With plan B the taxes happen sooner. With plan K the taxes happen later. We will scramble to produce output to pay those taxes later so the difference between B and K is just the timing of taxes. Apparently you don’t agree so I’m asking why?
Because no one will vote for the necessary tax increases. Look, they could do it now if they wanted to. They are spending 50 percent more in 2020 than they did last year. They could enact tax increases to go into effect in 2021 and later to pay for that spending. But they won’t. That’s even assuming that an increase in tax rates would actually work to increase revenues, which is no sure thing.
After World War II, we restored fiscal health with economic growth and Dwight Eisenhower. Economic growth meant that even though tax rates were not increased to pay off the debt, tax revenues went up.
Because we were willing to cut government spending from its wartime levels, and because Eisenhower had old-fashioned values about fiscal responsibility, for more than a decade we ran what economists call primary surpluses. The primary surplus is the government deficit if you do not include interest payments. If interest payments are $50 and the deficit $80 $20 (good catch by a commenter0, then the primary surplus is $30. If you keep running a primary surplus long enough, the interest payments keep falling until you no longer have a deficit. It’s like if you keep paying off some of the principal on your credit card, eventually you get out of debt.
But in case you haven’t noticed, Dwight Eisenhower is no longer President. We aren’t running primary surpluses, and we are not going to. We had some nice economic growth in the 1990s, and it took a while for Washington politicians to catch on, so the fiscal situation improved for a couple years. We had some slow economic growth from 2011-2019, and even though the Obama and Trump Administrations outspent the resulting increases in tax revenues, the Federal debt increased only gradually.
And now we have that 50 percent increase in spending. With more to come, probably. And no tax increases.
10 percent of GDP here, 10 percent of GDP there, and soon you are talking about real money. Of course I could turn out to be wrong, but I think this time we will catch the inflation virus.
Is it likely that the US economy sees substantial inflation without full employment? I thought that wages make up the majority of cost of everything in the economy, such that you cannot get inflation in the US economy without rising nominal wages (I could be wrong about this). Isn’t a change in relative prices not inflation, but a real shock? And if we have a real shock, don’t we want more inflation to help us speed the path to finding new patterns of trade and specialization, via the ability of inflation to keep the financial system from going into a liquidity crisis caused by defaults on debts? I feel like there is something I am missing. Either real resources are destroyed by the pandemic, in which case standards of living must fall and inflation helps keep full employment during the adjustment period, or real resources aren’t destroyed, and since they aren’t destroyed, inflation won’t be severe because the productive capacity is there.
1. First you say “no substantial inflation”, then you say “more inflation to help us speed the path to finding new patterns of trade and specialization, via the ability of inflation to keep the financial system from going into a liquidity crisis caused by defaults on debts”. There seems to be something contradictory here.
2. More and more people are out of work because they are no longer producing goods and services that other people want. In other words, less is being produced and, ceterus parabus, living standards must fall. If the same amount of money is spent for less goods and services, prices have to rise.
“10 percent of GDP here, 10 percent of GDP there, and soon you are talking about real money.”
This guy said it better:
“Here a trillion, there a trillion, everywhere a trillion-trillion. Old MacDonald had a farm, e-i-e-i-o.” —Bionic Mosquito
If interest payments are $50 and the deficit $80, then the primary surplus is $30.
Don’t you mean if interest payments are $50 and the deficit is $20, then the primary surplus is $30.
Good catch, Art!
Independent and populist voters would likely respond positively to candidates who support replacing income taxation with a VAT. It would expand the tax base and eliminate the wasteful spending and accounting exercises that distort corporate decision making. Expanding the base, not increasing the tax rate, is the ideal response.
And again, since there is a chance the virus or a mutation, will break out again in the fall, it is time to dispense now with the illusion that we will ever be able to go back to the old education model with vast campuses and tenured professors. Forget that antiquated model. Students are online now, let them remain there and pull the plug on the wasteful university model for significant savings. Lower tuition, lower public subsidies. Win, win.
And yet you can buy 30y inflation (via TIPS) at 1.37%
I agree. If Arnold is right, where should he put his money? Where does he put his money? He ought to tell us. Taleb says something along these lines: where he puts his money is more important than what he says.
Good points, Arnold. I think remembering the difference between more taxes and higher rates vs. tax revenues will be more important than ever. With a more fragile economy, our “flatten the curve” may also shift the Laffer curve — if there is ever a time that even moderate tax rates end up on to the right of the peak, the recovering economy may be the case.
As for paying for spending I certainly see us pushing it into the future, but eventually we pay through interest on debt or eroding the value of the dollar. We might foist this on the next generation, but spending non-existence resources cannot last indefinitely.
Doesn’t the deficit spending need to increase the money supply right now (and over the next few years) in order to raise inflation? Assuming that Kling isn’t conflating inflation with a real shock, it strikes me as an optimistic scenario that financial institutions aren’t creating massive deflationary pressure via huge reductions in lending activity.
That is, I fail to see why inflation is an outcome to worry too much about, compared to the relevant alternatives, which to my mind are a rerun of the financial crisis of 2008-2009 and the labor markets of the past 10 years where the best the country could do was to mail people disability checks instead of putting them to work doing something useful.
https://twitter.com/SidSanghi/status/1244268782341799938?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1244268782341799938&ref_url=https%3A%2F%2Fwww.zerohedge.com%2Fhealth%2Fcovid-19-saving-lives
Weekly deaths in the US down by 7,000 – 10,000 for the week ending March 7 2020! Silver lining with people changing their behaviors during COVID-19? Raw weekly death numbers taken from @CDCgov:
—
Deaths drop during recessions, almost a verified fact. Like I say, if the recession was due anyway, then with 2,000 dead from the virus we still save lives by moving the recession up two quarters.
But rather relying on the uncertainty of viruses to plan the budget, why not just have smaller recessions more often? Just say, hey this overheated economy is killing people, let us recess for a while.
A few other corrections, Arnold …
1. Harry Truman was President at the end of World War II – and through 1951, fully 6 years before Dwight Eisenhower was elected. Dwight Eisenhower didn’t orchestrate “fiscal health” and “economic growth” as you imply here – he inherited them! If you check the records of the Eisenhower Presidency, he mostly played golf. For that matter, if you check the records of the Truman Presidency, it was largely George C. Marshall, not Truman, who actually “orchestrated” the post-war fiscal health and economic growth – here in the US, all of Western Europe, and most of Asia as well.
2. Commenter Art Woolf caught your basic arithmetic error in your hypothetical “example” of deficits/surpluses/interest costs. But your example itself isn’t supportable by current, readily available DATA. And even you don’t get to just invent data that supports your invented narrative, when REAL data that undermines your narrative is readily available to anyone and everyone – here are some more links to some REAL data:
https://www.treasurydirect.gov/instit/annceresult/press/preanre/2020/R_20200326_2.pdf (4-Week T-Bills)
https://www.treasurydirect.gov/instit/annceresult/press/preanre/2020/R_20200326_1.pdf (8-Week T-Bills)
https://www.treasurydirect.gov/instit/annceresult/press/preanre/2020/R_20200323_2.pdf (13-Week T-Bills)
And I’ll give you the relevant “cliff notes” version of what these published Treasury auction files indicate:
Just last week alone (the latest being last Thursday) the Treasury conducted its weekly regularly scheduled auctions of short-term T-Bills – a total of $155 Billion dollars worth – at a Market-Set* interest rate cost to the US Taxpayer of precisely 0.000%.**
Furthermore, if you check the Amounts “Tendered” along side the Amounts actually “Accepted” (the aforementioned $155 Billion demand), you will note that the Financial Markets offered more than 3 times that amount – 4.7 times the case of the $60 Billion of 4-Week Treasury demand – ALL at or very near that very same 0.000% interest cost to the US Taxpayer.
[NOTE: If you dig a bit deeper at the site, you’ll note that, exactly one month ago, these same weekly scheduled T-Bill Treasury auctions were coming in at an interest cost of over 1.5%.]
*This was NOT the Fed fulfilling Treasury Auction demand at its “artificially” low interest rates, by the way. The Fed (Federal Reserve) is precluded BY LAW from buying Treasury debt directly at Auction and always has been. The Fed can ONLY buy Treasury debt from the private Financial Markets – AFTER those Markets have “set” their acceptable interest requirements AT THE AUCTION. In this case, the Financial Market’s agreed upon interest rate was 0.000%. And I suspect it’s going to remain at, close to, and even below 0.000% interest cost to the US Taxpayers for quite some time to come – AS DETERMINED/DICTATED BY THE PRIVATE FINANCIAL MARKETS!
NOT THE FED!
NOT THE PRESIDENT!
NOT THE CONGRESS!
** There are quite a few people who are vastly more familiar with the Treasury Bill/Note/Bond markets than I am, who postulated publicly after last week’s auctions, that the ONLY reason the Market-set interest rate didn’t go below 0.000% is because the Treasury is (currently) restricted by both tradition and regulation from accepting bids less than 0.000% (negative interest rates). That “restriction” may well change in the not-too-distant future – in which case the US Taxpayer (Government) will be getting PAID to borrow, rather than PAYING to borrow.
There are lots of things going on right now, Arnold, that you are not allowing yourself to consider. I’ve been following your blog and your thoughts since early 2008, and I have to say, that’s not like you. One of the reason’s I’ve followed your musings over the years is NOT because I’ve agreed with you at all times. Quite the contrary on several occasions, as a matter of fact – as you well know. But throughout, you’ve always been thoughtful in your musings and writings – and at least open to alternative explanations/postulations. And certainly open-minded about accepting those alternatives when there is substantial evidence to support them – as is the case now.
Back on your “The Inflation-Virus” post a couple of days ago, I put up comments explaining MY narrative as to what is going on, and why it’s going on, and furthermore WHY I have no expectations of either elevated inflation, hyperinflation, or $50/roll toilet paper in our future around this.
Like you, I and my “narrative” explanation may well be proven wrong. But at least I’ve got DATA to support my “narrative”.
All you seem to be relying on is hyperbolic drivel like that you cited from Mandel, and some erroneous “invented scenarios” to support your narrative.
And THAT isn’t the Arnold Kling who has earned my interest and respect over the years. (Makes me nervous.)
Perhaps 3 months is not the right time horizon for thinking about the long-term inflationary consequences of the stimulus.
Agreed, Arnold.
And something else I suspect we agree on: Any Government intervention of this magnitude worries me – as it does you. Your greatest worry seems to be that the negative unintended consequence of this will manifest as an out-of-control inflation.
I disagree, and I’ve explained why I think so.
My greatest worry is that this will become “politically perpetuated” to provide an ongoing ever-bigger Government-Reliant class of individuals, businesses, state governments, agencies, and institutions – in short, a perpetual “Bigger Government”.
And I rather suspect you harbor that concern as well.
As both you and I noted, either of us (and possibly both) may well be proven wrong in the future. I actually own a crystal ball, but it has always seemed to be busted, or the batteries are dead, or something. It’s never worked.
But I am GREATLY relieved – and very very impressed – that THIS Government, THIS private Financial System, THIS Federal Reserve has demonstrated a capability of dynamically, rapidly, cooperatively, and in a breathtakingly ORDERLY manner, responded to TWO unanticipated risks/threats to both the literal and economic health of this country – WRIT LARGE, and very, very cleverly (in my opinion).
Given the situation even at the end of the first week in March, I would not have thought that possible. Even you have postulated the possibility of near-civil war in the not-to-distant past, given the prevailing political and economic discord in the US.
I’m just fine with harboring concerns for the future, Arnold. But what you and I (and everyone else) HAVE to deal with is the present. And for right now – the present – the Government, the private Financial System, the Federal Reserve and even the state governments are doing precisely what they should be doing, precisely as we pay them to do, precisely what they are designed to do – in response to these admittedly unquantified threats. And that is critically important – right now.
A secondary concern I have for right now is that folks whose judgement and observations I’ve come to rely on to supplement my own over the years, seem to be panicking and “slipping out of their lane”, metaphorically speaking. For right now, THAT concerns me.
Since Fred Greenstein’s 1982 The Hidden Hand Presidency: Eisenhower as Leader, there has been a major rethinking of Eisenhower’s presidency. Turns out he didn’t “mostly play golf”. But he did do most of his work behind the scenes. So, for example, he didn’t publicly criticize Joe McCarthy but once McCarthy started making accusations against Ike’s beloved army, he made sure that the Senator was going down–as indeed he did.
Good stuff – thanks Roger. I’ll look into that book.
Harry Truman actually was president through 1952, until Jan. 20, 1953. So he was president almost a full 8 years (FDR died in April ’45) before Eisenhower took over.
Maybe you’ve already addressed this but why do you think TIPS spreads are so small?
I share Arnold’s fear about inflation in the long term. In addition, I an concerned about the erosion of state capacity in the sense that foresight and self-discipline become less and less necessary. Why bother if the government promises to help anyone who needs help, because why not. Why borrow money when you can get free money!
Rather than pay federal technocrats more and insulate them from political pressure, while telling the average household or firm to plan for the unexpected, we underpay many professionals in government service and send out transfer payments to anyone who can make an argument. Meanwhile, as Steve Sailer channels, we “Invade the Worlds, Invite the World, and are In Debt to the World.”
Because this is a one-time event–perhaps we can excuse everyone for solving problems “on the fly.” Perhaps.
I have always enjoyed reading Arnold opinions. It seems to me that some of his recent posts on this topic are essentially “reactive,” rather than things that have been written after some unhurried deliberation.
There is a role for someone who can say “no” when appropriate. It’s not clear who that person, or institution, is anymore in the US. Perhaps it’s still the bond market. Perhaps it’s the international market for U.S. dollars relative to other currencies.
If I understand correctly, somewhere in most durable and responsible national governments there are “agencies of restraint.” Where is it now?
A final thought–it would be nice if we had some written norms about when the government does and doesn’t step in to provide resources. Otherwise, every one-off event can be presented as an unexpected emergency. No one could possible have anticipated a pandemic! Who could have imagined that such things still occur? Get a clue.
Thanks for listening to my spontaneous thoughts.
P.S.: A friend mentioned the concept of “normalcy bias.” S.V. in Wikipedia-it’s worth discussing.
The Babylon Bee looks at the bright side: https://babylonbee.com/news/government-sends-out-1000-to-each-citizen-so-theyll-have-something-to-wipe-with-after-money-loses-all-value/
Before I even fire up the Google machine, this caught my eye:
“After World War II, we restored fiscal health with economic growth and Dwight Eisenhower. Economic growth meant that even though tax rates were not increased to pay off the debt, tax revenues went up.”
I’m 99.9% sure the tax rates (income taxes) back then were higher than they are now. Maybe we just got lucky with regard to the post-war economic boom — with the rest of the world in rubble, everyone wanted to buy American goods.
“The top federal income tax rate was 91 percent in 1950 and 1951, and between 1954 and 1959. In 1952 and 1953, the top federal income tax rate was 92 percent.” However, there were many provisions in the tax code which rich people availed themselves of to considerably lower their potential tax burden. No one paid close to that. The quote is from Taxes on the Rich Were Not That Much Higher in the 1950s, which gives more detail.
What’s your policy, or preference, on off-topic comments? Or commenting generally? I feel like commenting is the only reliably way for strangers to contact you. I don’t know of any other way to do it.
I had some thoughts I wanted to share, tho they’re only generally related to this post: How many of us need to be doing something else?
My blog is down currently, so I threw up a draft post at the link above in the interim.
A different take on inflation…
The real issue in the current crises is vast wastage of perishable output. A waiter either waits tables one day, or that output is lost. A band either plays a concert one day, or that output is lost.
In a very real sense the (huge) sums being spent are an attempt to avoid economic disaster (and perhaps political calamity) from the forced idling of output. Since the parties involved (crony bits aside) will mostly use the money to consume things they would have otherwise consumed, this shouldn’t be very inflationary for a while. I am deliberately vague on “a while”. If the spending is so large or so long lasting that demand for un-suppressed goods rises in a substantial and lasting way, without any offsetting production, that will be a different story. (But, why should the price of oranges ever be a function of whether waiters are employed or not?)