Blue Mass Group

Reality-based commentary on politics.

Deficits and Economic Recovery

By

 “What is the disconnect?”, you ask.

The Republican philosophy of “borrow-and-spend, and tax benefits-to-the-wealthy” has created a problem that won’t be easily solved. Although the mainstream media will report the FY 2008 federal deficit as $455B, in actuality it is over $1T, as noted in the excerpt from Wikipedia on the subject of federal budgets.

“Using 2008 as an example, the “On-Budget” deficit of $638 billion is reduced by the “Off-budget” surplus of $183 billion to arrive at the “Total” deficit of $455 billion. It is this latter amount that is often reported in the media. The national debt increased approximately $1,017 billion in 2008, which is the $638 billion on-budget deficit plus an additional $379 billion of supplemental appropriations or otherwise non-budgeted expenditures, primarily the Economic Stimulus Act of 2008, the wars in Afghanistan and Iraq and earmarks.”

Note that the $183 “Off-budget” surplus is basically the annual Social Security revenue less expense, and using that to provide the Bush tax cuts to the wealthy is a massive transfer of wealth from future recipients of SS to today’s fat cats. John McCain decried Barack Obama’s tax plan as “spread-the-wealth”, but was totally silent on the much larger issue in reverse that his Party has foisted on the American people.

And to add in the many “supplemental appropriations” without calling them out in the deficit is another trick that the mainstream media lets them get away with. Of course that is continuing, as we can see there is already a $631B debt increase in less than 2 months of FY 2009.

So when Barack Obama enters the Presidency in January he has the dichotomy of controlling the debt increase while stimulating the economy. That is certainly a test that won’t wait 6 months as John McCain noted during the campaign. But at least Obama will take the test, unlike his Republican predecessor who ignored it and John McCain who apparently isn’t even aware of it.

This enormous Federal Debt is one pillar of the “Twin Deficits”, the other being the Foreign Trade Deficit.  While President Bush is in Peru advocating “Free Trade” and decrying what he claims is “Protectionism” we are allowing our wealth to be further drained by Trade Policy that creates an uneven playing field for America-based companies, and treats the workers of the World as cheap capital by Multi-national corporations.

What used to be “we have corn, and you have rice, so let’s trade” has become “which workers of the world are willing to perform this job at the lowest wage, and without benefits?”  It is a race to the bottom, and the US workforce has the furthest to fall.

As we have transferred about $5T of wealth out of the US since the year 2000, we are also seeing how this shows up in the account balances between nations.  Since we are the debtors, those outside the US are increasingly their ownership of US assets.  Many of our banks, utilities, hotels and even fuel stations are now owned by foreign interests.  We have “sold America” in order to pay bottom dollar for our goods and trinkets.  But without this wealth our economy stagnates, as we have run out of money and no longer have the earning power to replace it.

The history of US Trade Deficits since the turn of the Millenium indicates how much wealth we have allowed to leave our hands.

Year, Trade Deficit ($B), Total Increase in Deficit

2000, 379.8, 379.8

2001, 365.1, 744.9

2002, 423.7, 1168.6

2003, 496.9, 1665.5

2004, 607.7, 2273.2

2005, 711.6, 2984.8

2006, 753.3, 3738.1

2007, 700.3, 4438.4

2008, 534.5 (9 months), $4,972.9B

We think of NAFTA when these trade agreements are discussed, but it has expanded well beyond that agreement which was signed in 1994 during the Bush years.

United States free trade agreements

Existing Bilateral Australia · Bahrain · Chile · Israel · Jordan · Morocco · Oman · Singapore

Multilateral Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) · North American Free Trade Agreement (NAFTA)

Pending Awaiting

implementation Peru

Awaiting

legislation Colombia · South Korea · Panama

Proposed Bilateral Ecuador · Ghana · Indonesia · Kenya · Kuwait · Malaysia · Mauritius · Mozambique · New Zealand · United Arab Emirates · Uruguay

Multilateral Free Trade Area of the Americas (FTAA) · Middle East Free Trade Area (MEFTA) · Transatlantic Free Trade Area (TAFTA) · Free Trade Area of the Asia-Pacific Region (FTAAP)

Suspended Southern African Customs Union (on hold since 2006) · Thailand (on hold after 2006 coup) · Qatar (on hold since 2006)

Defunct or

expired Canada (expanded into North American Free Trade Agreement)

 

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Comments

  1. You’re on track with the first half of this, but the section on free trade doesn’t stand up too well. Protectionism isn’t going to help anyone in the current economic environment. The Smoot-Hawley tariffs made the Great Depression even worse and American companies need access to markets right now.  

    • but rather trade agreements where the workers are fairly compensated.  If that were made a requirement it would be less likely American companies would move jobs overseas so they could pay bottom dollar.  What is fair?  Start with the equivalent American wage rate in the currency of the trading partner, and discount that by some percentage according to cost of living in that country.  So where the American worker may be paid $20 per hour, the rate of pay in the trade partner country may be $12 per hour, but not $2.

      <

      p>And if it still made sense to move the operation, then at least the worker would make a decent wage, and probably lessen his incentive to sneak into the US for an $8/hr job.

      • We Americans come out ahead when we import goods more cheaply than we can manufacture them domestically. The trade deficit arises not because foreign goods are “too cheap” but because Americans are not saving enough money for retirement. We need higher limits on IRA contributions and we need the federal government to set an example with better management of Social Security.

  2. on deficit as a percentage of GDP, I had to approximate GDP by reading from a curve, but it is pretty linear from $10T in 2000 to about $14T this year.  Using the increase in debt from FY to FY over that period, the ratio follows:

    <

    p>Year, GDP, Increase in Debt, Debt Increase/GDP Percentage
    2000, $10T, $18B, 0.18%
    2001, $10.5T, $133B, 1.27%
    2002, $11T, $421B, 3.83%
    2003, $11.5Tm $555B, 4.87%
    2004, $12T, $596B, 4.97%
    2005, $12.5T, $654B, 5.23%
    2006, $13.0T, $574B, 4.42%
    2007, $13.5T, $500B, 3.70%
    2008, $14.0T, $1017B, 7.26%

    <

    p>Note even in the last year of the Clinton presidency the debt increase was (a small) $18B whereas it is usually reported as a surplus.  The difference is that the reported deficit assumed the Social Security/Medicare Surplus was part of the general budget (which is the way it is typically reported, but that doesn’t stop the debt increase)

  3. Why not start with the simplest, biggest cost savings we can make?  

    <

    p>Let the word out:  We Won The Cold War!  

    <

    p>Time to bring the troops home and shut down the bases that house them all over the world.  Time to shut off the tap of billions of dollars to pay foreign nations for the costs of stationing our troops over there.  

    <

    p>Let’s shut down NATO.  It did what is was designed to do.  That was in the past and no longer needed.  The Warsaw Pact is gone.  Why do we need look ’round the world for something for NATO to do?  Is this a classic case of winning a war and losing the peace?  

    <

    p>Put the troops back on US shores.  How much of a military do we need then?  How many jobs will be created over here?   How long before we save a trillion?

    <

    p>  

  4. The Bush tax cuts caused a year on year decrease in the deficit. Whatever happened this year, it wasn’t the Bush tax cuts that caused the deficit to rise again. Therefore it is nonsense to repeal them in the name of the deficit.

    <

    p>http://en.wikipedia.org/wiki/U…

    • I claim that the year-on-year decrease in the deficit would have been greater without the Bush tax cuts. It happened despite the cuts, not because of the cuts.

      <

      p>And I have as much proof as you do.

  5. Just a note, Bush won’t be President anymore after Jan 20th and he’s not running for anything right now.

    <

    p>I also think your facts might be more meaningful if you went beyond 2000 to track the data (like maybe back to 1990) although I know it doesn’t fit into your Bush/Republican bashing goal. Also, was Bush the first President to state the budget deficit in these terms (with SS surplus figured in)?

    <

    p>Why do the “fat cat” filthy rich, “borrow-and-spend, and tax benefits-to-the-wealthy” Republicans want to have a trade deficit?

    <

    p> PS Bush/Republicans haters like yourself have to remember the DEMOCRATS have controlled both house for the last 2 years. Plenty of blood on their hands for the deficit! But, with a Democratic President and both house overwhelmingly Democratically controlled… will budget deficits suddenly become acceptable to the Democrats who have derided Republicans for the last 8 years?

    <

    p>Lastly, do you have any suggestions to fix any of this (other than your protectionism inference)? I agree that it is always good to study the past so we don’t commit the same errors, but in a proactive constructive manner vs. just bitching.

    • The anger I have with the deep hole that has been dug is tainting my comments.  The Globe article piqued that anger by reporting the current fiscal year (in good part an Obama Administration) would see a deficit of $1T, whereas I firmly believe the past FY already surpassed that amount.

      <

      p>As far as the use of SS/Medicare surplus to improve the general budget deficit, that is not new to the Bush Administration.  I had already noted that in a comment:

      <

      p>

      Note even in the last year of the Clinton presidency the debt increase was (a small) $18B whereas it is usually reported as a surplus.

      <

      p>As far as suggestions to start our way back, I offered a few in the poll, and I can tell you the ones I selected and why.

      <

      p>1. Move to an Obama tax policy
      2. Enhance worker benefits in trade agreements
      3. Push for Obama’s stimulus plan
      4. Phase out involvement in Iraq over 16 months

      <

      p>I believe the current tax policy has added to the maldistribution of wealth in this county and that hurt the economy.  When the masses don’t have the money, but the need to spend, and the few have more money than they can reasonably spend, the economy is weakened.  

      <

      p>Rather than “protectionism”, I would advocate fair trade, and one element of that would be to include in the trade agreements minimum wages, benefits and working conditions on both sides of the trading line.  This is not protectionism.  I would go further, and recognize the individual income tax paid by employees of companies when developing corporate tax laws, thereby providing an explicit tax benefit to US companies that hired US tax-paying employees.

      <

      p>Not yet knowing the details of the Obama stimulus plan, it is difficult to give full support to it.  However, from what has been described it will focus on providing jobs in the US and some degree of tax breaks to mitigate the current dearth of wealth in the middle class.

      <

      p>And I would support the reversal of the preemptive war foreign policy, and support the phased withdrawal from Iraq on a timeline accelerated from the discussed Bush-Maliki agreement that will draw that out over 3 years.  A faster withdrawal is needed to recover our foreign policy credentials and to lessen the cost on our overburdened economy.

      <

      p>Maybe there are other suggestions to add to the polling question – if so, feel free to comment.

      • How would you enhance worker benefits in trade agreements. One problem I see is if you start to increase the costs of good from oveseas, you will potentially severely restrict the lower income workers in the US from buying goods. Let’s face it, Walmart is a haven for low and middle income families because the goods (clothing) are so darn cheap. Increase some of these trade rules and the costs and prices will go up, and so will the inability for lower income people to buy goods. I know in the long run it may be good for the US economy but it will be difficult (for lower income people).

        <

        p>Understand too that ANY stimulus package will be adding directly to the bottom line of the deficit. I actually agree we need one and I agree we have needed (and received) things like this in the past from Bush… but it increases the deficit and we can’t cry about that latter. I for one wish there was some way to make sure the stimulus was used properly. Like giving money to people to buy food and they buy drugs/booze… we need the stimulus money to be used to buy goods and not be saved or used to pay off debt. Maybe we need to structure it so people purchase automobiles, appliances, computers, homes or other items which will help the economy.

        <

        p>No Obama tax plan since they know it is counterproductive (that was campaign rhetoric).

        <

        p>I often talk about the wealth of the middle class. I think the middle class is doing ok, but they have tremendous pressure to keep up with the joneses. Being from their we (with other Fathers) would often talk about how different our houses and lives were from our Fathers. Our current middle class has TVs in every room, including the big fat flat panel, 2 cars, multiple vacations to Disney, weeks on the Cape, 6 cell phones in family, golfing no longer a rich man’s sport, attend Patriot, Red Sox, Bruins games even though tickets are $50+ each… We live well beyond our means.

        <

        p>PS When are sports teams going to lower ticket prices and stop paying these “heroes” $20-30 Million/year????

        <

        p>PSS $300-700 Billion leave our borders every year for foreign oil. Do you see anyone driving less? Do you see what cars, vans and SUVs the middle class is driving?

        <

        p>I’m lucky enough to be doing well financially but I went out to eat twice this weekend and both times had to wait for a table. Even during these economic disastrous times, people are spending money they don’t have.

  6. Coming late to this discussion, let me just add a couple of quick observations.

    <

    p>I find it frustrating that you don’t provide links to any of your sources. That tends to make me discount your “facts” as either made up or as selective truths that you pulled out to support your case.

    <

    p>Charley asks the right question (or one of them, anyway) when he wonders about putting things into perspsective by expressing these rather abstract huge numbers into percentages of GDP (or other aggregates, such as other measures of income).

    <

    p>When looked at this way, federal debt is still a problem, but one that is hardly out of control. This chart, for example, shows that federal debt, as a % of GDP, was well below 40% during most of the 1960s and 1970s, then surged to over 60% during the Reagan/Bush 41 cut-revenues-and-spend-more years, falling modestly during the Clinton years (remember, we actually had a surplus for a while?!) and then shooting up during Bush 43 to a level not seen in over 50 years, during the Eisenhower years. I’m sure I needn’t point out the obvious, that Republicans seem to be REALLY bad at managing debt…

    <

    p>Your comments about the “twin deficits” are totally off the mark, as another commenter has noted, not to mention offensive to me. As to the latter, to say that foreign workers “sneak into the US for an $8/hr job” is to totally miss the point that they are not so much sneaking in as being welcomed with open arms. We need them.

    <

    p>As to your confusion about the trade deficit, it is NOT created by a “race to the bottom” (whatever that means), but it is simple double-entry bookkeeping that tells us in order to run a capital surplus (i.e. borrowing money from foreigners, as you rightly point out, to finance our federal governmente deficit (because Americans have been taught they don’t have to save — they can just take out loans or watch their wealth increase as stock market and housing prices bubble — brought to you by the courtesy of the Fed)), we need to run a trade deficit to finance those capital loans. It has nothing to do with wage rates or trade agreements or any of those issues. It is simply that we are borrowing money from abroad.

    <

    p>I’d suggest a little reading of some basic economics; Paul Krugman would be a good place to start, and David Ricardo’s theories have stood the test of time (with some updating); it is not absolute, but relative advantage that determines the terms of trade.

    <

    p>I could go on, obviously, but I promised to be quick. That’s hard to do on such a complex issue, but I hope this helps.  

    • Here are a couple that I used – so have at them.

      <

      p>First of all, here is the link to the Treasury website to find the daily US Federal Debt.
      http://www.treasurydirect.gov/…

      <

      p>And here is the link to government site for the foreign trade deficit.
      http://www.census.gov/foreign-…

      <

      p>It is well-known that we are a nation that consumes more than we make.  But is “saving” the only issue?  What about creating more?  And saving is not an equal opportunity activity.
      When you say we should “save”, do you mean these people?
      http://money.cnn.com/2007/04/2…

      <

      p>I certainly agree that they should be able to save, as their taxes are lower than most of us:
      http://oversight.house.gov/doc…

      <

      p>But what about these people?
      http://www.nytimes.com/2008/04…

      <

      p>Who listened to their president for advice on how to help the economy:
      http://thinkprogress.org/2006/…

      <

      p>As for the “race to the bottom”, even your noted Paul Krugman has stated the need to restore our capability to generate wealth through making things.

      <

      p>

      About the trade deficit: … The flip side of the trade deficit is a reorientation of our economy away from … manufacturing, to industries that are insulated from foreign competition, such as housing. … The trade deficit isn’t sustainable. … [O]ne of these days the easy credit will come to an end, and the United States will have to start paying its way in the world economy. To do that, we’ll have to reorient our economy back toward producing things we can export or use to replace imports. And that will mean pulling a lot of workers back into manufacturing. So the rapid downsizing of manufacturing since 2000 … amounts to dismantling a sector we’ll just have to rebuild a few years from now.

      <

      p>http://economistsview.typepad….

      <

      p>Although I appreciate the feedback, I’m not so fond of the condescending tone of some of your comments.      

      • I suppose this diary is a bit dated, so won’t comment much here, but I do hope we’ll circle back to a discussion of these issues. The questions you raise are critical to the dialog we, as a nation, need to have if we are to solve our common problems.

        <

        p>As you can tell, you and I come from different places, which is, in my experience, the only way we can learn and advance the discussion. It does no good to talk only with people you agree with. Our gains come from our differences.

        <

        p>That said, let me go on to point out a couple of differences briefly.

        <

        p>One is your quote from Krugman. I fail to see how you think this invalidates my statement about the trade deficit — if anything, it is at least tangentially supportive of what I said. Another time.

        <

        p>Also, you say, ‘It is well-known that we are a nation that consumes more than we make.  But is “saving” the only issue?  What about creating more?’

        <

        p>Saving, by definition, is the difference between your income and your outgo. How much you “create” isn’t the issue — it’s whether you keep any of that for future use (save it, in other words) or spend it all (and maybe more). Our country used to have a personal savings rate in the 8% to 10% range, in good times and bad (at least, since the Great Depression); of late it’s been negative.

        <

        p>Part of the reason that people haven’t been saving, of course, is that they’ve come to expect, courtesy of Greenspam and an overly-generous Fed, that their assets will increase in value with some regularity, and so they don’t need to save — the “market” will do it for them. Wrong! as we’ve found out time and again as bubbles burst.

        <

        p>I apologize for what you take to be a condescending tone. I appreciate your pointing it out to me, and I will try to do a better job. I have a cognitive disability that may explain that, in part, but I do not mean to use that as an excuse for rudeness. For your part, I ask you to not be too thin-skinned, and realize that I do not mean to attack you personally.  

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