing that neither candidate seems to understand the disease that is killing the US economy.
Source: Goldman Sachs
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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The reality is that neither candidate actually understands how the monetary system works and therefore neither knows how to fix our current problems. They’re working off the scariest mainstream model which is currently Greece.
How about this for a scenario: Romney wins. Fails to satisfy the right with policy. Faces and loses a primary challenge from Ryan in 2016. Hillary sworn in, January of 2017.
There should be some fiscal tightening, i.e. the bush tax cuts for people earning over $250,000 dollars(although weighted in such a way to prevent small businesses to the greatest extent possible being affected).
Another are the tons of loopholes using by companies. Tax rates could probably go to around 28 % or so, which is the midlevel in terms of the world, the amount of revenue would nonethless be higher.
And aside from that, you’d need a big fiscal stimulus, which would pay for itself and then some if it’s concentrated at actual demand, not just broad tax cuts.
And finally, some inflation-targeting at 4 %, massive mortgage reform, student debt writeoffs, public option introduced into health care and so on.
There’s actually quite a bit of fiscal tightening at the higher end which could be done, as long as it’s coupled with the right fiscal and monetary stimulus which would offset it as well as go well beyond it.
It’s a cliché but it’s true: the best way out of a debt trap is growth.
At $250,000 only 3% of ‘Small’ business is affected.
So, as a group that hopes for higher continued deficit, who do we root for to win?
Obviously if Ryan has his way he’ll take us running over the steepest fiscal cliff he can. Obama will do the same thing, he’ll just choose a slightly smaller cliff.
The negative impact of Obama’s budget would be slightly smaller, and Republicans will blame the downturn on Obama and say the cuts were too small.
Maybe long term we’re better off with Ryan steering the whole ship into the ground and making it more evident we need more deficit spending and not less?
Don’t worry–neither of these “projections” will ever come to pass. Already the deal is in the works to extend the tax provisions which will maintain the deficit in the trillion dollar range. Anyone with two brain cells to rub together in Washington (still a majority, one hopes) knows that resetting the tax code to raise an additional $370 billion next year would crush GDP. The most likely outcome is that we drift along in this “continually extend the tax code” stupor and not increase discretionary spending while entitlement spending continues to churn upward.
Ryan’s plan is tighter than Obama’s, but Romney’s is significantly less. I have no idea what Romney actually stands for, right now, so who knows what will happen if he gets elected.
Ouch, ouch, -3% of GDP in each of the next 2 years.
My problem is that I have seen these kind of projections never pan out. My bet is the error around those estimates is huge (+/-5% anyone?) so which one is better? who knows.
But your overall point might still be correct. they will both move us toward austerity even if not by as much as the projections show.
Here the opinion of David Walker, the former controller of the US.
http://finance.yahoo.com/blogs/daily-ticker/u-government-debt-grows-10-million-minute-david-160752953.html
Total US debt to GDP ratio is not 70% but 135% (only Greece is worse). Remember, the folks get taxed for Social Security but that money has been used to cover other expenses of the federal government, like wars, pork barrel spending etc.
And?
We keep hearing that there’s a “(trust) fund” filled with money. But there isn’t a trust fund. So, to cover the expenses of Social Security the gov’t needs to borrow extra money.
Oh yes, the FED can “print” the money but that only will delay the “Day of Reckoning” for the US.
Have you read anything Cullen has written?
Yes, I have. And since MR fails to accurately describe the current monetary system and therefore I continue to consider MR to be garbage. MR is simply another theory that allows Cullen and a lot of folks here in the US to say: “We’re different”. It’s what people say in many other countries too. No, the monetary system is in all countries exactly the same. And the problems with Social Security are the same in other countries.
What MR fails to include is human psychology/behaviour, something Robert Prechter does succesfully include in his forecasts.
Ouch. I’d be interested in what you dislike so much about MR? Or rather, why you think it fails to describe the monetary system. From my perspective, that’s all MR does. It just describes. It doesn’t make guesses about how people will respond or think about the system. It just describes the system for what it is. I’m like a car engineer. I just describe how the car runs. I don’t tell you how to run it or how to respond to other drivers. You might take my ferrari out onto the street and drive it into a wall for all I know. That’s fine, but don’t blame me for that….I told you how the car works and you still crashed it….The whole point of MR is to describe and let others decide what is best in terms of use….
You know, people are willing to engage in a dialogue with you on why you think MR is “garbage”, but you don’t answer questions unless you can reiterate your old points.
Apart from the particulars of mechanics, the understandings of MR could be applied to Australia, the UK, Japan, and any other country that 1) issues their own currency 2) issues debt in their own currency 3) does not attempt to force a hard peg or currency convertability (i.e. lets it largely free float). The reason we’re U.S. centric here is because we live here and understand this system best.
Cullen is very open minded to the potential that he has some stuff wrong. I’ve never seen him claim to know everything. But you’re not even trying to refute his points. You’re just spreading some ideological stuff you read on Zero Hedge.
Maybe Cullen describes the system well.
But I think the mistake he mistakes is that he assumes that because the U.S. government *can* run deficits (print, borrow, whatever your want to call it), that it can do this without negative consequences.
He does more than describe the system. He makes recommendations — run deficits — and some of his followers make shaky assessments such as blaming recessions on balanced budgets.
I suspect he comes at this from the perspective of somebody who benefits from asset inflation that results from easy money. Deficits grow the supply of money, which means stock markets rise faster than the growth of the economy and bond markets are guaranteed. However, inflation (even at our current rates of 4 or 5 percent annually, is really bad for workers.
I absolutely acknowledge that govt can have negative effects and I’ve been really critical of some of the spending in recent years (like cash for clunkers and the housing tax credit). But I also don’t take the ideological view that govt is inherently bad. It can and does help at times. Especially when the economy is in a rut.
Deficits help drive corporate profits which ultimately helps us all in some facet. When companies earn higher profits they hire more workers. Additionally, I am not the only person in the world who benefits from asset inflation. 50% of this country owns stocks in some capacity.
And again, you come back to inflation. What inflation? I’ve been hearing about all this destructive inflation for 5 years now. The latest CPI report showed 1.7% headline. Is that what you’re afraid of? The historical average is 3.5%.
1. I’d like to see you address inflation more directly, rather than say it can’t happen. California hasn’t had an earthquake lately, but that doesn’t mean we don’t have plans for that event.
If we do have 5, 6,7 inflation (and in historical terms, this will happen at some point), what measures would you take? Would you continue deficit spedning? Would you raise rates?
2. I’d also like to see you address the consequences of higher interest rates on $15 trillion, etc., in federal debt. Will we just borrow more money to pay these higher rates, or does the Fed keep rates low forever so it doesn’t have that problem? And wouldn’t that create problems?
3. Some of your followers believe that balanced budgets, per se, are bad. Do you share that view?
1. I never said inflation “can’t happen”. I don’t know why you insist on putting words in my mouth. I’ve explained how inflation could become problematic. If money creation exceeds productive capacity then we begin to erode living standards. Dozens of measures say we’re far from that point. Capacity utilization, the output gap, unemployment, etc.
2. I’ve talked about “higher rates” plenty. You still aren’t connecting the dots on MR, having your own currency, interest rates, inflation and the economy. I explain this here:
http://pragcap.com/what-happens-if-and-when-the-interest-rate-rises
3. I’ve never said a balanced budget is bad. I’ve never even said a surplus is inherently bad. In fact, a surplus can be fine in the right environment (for instance, with current account surplus – see Germany or China). I’ve said that a nation with a current account deficit is likely to run into an economic rut if it tries to run a budget surplus AND a current account deficit at the same time.
I cannot understand why you continue to be disrespectful to Cullen after all he has done to help educate everyone here at pragcap.
BV-
We’ve been here a long time together. You’ve said some “interesting” things over the years but this falls into the absurd. Like are you even real.
If you believe in Prechter your havn’t been reading him long enough. The most Staunch EW guys have left him. His site is all about extracting money from people. To which he totally understands the behaviorial aspects of investors…and he’s playing you like a puppet. Howz that P3 wave coming? Should be here any day now right? Didn’t he say fade the move in 2009…then in 2010, 2011.
Rather than continue- please tell me about yourself..I’m beginning to wonder….
What do you do for a living? Where do you live? Are you a paper trader? Why are you here?? who’s paying you to write what you do?
I consider the Elliott wave (e.g. A, B or C wave(s)) stuff to be sheer nonsense. But when it comes to human sentiment/behaviour, Prechter is spot on. I still can recommend his book “Conquer the crash”. Hendry has read Prechter’s book as well and it has helped to form Hendry’s views.
Every economist/blogger/celebrity provides a certain amount of insightful stuff. (e.g. Prechter, Michael Hudson, Peter Schiff, F. William Engdahl, Steve Keen, Paul Krugman, A. Gary Shilling, Warren Mosler, Mike Shedlock, Hugh Hendry, Michael Pettis, Jim Puplava, Karl Denninger). But each also has one or more blind spots. And these blind spots emerge when one compares their views.
What I noticed is that folks (e.g. Congress) from the US are sometimes (extremely) US centric. They fail to overlook the fact that the USD is the senior currency and therefore that e.g. US monetary/economic/financial policies has far reaching consequences in the ENTIRE world.
No, I am not paid by anyone to write this stuff. It’s the result of reading A LOT OF articles & books. And, of course, the internet is also a plentiful source.
Ahhh..I hate having to keep my mouth shut on stuff I know…I’ll just say those are some interesting names you put together.
There are few blind spots for those names you listed. You don’t see anything but the ground beneath you….when your always digging in to your position.
No shit..our congres sucks. U.S Centric yes…look at our geography..We’ve got two neighbors..Canada and Mexico. Europe is locked in surrounded and has had to deal with so much more. They’ve had to share resources…get along..borrow gas from countries they hate, etc. Your right…but how many Americans are leaving for the job plentiful Africa, Columbia???? I travel alot..and my favorite part is coming home to Los Angeles to see friends. Why do you care so much about the U.S caring about the U.S shouldn’t we?…which isnt’ really true though…is it? When was the last time you were in Europe and people were talking about doing something for the U.S? How about Africa? How many Italians actually leave Italy? Very few. Isn’t every country concerned with their people first. Hasn’t the U.S shown an alacrity to help the world when calle on..when not called on? Hasn’t the U.S done an excellant job as a leader of the world?
Whatever..Fuck America right bond Vigilante..were just all about ourselves. Our polcies didn’t cause spains trurmoil or Europes problems? It didn’t cause corruptionin Africa? It didn’t cause China to move from the darg ages to a world power. You give us too much credit…or you just want to continue your narrative myth.
The narrative you write is so biased. First it was MMT this…now it’s MMR that….nothing really works for you unless the U.S is chocking on it’s on dollar bills because hyperinflation only lets us eat the greenback to get our daily greens.
The govt doesn’t actually print much money at all. They print notes and mint coins but those are minor pieces of the money supply in the grand scheme of things. The rest of the money the govt obtains is actually just being redistributed from Joe to the govt then to Jane in the form of govt spending. And then Joe gets a t-bond every once in a while for buying a bond at auction. This increases net financial assets, but doesn’t actually result in more “money” being printed into the economy. Most of the true “money printing” in our country is done by private banks who just enter numbers into computer systems and increase people’s purchasing power.
I apologize if I’ve missed a post on this (went on a longer than expected hiatus of being able to check PragCap regularly), but I recall you describing taxation and (federal) government spending as the destruction and creation of money, respectfully. How does the new description of the govt not printing money jive with the old creation/destruction view?
How much exactly do deficit doves want to spend for stimulus? … It has to replace lost production and do so until the economy starts growing on its own, right? So that’s maybe $10 trillion over the next three years?
Does that really grow the economy past the stimulus period? Does it panic the rest of the world?
Johnny,
Think of govt spending as a flow. When the govt taxes you they are really just taking your money and giving it to someone else. When they sell bonds they are obtaining money from the bond buyer and giving it to someone else (in addition to adding a net financial asset in the form of the bond). The problem in the USA is not that we aren’t producing enough. There is tons of idle capacity out there. What we’re lacking is the kick-starter to get the idle capacity up and going again. We’re like a young vibrant athlete with a bad heart. The blood flow is weak. And the govt can come in and get that flow going by deficit spending. They kind of serve the role of an artificial heart. This increases spending and offsets the fact that spenders have turned into savers during this downturn. This is what we need. We need to increase spending so that companies obtain more revenue and visibility and start hiring more people. Then the private sector will strengthen to a point where they can carry the baton. We’re not quite there yet, but if the govt turns off the spigot right now the flow will stop, the pvt sector still will not have recovered and the patient will enter cardiac arrest.
+1 (The organic metaphor works better for me than the mechanical ones.)
Re: “the worst part of all this is the sense of hopelessness knowing that neither candidate seems to understand ..” – the consolation is that I can be pretty sanguine about this election. While I find Obama personally and politically vastly preferable to Romney, if things get significantly worse in the next cycle (as nothing fundamental, including health care costs and global imbalances, has been resolved), letting Romney/Ryan take the neo-con/liberal approach to the limit may finally discredit it once and for all with the American public.
PS Flash from the BBC: ‘Scientists think virus causing constrictor snakes to tie themselves in knots may have originated with rodents.’ – Are they sure politicians (easily confused with rats) weren’t the source? Hey, we could ship all the latter down to the Everglades – currently being overrun by giant Burmese pythons.
Sorry, but I was looking for a dollar figure.
I seriously doubt that deficit spending has any long-term impact on the economy. If you give me a dollar to spend, I will happily spend it, but as soon as the money dries up, so does the economic activity.
Now if you pay me to build a bridge, then permanant economic activity is created, or if you pay for my college education then I will be a better producer, but most government spending these days is simply transfer payments which have no lasting impact.
…
As to idle capacity, there is a great deal of idle capacity in the world. The way to untap them is education, freedom, political instittions, etc. Money plays a very small part in that.
By the way, much of U.S. ‘idle capacity,’ is because that production is being done elsewhere. You can’t stimulate auto production here by giving me money to buy a car if I simply buy a foreign car.
Saying the deficit spending has no long-term effect is like saying that the blood flowing through your veins has no long-term impact. An economy is based almost ENTIRELY on a flow of spending (and the production that this flow enables/drives). Someone buys something from someone else and that someone else uses the income to build something cool, sell it to someone else, invest more, spend more, etc etc. It’s all one big flow. It’s only useless if the actors aren’t using the flow to build great things that improve our living standards over time. Then it’s just one permanent stagnant system with a flow that does not but maintain the status quo. This is why govt spending can be really useless at times. They spend all sorts of money on things that just don’t do anything and at times exacerbate bad elements of the economy. When the flow doesn’t result in anything positive it’s a lot like sitting on your couch all day waiting to die. We agree 100% that the spending must result in productive uses to be “good”, but the flow is necessary to get the economy going and give people a chance to even create all those great things that make our lives better….
Using your analogy, I suspect there is enough ‘blood’ in the veins, but either it’s not getting to the right places and there are structural problems.
So maybe instead of pumping more blood into the patient, we could ask him to get fit so his circulation will improve or maybe prescribe some regulatory medication to improve his health. Oh, and cut off some of the bad debt he’s carrying, so he doesn’t have to go to the blood bank every month to pay them back.
Don’t think of it as “more blood”. Think of it as speeding the flow. In a recession or an economy with a huge output gap the flow is too slow. There’s not enough income to buy all the output we produce so the result is companies firing workers to maintain profitability. This has occurred because the private sector has reined in spending. This is like a heart attack for the economy. The heart of the economy isn’t producing the flow. The govt can come in and attach their artificial heart and pump the heart which gets the flow going again. Remember, the govt doesn’t print money (except for notes and minting coins). They redistribute it. The NFA added via the bond is just a financial asset that helps improve the stability of private balance sheets. Don’t think of it as more blood. Think of it as a cleansing of the blood.
The heart analogy is a great one. It would be helpful if you wrote a post using this analogy rather than the car. I think people will relate to it better.
Certainly everyday language using something ordinary people understand is the key to getting the message across to the population that is just doesn’t know which way is up anymore.
One lot want to stop all spending because governments ALWAYS waste money (which is not true) and the other lot want the government spending to continue forever because its a free lunch……………
Both candidates do indeed understand how the economy works as does the Chairman of the Federal Reserve. The problem is not an understanding issue, but to who’s interest they will be serving.
Why do you think both candidates understand how the economy works? Where is the evidence…..?
It is great to have dissenters on his site. It makes MR more lucid and drives home the logic. I tried to explain this stuff to a few Irish people on a plane from London to Ireland last week as I do from time to time. They, like most others can’t get away from the household debt proxy, understand how a currency works and the importance of denominating your ‘debt’ in your own currency.
Ireland should do an Iceland – restructure – and go back to the Irish Pound. I left in 1986 when unemployment was 20% and government finances were doomed – plus ca change. For about 10 years, it was amazing what could be achieved with a bit of confidence. Shame the Irish economy got carried away with itself and one politician then bankrupted the nation by promising to stand behind €60bn+ of bank debts that it didn’t understand and 1m workers couldn’t service. Now everyone is leaving again…time for a new republic!
This is a complete waste of time I know (Cullen told me the following has been referred to in this forum in the past)… but I can’t let it go. The current tax system is a mythical requirement just like the fiscal cliff is a mirage supported by vested interest.
A solution to everyone’s problem is The Automated Payment Transaction Tax (APT) by Edgar L. Feige PhD University of Wisconsin Professor of Economics.
Essentially it would apply a micro fee to all financial transactions split equally between the two sides of the transaction.
The APT would eliminate the tax complex. Gone would be personal, corporate, property, estate, capital gain, income, sales, excise and all manner of taxes or levies disguised as fees as well as the elimination of tax returns, deductions and special interest exemptions.
EXTRACT on some of his number crunching (from http://www.apttax.com/execsummary.php):
“Feige’s 2005 projections of total debits of $881 Tril., and total transactions of $832 Tril. (based on the most recent 2002 Bank for International Settlements data) update the figures he used in his original paper, published in Economic Policy in 2000. Taking the average of these two estimates ($856 Tril.), he conservatively assumes that the replacement of the current tax system with a revenue neutral APT tax will reduce total transactions by 50%. The projected potential APT tax base for 2005 would then be $428 Tril., permitting a revenue neutral flat tax of .57 percent on all transactions or .28 percent on each (buyer and seller) transactor to replace projected 2005 Federal tax revenues.”
I have sent this material to Charlie Rose, John Stewart, Bill Maher etal and get zero interest. I don’t even think Feige and his post grads spend any time on this anymore.
Even if we had to increase Feige’s projection of a 0.57% transaction fee to a 5.7% fee … sign me up. In Vancouver BC where I live, I pay 12% consumption tax on top of all the income, dividend, interest and hidden fee taxes. It stinks.
I have links to all of Feige’s work and 3rd party commentary on my blog here:
http://www.brianripley.com/1/category/apttaxe023357302/1.html
Because something has been referred to before dose not make it a waste of time. Some ideas just need the right time to come along………..
I am not so much concerned that leadership does not understand the disease… as I believe there are enough people suffering around the country that the prevailing hurts can be heard – even by the deaf ears in Washington, D.C.
What is truly concerning to me is that the powers that be who finance these elected officials have an ideology all their own – whose sole goal is to widen and make permanent – the present gap in income inequality and extend it further into economic opportunity inequality.
You mean make themselves richer……….? Of course, that’s a human condition at ground zero for capitalism…………
Cullen,
In the vein of your discussion here with Johnny Evers. Perhaps it would be a good point to bring up your initiative.
At one point he made a differentiation between fiscal stimulus and paying someone to build a bridge. Well, if the bridge (or whatever) is a productive economic advantage and fiscal stimulus is used in a manner to get it built in an environment when it otherwise would not be then…..
The point is always the fiscal stimulus needs to be ‘effective’. There’s plenty of examples of ineffective (read ‘stupid’) fiscal stimulus (see Clunkers, Cash For).
In general I, personally, would like to see more discussion on the idea that S= I + (S – I) shows that the government could be wildly more effective with fiscal stimulus if it were administered in a way that incentivized more flow to economically beneficial domestic investment.
I haven’t thought this all the way through, but there also seems to be a potential for something like your initiative to ‘eventually’ work to reduce the CAD if it spurs enough domestic investment. (Investment becomes new products and services we potentially export en masse)
Sorry if this is rambling- sitting at a bar watching a freaking rain delay.
And who do you export these new products and services to? You have to know who is going to buy before you make anything. To me this is the nubb of the problem. To me its is obvious what to do but I cannot see it happening in America.
The government should be repairing and improving our infrastructure – roads, bridges, rail, power grids. They aren’t exportable, but they improve the overall efficiency of the economy.
@Dismayed, I agree with you. But my point was that we should be talking about ideas/proposals to change how the gov’t decides how it would affect fiscal stimulus on the spending side.
Ummm, it’s a hypothetical- the crux of which is that the result is otherwise unpresent efficient economic production. This is why I brought up Cullen’s initiative because I think it is at least a good idea for souring efficient and useful economic production………
Can’t quite follow your comment here (word choice, syntax, typos?)-
isn’t “souring efficient and useful economic production” pretty much what neoliberal economics has already accomplished?
Just how many drinks did you have during that rain delay?
Dang.