Responsibility for Deficits

 Kevin Drum had a post the other day showing the percentage of the nation's GDP devoted to the federal government.  It's roughly 21 percent from 1980 to now. Kevin argues that shows the various tax cuts delivered by Republican presidents (Reagan, GWB, TFG) are responsible for our deficits: because spending has remained level(ish) the deficit must be on the tax side.

I don't find that argument conclusive. I think a more realistic picture is that spending and taxing both wiggle over the years: sometimes up and sometimes down, but consistently the public and its political leaders are comfortable with a regular deficit. 

Inflation Worries and the 1970s

 The debate over the proper size of the Covid bill often gets into inflation--will a bigger federal debt cause greater inflation.  I've commented somewhere that while any inflation will take a while to show up, based on our experience in the 1970s it takes a long time for policymakers to react and fight it.  

Expanding on that--we do have the experience of the 70's to guide us, and we know that very high interest rates a la Paul Volcker will stifle inflation albeit at the cost of a recession.  Another factor I'd consider--in the 70's unions had more power than now.  The industrial sector was much more important in the economy, and unions had considerable power in that sector.  I think it's also true that union contracts had been written in a way to cope with inflation, at the cost of adding to inflationary pressures. Globalization has come a long way since the 70s, so presumably it's harder for an economy to go its own way and inflate.  Finally, a big part of the inflation then was the effect of OPEC finding its power, resulting in much higher prices for oil.  Today we don't have any cartel with similar power over a critical factor in the economy, and oil specifically and energy generally are less important economically.

The Two Sides of Low Interest Rates

 In today's NYTimes Paul Krugman has an article arguing for big stimulus spending, partially justified by the very very low interest rates now being charged for the Federal government's borrowing.

In the business section is an article on CALPERS (the California employees pension fund) and its problems with trying to have its 7 percent return on investments.  It's taking on more risk to try to get its returns up.   CALPERS has, or used to have, a reputation for good investment strategies, so if they're having problems you can bet other smaller retirement funds across the country are having more problems.

I don't have any answers, just the observation. 

[Updated--ProPublica has a related piece, also on impact of Fed's actions on retirement savings.'

The Great Switcheroo: Republicans

A quote:
"

Second, the Republican policy reversals are staggering:

• Members of Congress who once claimed to be committed to debt reduction would increase debt by more than $2.7 trillion in just seven weeks.
• Congressional Republicans would increase government spending by 50% more than they cut taxes two months ago.
• The self-labeled fiscal conservatives in Congress, who had once insisted that all government spending increases be offset by spending cuts, would abandon that principle.
• A party that just a few years ago proposed reforming old-age entitlement spending, the principal driver of government spending growth, would have no proposals to do so. If press reports are true, this bill may even increase Medicaid spending.
• The Republican Congressional Majority, which built last year’s balanced budget plan on deep future cuts to nondefense discretionary spending, would be supporting big increases in that spending."

Who is saying all this: Keith Hennessey, CEA under Bush.

Inflation and Rising Interest Rates

After the events of 2008, as Congress passed the stimulus bill and the Obama administration took charge, conservative bloggers such as those at Powerline started to worry about inflation.  Liberals such as Kevin Drum and the liberal economists mocked the concerns.  I have to admit that while I mostly agreed with the liberals, my memory of the inflation of the 1970's caused occasional qualms.

Turns out the liberals, and Bernanke and Yellen were right--we didn't have inflation over the Obama years.  Interest rates remained low.

But, with today's news of the stock market fall, there's more discussion of inflation.  Maybe finally inflation will hit and pass the 2 percent a year benchmark the Fed has used.  I'm no economist and I'm not panicking about the stock market.  But I do want to point out something I've not seen mentioned.

The federal deficit is projected to rise very significantly this year.  Trump's tax cut will hit revenues, and even if he's correct it will stimulate the economy, any increase in revenues will take a while to show up.  But what if it doesn't?  And what if inflation is at the door, and the Fed raises rates faster than expected?  The net result of higher interest rates is greater budgetary pressure and a larger deficit.  (We know that from Clinton's early years.)  That's not a good formula.

(A parenthetical note: I've not seen the Powerline bloggers raise any concerns about the deficit since January 19, 2018.)