Limits to Overused Fiscal and Monetary Policy Can Result in Self-Induced Governmental Impotence

“The [U.S.] federal budget deficit is growing faster than expected as President Trump’s spending and tax cut policies force the United States to borrow increasing sums of money.”[1] This observation was made just after the Federal Reserve Bank relented under pressure from the White House to lower interest rates because bond investors had been investing with a possible future recession in mind. With the U.S. Government’s accumulated debt standing at $22.4 trillion and interest rates already low, the limits to both fiscal and monetary policy were apparent even if most Americans in the political and business elite were focused on avoiding a possible recession in 2020.

According to the Congressional Budget Office in August, 2019, the federal deficit for fiscal 2019 would reach $960 billion; the deficit for the next year would reach $1 trillion.[2] Back during the Reagan administration in the 1980’s, deficits were in the hundreds of billions and the debt was in the trillions. It would seem that the fiscal imbalance had gotten worse since then, in spite of the fact that recessionary periods were greatly outweighed by stretches of growth. In fact, the U.S. in 2019 was in its longest period of economic expansion. Yet the deficits and thus debt rose rather than dropped. President’s tax cuts in that period of expansion played a significant role. Tax revenues for 2018 and 2019 fell more than $430 billion short of what the Congressional Budget Office had predicted.[3] In August of 2019, the president made public his consideration of payroll tax cuts just to guard against a possible recession (especially if one should hit before the next election day).

Using recessionary fiscal tools during an economic expansion means the deficits in good times won’t counter those in bad times. The result in the case of the U.S. has been a steadily increasing accumulated debt, rather than a debt from bad times being paid off in good times. That’s the fiscal theory, but it ignores the insatiable desire for instant gratification in human nature that can easily find power in a representative democracy. Accordingly, the use of leverage, or debt, by a democratic government should be extremely limited; tax cuts during periods of expansion can be seen as a red flag that a government has already gone too far.

Fortunately, lower than expected interest rates even before the Fed’s announced rate cut in August, 2019, reduced the amount of money the U.S. Treasury had to pay to its borrowers. So the public as well as policy makers could conveniently overlook the fact that the projected deficit for fiscal year 2019 was 25% higher than the prior year’s deficit. One weakness of a democracy is that if things look ok on the surface, needed work on the fundamentals—the substratum—will likely be put off. It’s more understandable that the electorate would have this weakness—less so for the elected representatives who know or should know the fundamentals and look out for the fiscal balance of the government. Speaking of balance, it is interesting that the federal system too was so much out of balance with the federal level holding most of the governmental power even though the States technically still had residual sovereignty. In other words, the tremendous fiscal imbalance can be viewed as an indication or manifestation of a more fundamental imbalance in the U.S. system of governments. In contrast, the E.U. suffered from an imbalance in the other direction, as the state governments anxiously guarded most of their powers.

See: Skip Worden, Essays on Two Federal Empires. Available at Amazon.

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1. Jim Tankersley and Emily Cochrane, “Budget Deficit Is Set to Surge Past $1 Trillion,” The New York Times, August 22, 2019.

2. Ibid.

3. Ibid.

Behind Corporate Loopholes: Wealth and Power

A company in the U.S. wants a tax loophole to apply. Starbucks, for example, wanted to be able to use the manufacturing deduction by stretching manufacturing to include the roasting of coffee beans. So in 2004 the company hired Michael Evans, a lobbyist at K&L Gates who had just a year before worked as a top lawyer on the U.S. Senate Finance Committee, which writes tax law. Evans was able to urge his former colleagues in the Senate to expand the definition of manufacturing to include roasting in a clause added to a 243-page tax bill called the American Jobs Creation Act.  As you might imagine, Starbucks was not the only company to get a tax break written into that law. By 2013, the manufacturing deduction had saved Starbucks $88 million that the company would otherwise have had to pay in corporate income tax. In 2012, corporate tax breaks and loopholes added $150 billion in lost revenue for the federal government, increasing the budget deficit by that amount.[1] Three lessons can be gleamed from the hidden corporate loopholes. 

First, the damage done to the U.S. debt by corporate loopholes has been significant. While dwarfed by the debt incurred to finance the Iraq and Afghanistan wars ($2.4 trillion added to the debt by 2013), $150 billion of lost revenue from corporate tax benefits for that period alone is nonetheless significant. 

Second, the “insider influence” itself violates the principles of openness and fairness, which are so esteemed in a democracy. The many points of access to influence legislation can be abused by legislators and lobbyists alike by their stealth dealings, sometimes literally in the middle of the night as a bill is about to be voted on. Ideally, the many points of access refers to the fact that various groups (and citizens) can reach legislators, not that the most powerful interests can abuse their ability to contact lawmakers for private gain (both to the interests and the lawmakers, thanks to political campaign contributions). In fact, for a lobbyist, including a corporate lobbyist, to have disproportionate influence on a bill to make it financially beneficial to the lobbyist's clients can be reckoned as a conflict of interest because even the information supplied is apt to be biased. The many points of access is meant to dilute the influence of the private interests that stand to benefit most from loopholes. 

Third, the contacts that lobbyists have in government from having worked there themselves can play a major role in the loopholes being granted and even in secret. Other self-interested interests cannot check the self-interested influence of the companies or industries that would gain most, so the private benefit gets away with eclipsing the public good. A law prohibiting former legislators and Congressional staffers from lobbying for at least ten years might make a dent in the inordinate insider influence of corporations in Congress. However, the influence of a Speaker of the House such as John Boehner, who became a corporate lobbyist after resigning from Congress, would hardly be diminished in his private influence, and thus earnings. Information that only insiders have sells. 

Like water, pent-up power naturally seeks its way around an obstruction with the objective of reaching an objective. The influence of wealth inexorably finds its way into the halls of power, especially in democracies as they have many points of access. This vulnerability is particularly great in cases in which candidates for public office must raise large sums of money to get elected. Asking the candidates to look the other way when a big donor is knocking at the door runs against human nature; even if laws prevent large donations, power finds its own way in the dark. The power both of candidates/lawmakers and corporations can be so massive that space itself bends toward mutual objectives. Perhaps the question is whether trying to bend space back only slightly is worth the time and energy of passing a law. Although removing the financial need of candidates for campaign funds (e.g., by public funding of advertising) could in theory take out part of the incentives on one side of the equation, corporations could tempt the incentive for private gain in other ways, such as with the promise of a lucrative job afterwards. 

In the end, the threat to the democracy is the inordinate power from the concentration of private wealth as in large corporations. The citizens are hardly focused in their collective use of their power, so the insiders in government tend to be influenced inordinately by the moneyed interest at the expense of the public good, the good of the whole.  

1 Ben Hallman and Chris Kirkham, “As Obama Confronts Corporate Tax Reform, Past Lessons Suggest Lobbyists Will Fight For Loopholes,” The Huffington Post, February 15, 2013.

See Institutional Conflicts of Interest, available at Amazon. Conflicts within the U.S. Government, in business, and between business and government are explored, as well as the very nature of an institutional conflict of interest. 

Instant Gratification Rules in American Fiscal Policy

With an expected deficit of $1.2 trillion for 2018-2019, the U.S. Government in December, 2017 enacted a tax cut with an expected revenue loss of nearly $1 trillion over a decade (assuming some growth from the tax stimulus) and, two months later, a budget deal passed adding $300 billion to federal spending in the next fiscal year.[1] All this was done with the U.S. debt at over $20 trillion—higher than the annual GDP at the time. With the  economy humming along with a low unemployment rate, the prospect for any fiscal discipline was bleak. Put another way, if budget surpluses could not come at the boom end of an economic cycle, then deficits would be likely in good times and bad. Behind the structural imbalance of contiguous deficits and an ever-growing debt is the all-too-human preference for instant gratification without a corresponding value being placed on self-discipline.

In a republic, the electorate elects representatives in part because direct democracy has no constraint on the immediate passions of a people. In the case of the U.S. Congress and White House,  the representatives had not by 2018 at least resisted the instinct for immediate benefit for the good of the American republics and their peoples—which together constitute the United States. Thomas Jefferson and John Adams agreed in retirement that an educated and virtuous citizenry is vital to a viable republic. The $20 trillion federal debt reflects back on Americans not in a good way in this respect.

For a republic—including one that is also a federation of republics—to be viable over the long term, some allowance for the long term must be made in the form of fiscal discipline. This is essentially self-discipline on a societal level. In the case of the tax cut and additional federal spending, Americans could “expect some of the strongest economic growth” in years.[2] This made the urge for instant gratification particularly alluring. In the medium term, Americans would face “more risk of surging inflation and higher interest rates—fears that were behind a steep stock market sell-off” in early February, 2018.[3] Notice that the negatives begin only in the medium term; hence they do not detract from the instant gratification. In the long term, the U.S. could have less flexibility fiscally in enacting a stimulus to combat a recession or even a crisis like that which had hit Wall Street in September, 2008. Additionally, “higher interest payments could prove a burden on the federal Treasury and on economic growth.”[4] The short term boost in an already booming economy could be expected at the time to hamper economic growth perhaps at a time of recession! Yet the force of this anticipation had no power in the enacting of the tax cut and additional spending. Knowledge, it appears, requires virtue manifesting as self-discipline. That it was missing reflects especially on the elected representatives of both parties, but also on the American electorate that elects and re-elects those representatives with impunity.

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[1] Neil Irwin, “Austerity Era Comes to End,” The New York Times, February 10, 2018.

[2] Ibid.

[3] Ibid.

[4] Ibid.

On the Danger to the United States of Living off Government Debt: The Case of the Dollar as World Reserve in 2010

Given the $13 trillion of U.S. Government debt in 2010, the dollar was losing out at the time in percentage terms to other currencies as the global reserve currency. To be sure, in absolute terms, there were still more dollars being held abroad than twenty or thirty years earlier, but as a report from Emma Lawson of Morgan Stanley showed, other currencies were taking on more of a relative presence. The lesson concerning excessive public debt was not grasped at least through the 2010's, as the debt continued to increase trillions of dollars more.

The Euro had been making the greatest strides in percentage terms, particularly in 2002. The slight downturn in 2009 might have reflected the impact of the financial crisis of 2008 in Europe, though the Greek debt issue had not yet reached a boil (it would be interesting to see the figures from 2010).  In any case, the dramatic drop in the dollar’s percentage terms also came in 2002, before the Iraq war and the bank bailout spending (i.e., the $13 tillion dollar debt). The drop could have been in reaction to September 11, 2001, though it would seem an exaggeration even then to say that the US financial system would be undone by the attack.  Even so, as we know from 2008, irrational exuberance can take hold in even a global market. We ought nevertheless not lose sight of the fact that the number of dollars held in reserves around the world increased. The pie got bigger, and even though the dollar piece became larger, it was a smaller proportion of the pie in 2010.  Even so, the $13 tillion in US Treasury debt, the decision of the Chinese to allow their currency to appreciate to a limited extent, Russia’s call for a mix of global reserve currencies, and the EU’s bailout of the Greek bonds all pointed to trouble for the US dollar as “the” reserve currency. Also troubling was the UN report at the end of June, 2010, which urged that the US dollar is no longer stable enough to be the world’s reserve currency. Ouch! The dollar slid %5 in June. Fortune reports that central banks had been preferring gold to the greenback.

Lawson believed that  ”over time we anticipate that reserve managers may reduce their holdings further.” She is looking at the significance of small percent changes over a short time—and this I see as perhaps susceptable to overblowing small trends. For example, she found that central banks had dropped their allocation to U.S. dollars by nearly a full percentage point to 57.3% from 58.1%, and calls this “unexpected given the global environment.” But was such a change, relative to those shown in the chart, really significant? She argued that other dollars - the kind that come from Australia and Canada - had been benefiting from skiddishness on the dollar. The allocation to those currencies, which fall under “other” in the data, rose by a full percentage point to 8.5%, accounting almost exactly for the drop in the U.S. dollar allocation. She was undoubtedly assuming that the trend would continue, but a look at the chart can demonstrate that even the dramatic changes in 2002 had not continued at such a rate (e.g., for the euro and the US dollar). 

Even so, Treasury’s huge debt could not but undermine the US dollar over the long term. This point ought not to be minimized or ignored under the fiscal pressure to push the US economy out of recession. Even if the US did not admit that the debtload was too high to be paid down one day (the debt then approaching the annual GNP of the US), the market rendered its verdict. Relative the huge debt facing the US dollar (and remember there are huge state debts, such as in California, Illinois and Florida!), the “crisis” facing the euro in 2010 paled in comparison.  As of mid 2010, the euro was still over $1.20. Years earlier, it had been at parity. The media frenzy on Greece's debt in 2010 ought therefore to be put into some kind of perspective, and the impact of the dollar’s public debt not be lost. 

It’s not clear to me that the human mind can conceptualize a trillion, not to mention thirteen of them. Yet we glide over the public debts in the US as though they were sustainable. If the US falls, it will be from within--from consolidation at the empire-level.  Such a fall will likely come as a surprise to most Americans, who in being oriented to external threats tend to miss the gravity of the black hole amassing under our very noses.  To be sure, the additional debt enables us to live beyond our means as a society, and such a condition can be very addictive.  Perhaps the parallel question for us to reflect on is whether Rome fell from within or simply from the Goths.

Sources:

 http://www.businessinsider.com/morgan-stanley-dollar-euro-reserve-holdings-2010-7#ixzz0tBDYFjMd

 http://wallstreet.blogs.fortune.cnn.com/2010/07/09/central-banks-start-to-abandon-the-u-s-dollar/

Voluntary Greek-Debt Maturity Extensions: A Rush for the Exits?

As the E.U. was working out more loans for Greece in summer 2011, rating agencies looking at the state’s debt indicated that default would be pronounced should the decision of bond-holders to continue to hold Greek bonds be anything less than voluntary. Germany had been pushing for something less than voluntary so taxpayers would not have to bear so much of the risk and cost. France, doing the bidding of its banks, effectively used the rating agencies’ default-guidelines to insist that additional E.U. loans do not require then-current bond-holders to agree to later maturities. Given the extent of Greece’s debt-load relative to the state’s GDP, a private sector bond-holder, such as a bank, would naturally loose little time in getting out of holding Greek debt, even given the high interest rates (which reflect the risk).  

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.