Mark Steyn, US Federal Debt & Conventional Wisdom

[August1991]

Mark Steyn, after a long holiday, returns to post this:

And, without serious course correction, America is doomed. It starts with the money. For dominant powers, it always does from the Roman Empire to the British Empire. Declinism is in the air these days, but for us full-time apocalyptics were already well past that stage. In the space of one generation, a nation of savers became the worlds largest debtors, and a nation of makers and doers became a cheap service economy. Everything that can be outsourced has been manufacturing to by no means friendly nations overseas; and much of whats left in agriculture and construction to the armies of the undocumented. At the lower end, Americans are educated at a higher cost per capita than any nation except Luxembourg in order to do minimal-skill checkout-line jobs about to be rendered obsolete by technology. At the upper end, Americas elite goes to school till early middle age in order to be credentialed for pseudo-employment as $350 grand-a-year diversity consultants (Michelle Obama) or in one of the many other phony-baloney makework schemes deriving from government micro-regulation of virtually every aspect of endeavor.

SteynOnLine

Where to begin? Protestant WASP Conventional Wisdom in North America is that debt is bad.

I would be the first to limit government spending and government regulation. I argue here constantly about reducing the size of government in general, and the Canadian federal government in particular.

But America is in the middle of a strange economic situation (liquidity trap, to give it a name), where many people are simultaneously trying to pay down their debts (deleverage). This may be a wise action for each individual but in this case, wise individual choices may lead to collective folly.

This situation means the economy is somehow different. If you don't believe me, look at reported inflation rates and current nominal interest rates. Both have been very low (almost zero) for about two years.

To counter this situation, Obama (and Bush Jnr) both approved huge government spending packages. They were right to do so. This has lead to huge government debt.

Debt? The US federal government has had much higher debt levels (as a percentage of GDP) than under Obama. In the worst case scenario, federal government debt under Obama in 2016 might reach 100% of GDP. In the late 1940s and in the 1860s, it reached almost 300% of GDP.

The US federal government can handle high debt levels because the US federal government has the power to tax.

-----

IMHO, demography is a very seductive game for an analyst. Malthus fell afoul and any number of Quebec demographers, professional or amateur, have been proven wrong. When Steyn got into demographic projections, I watched with curiousity.

Questions of government debt are a different order of magnitude in the public eye, and among specialists.

IME, Steyn is often right. In this case of US federal government debt, he's wrong. But I can agree with a basic point of his Internet column/rant/foray.

Americans succeed when they make the world a better place. In the long run, Americans do that best when the government is not involved.

Edited October 26, 2010 by August1991

[msj]

Ohhh, where to start.

I guess first, congratulations for finally recognizing a liquidity trap that has been staring you in the face for years now. Good to see you stop denying it.

As for the rest of your post, well so that people are not misinformed I recommend the following reading:

1) Conventional WASP protestantism says little about debt and morality.

Seriously, when was the last time some WASP has lectured anyone about debt? The 1800's?

Are your notions that dated? I would say yes.

2) Congratulations once again for recognizing a liquidity trap and Japanese disease. Something that I have pointed out in these forums many times and a long time ago. Along with Paul Krugman (gasp!) amongst others.

Funny thing when one looks at information and data rather than who is suppling the data...

3) Obama and W did not approve huge government spending packages that created the deficits.

How people forget that tax cuts were a large portion of the package (which I have linked to in response to you elsewhere and for which you conveniently ignore - and no, I'm not going to find that link now). Edit - here's a more recent one which sheds some light along with this one.

4) No kidding government can handle high debt levels. Like, duh?

5) When the private sector is going through a liquidity trap then it's not a bad idea for the government to pick up the slack. Aggregate demand is being hammered and the government by stepping in is helping.

But, oh no, the right wing nutters have to complain about the government "crowding" out the private sector.

Um, duh, liquidity trap.

Edited October 26, 2010 by msj

[August1991]

1) Conventional WASP protestantism says little about debt and morality.

Seriously, when was the last time some WASP has lectured anyone about debt? The 1800's?

You did, here.

----

There's a difference between personal debt, and State debt. The State has the power to tax; individuals don't have that power.

There's more.

But msj, I'll leave you to Steyn's screed because he presents North American WASP conventional wisdom - much as you do. America is in debt, it produces nothing, bankers steal, real estate is over-priced, and this is all bad.

I happen to think that Steyn, and this conventional wisdom, is wrong. With one genuflection to Steyn: too much government rarely leads to much good in the long run.

Edited October 26, 2010 by August1991

[msj]

You did, here.

----

Ummm, nothing in that link hints to morality vis-a-vis debt.

Which is not surprising given that I'm not white (well, perhaps mostly, but my first nations blood running through my body begs to differ) and I'm an atheist.

Edited October 26, 2010 by msj

[maple_leafs182]

4) No kidding government can handle high debt levels. Like, duh?

These levels are too high.

5) When the private sector is going through a liquidity trap then it's not a bad idea for the government to pick up the slack. Aggregate demand is being hammered and the government by stepping in is helping.

Yes it is a bad idea.

The government has created a bubble economy threw inflating the currency, inflation will lead to an increase cost of living. In the U.S, many people are already struggling to get buy, they won't be able to afford the higher prices.

Goldman Sachs has said "expect higher gas prices in 2011 & 2012".

[bush_cheney2004]

....America is in debt, it produces nothing, bankers steal, real estate is over-priced, and this is all bad.

America produces nothing? America produces....America.

[Michael Hardner]

America produces nothing? America produces....America.

America owns China, and China produces lots. Therefore America produces lots.

[GostHacked]

America owns China, and China produces lots. Therefore America produces lots.

America has lots of debt as well, and the Chinese own that debt. Wonder when they are gonna collect on it?

[Michael Hardner]

Steyn is such a blowhard. Now on the subject of economics, he complains about Globalization (which was brought to us by ostensibly forward-thinking conservatives in the 1980s) and shows that he is some kind of isolationist. He dismisses services, equating them to what Michelle Obama does.

What a cranky mess he is.

[Michael Hardner]

America has lots of debt as well, and the Chinese own that debt. Wonder when they are gonna collect on it?

I guess when the bonds come due. msj has addressed this quite well, I think.

[dre]

Mark Steyn, after a long holiday, returns to post this:SteynOnLine

Where to begin? Protestant WASP Conventional Wisdom in North America is that debt is bad.

I would be the first to limit government spending and government regulation. I argue here constantly about reducing the size of government in general, and the Canadian federal government in particular.

But America is in the middle of a strange economic situation (liquidity trap, to give it a name), where many people are simultaneously trying to pay down their debts (deleverage). This may be a wise action for each individual but in this case, wise individual choices may lead to collective folly.

This situation means the economy is somehow different. If you don't believe me, look at reported inflation rates and current nominal interest rates. Both have been very low (almost zero) for about two years.

To counter this situation, Obama (and Bush Jnr) both approved huge government spending packages. They were right to do so. This has lead to huge government debt.

Debt? The US federal government has had much higher debt levels (as a percentage of GDP) than under Obama. In the worst case scenario, federal government debt under Obama in 2016 might reach 100% of GDP. In the late 1940s and in the 1860s, it reached almost 300% of GDP.

The US federal government can handle high debt levels because the US federal government has the power to tax.

-----

IMHO, demography is a very seductive game for an analyst. Malthus fell afoul and any number of Quebec demographers, professional or amateur, have been proven wrong. When Steyn got into demographic projections, I watched with curiousity.

Questions of government debt are a different order of magnitude in the public eye, and among specialists.

IME, Steyn is often right. In this case of US federal government debt, he's wrong. But I can agree with a basic point of his Internet column/rant/foray.

Americans succeed when they make the world a better place. In the long run, Americans do that best when the government is not involved.

The US federal government can handle high debt levels because the US federal government has the power to tax.

Thats the problem.... It DOESNT have the power to tax, and it DOESNT have the power to reduce spending. Both those things are virtually politically impossible. The government is essentially paralyzed.

And we arent just talking about the size of the debt now... we are talking about a long term trend and huge budget defecits almost every year for nearly 40 years in a row.

But heres the thing... the debt is not really growing. That debt is denominated in US dollars which are steadily losing value. In terms of real wealth the US owes about the same as it did 10 years ago. If they keep depreciating their currency eventually the 20 or 30 trillion dollars they owe will only be enough to buy breakfast at IHop.

Really how sustainable this paradigm is for the US has nothing to do with the US government. Its about the willingness of the rest of the world to continue bailing out the US by buying US paper. Right now theres still a good market for this paper because countries that have huge trade surpluses with the US see the US as "too big to fail" (remember that term?). To these countries its worth it for the time being to keep bailing the US out every year, because if the US consumer market implodes they lose most of their business. But as other markets develop countries will less and less willing to give the US trillions of dollars that they know they will never get back.

[dre]

I guess when the bonds come due. msj has addressed this quite well, I think.

Even as bonds mature in the current environment countries like China will just buy more. Because they know that if they dont they will speed up depreciation of the US dollar, and Americans will be unable and unwilling to buy Chinese made products.

You gotta realize that countries with big trade surpluses with the US see it exactly like the US government saw various banks and financial giants during the recession. TOO BIG TO FAIL. Theres a huge ammount of growth happening in the pacific rim and other places around the world almost completely on the back of the US consumer. So its prudent for these countries to keep things going for as long as they can, and thats why theres still a relatively strong market for US paper.

So for at least the forseeable future the US will go on recieving the MOTHER OF ALL BAILOUTS from the rest of world.

[Michael Hardner]

Some perspective on American declinism:

The New Republic

What the long history of American “declinism”—as opposed to America’s actual possible decline—suggests is that these anxieties have an existence of their own that is quite distinct from the actual geopolitical position of our country; that they arise as much from something deeply rooted in the collective psyche of our chattering classes as from sober political and economic analyses.

[maple_leafs182]

America owns China, and China produces lots. Therefore America produces lots.

You got it backwards, China owns America.

[Michael Hardner]

You got it backwards, China owns America.

The declinists love to talk about how much debt China owns, but for some reason nobody wants to talk about American ownership of Chinese assets. I wonder why ?

It might be because the admonishments to make American workers take less to compete with China would ring hollow, that workers would discover that their own bosses are selling them out - not China taking their jobs but America moving jobs to China.

Maybe that's why.

[bush_cheney2004]

...It might be because the admonishments to make American workers take less to compete with China would ring hollow, that workers would discover that their own bosses are selling them out - not China taking their jobs but America moving jobs to China.

Maybe that's why.

The Chinese are emulating America...they even what to go to the Moon. Imagine that....

[maple_leafs182]

The declinists love to talk about how much debt China owns, but for some reason nobody wants to talk about American ownership of Chinese assets. I wonder why ?

It might be because the admonishments to make American workers take less to compete with China would ring hollow, that workers would discover that their own bosses are selling them out - not China taking their jobs but America moving jobs to China.

Maybe that's why.

All that means is that wall street is seeing higher profits by using cheap labour.

China won't continue to finance the American government, they are losing too much money with the devaluating U.S. dollar. They will soon cut and run from the dollar, when that happens the dollar will come crashing down. China holds the power.

[dre]

All that means is that wall street is seeing higher profits by using cheap labour.

China won't continue to finance the American government, they are losing too much money with the devaluating U.S. dollar. They will soon cut and run from the dollar, when that happens the dollar will come crashing down. China holds the power.

If the US dollar comes crashing down so will a huge piece of Chinas economy and exports. Its unlikely what you describe will happen in the very near future... although eventually It WILL happen.

And China really only holds about 7% of the power. Only about 35% of the US public debt is even held by other nations (the rest is held by Americans, and local American governments, etc. Out of the 35% of the US debt thats held by foreign countries China holds about 20%.

Ironically in the end it might actually be Americans that pull the plug on the US dollar. More than half of that money is raised by selling savings bonds to US citizens... they could decide not to buy them anymore, or decide they cant afford to buy them...

[Michael Hardner]

All that means is that wall street is seeing higher profits by using cheap labour.

China won't continue to finance the American government, they are losing too much money with the devaluating U.S. dollar. They will soon cut and run from the dollar, when that happens the dollar will come crashing down. China holds the power.

Did you see my post ? Foreign investors, including the US, own large percentages of Chinese assets. Their fate is now intertwined with that of the west. They don't own us, we own each other.

[Jack Weber]

Steyn is such a blowhard. Now on the subject of economics, he complains about Globalization (which was brought to us by ostensibly forward-thinking conservatives in the 1980s) and shows that he is some kind of isolationist. He dismisses services, equating them to what Michelle Obama does.

What a cranky mess he is.

I generally agree with Steyn when he talks about Islamofascism..

As for crybaby act about Neoliberal economics...I assume he's a big fan of that Friedmanite/Von Hayek mindset on the matter,or at least he was...I guess ya' reap what you sow!

One has to wonder what's going on when an unabashed conservative is questioning one of the basic tenets of economic conservativism????One has to wonder if the fallacy of global free markets is begining to hit home???

[August1991]

America produces nothing? America produces....America.

The conventional wisdom (as presented by Steyn) is that America has outsourced all the middle class, producing jobs abroad. IMV, that conventional wisdom is false so I guess I agree with you. If I understand you rightly.

America has lots of debt as well, and the Chinese own that debt. Wonder when they are gonna collect on it?

In fact, China owns a rather "small percentage" of the US federal debt - around 10% if I recall.

Unlike the Japanese in the 1980s and 1990s, the Chinese tend to own federal paper and not privately issued US paper.

Does this matter? Not really. By historical standards, US debt levels are still low. In the early 1800s, after the Civil War, in the 1930s, and after WWII, debt levels as a percentage of GDP were much higher than now. In the 1930s for example, debt in the US reached over 300% of GDP. At present, US federal debt is about 60% of GDP.

Thats the problem.... It DOESNT have the power to tax, and it DOESNT have the power to reduce spending. Both those things are virtually politically impossible. The government is essentially paralyzed.

And we arent just talking about the size of the debt now... we are talking about a long term trend and huge budget defecits almost every year for nearly 40 years in a row.

dre, you are confusing a specific short term situation with a long term problem.

I agree that government is a juggernaut that must be restrained. Now, however, is not the time to do it.

In very simple terms, the US federal government can change the "atmosphere" so that millions of people can get on with their lives and work productively - but to do this, the government will have to borrow alot. Or, the US federal government can do nothing and watch while many ordinary, honest people remain unproductive.

When Americans are productive, they will quickly have the means to pay back the US federal debt accumulated.

-----

Let me try a radical idea. Have you ever seen this video?

Since 2008, many Americans feel like the guy in that video. As a result, they don't want to deal with anyone and so trade no longer occurs - and the US economy is in a recession. The US federal government is in a position to reassure those people that despite all, trust is possible, and trade/co-operation is usually good. Once reassured, trading and working again, Americans will quickly generate the tax revenues to pay back the federal debt.

OTOH, if the US federal government were to raise taxes, and/or cut government spending, the guy in that video would be even less inclined to make any kind of deal with anyone. And the recession would last longer.

Edited October 28, 2010 by August1991

[dre]

dre, you are confusing a specific short term situation with a long term problem.

I agree that government is a juggernaut that must be restrained. Now, however, is not the time to do it.

In very simple terms, the US federal government can change the "atmosphere" so that millions of people can get on with their lives and work productively - but to do this, the government will have to borrow alot. Or, the US federal government can do nothing and watch while many ordinary, honest people remain unproductive.

When Americans are productive, they will quickly have the means to pay back the US federal debt accumulated.

Its not a short term situation... its an unmistakable trend that spans multiple decades. It started in the 1980's and was made possible by the suspension of convertability in 1972.

Not only does the government not want to reverse the trend but it probably couldnt even if it wanted to. Especially since it also faces trillions apon trillions in unfunded liabilities that arent even included in that debt.

I dont see a scenario in which spending can be substantially curtailed over the next thirty years or so. In fact spending will have to increase. Many trillions of dollars will be needed to fund the aging population, rebuild and refurbish an aging infrastructure and so on. Plu

And its also politically impossible because half the country wont entertain cuts to social spending, and the other half wont entertain cuts to defense spending.

http://www.colorado.edu/AmStudies/lewis/ecology/natdebt.gif

The US would have to put together a string of budget suprluses to make a big difference to that trend. But how can anyone really have faith in them doing so when theyve only run one balanced budget in the last 40 freakin years? Even though it was 40 years of relative peace and great prosperity!

When Americans are productive, they will quickly have the means to pay back the US federal debt accumulated.

Americans are the most productive they have EVER BEEN, and we are on the tail end of one of the most prosperous periods in American history.

Lets run some hypothetical numbers. Lets say that the US could put together a string of modest 50 billion dollar budget surpluses. They would need to run that surplus for TWO HUNDRED AND EIGHTY YEARS to pay down the debt.

Lets really make a stretch here... and assume that even with the massive unfunded liabilities over the next few decades (rebuilding everything, aging population, etc), that the US could run a string of 300 billion dollar suprluses. They would STILL need to do that for 40 consecutive years.

And once again... these is an entity that has only 1 balanced budget in the last 40 years, and even THAT only happened because of a massive tech boom.

Its almost mathematically impossible for the US to pay off that debt without massively devaluating its own currency. Its definately "practically" impossible.

Edited October 28, 2010 by dre

[August1991]

Percentage of GDP is not even relevant and I dont know why they track it.

GDP measures the production of a country. The US federal government can tax that production. Hence, it makes sense to measure the debt/GDP ratio.

People lend to Hydro-Quebec at very low rates because Hydro-Quebec has a solid revenue stream. They lend to the US federal government at even lower rates because it has a more solid revenue stream.

The US federal government has the power to take as much money as it wants from people like Warren Buffet, Steven Spielberg, James Cameron, Bill Gates and so on. If Americans don't pay their taxes, they go to prison. That's why US federal government bonds have the lowest interest rates on the planet.

Edited October 28, 2010 by August1991

[dre]

GDP measures the production of a country. The US federal government can tax that production. Hence, it makes sense to measure the debt/GDP ratio.

People lend to Hydro-Quebec at very low rates because Hydro-Quebec has a solid revenue stream. They lend to the US federal government at even lower rates because it has a more solid revenue stream.

The US federal government has the power to take as much money as it wants from people like Warren Buffet, Steven Spielberg, James Cameron, Bill Gates and so on. If Americans don't pay their taxes, they go to prison. That's why US federal government bonds have the lowest interest rates on the planet.

GDP measures the production of a country. The US federal government can tax that production. Hence, it makes sense to measure the debt/GDP ratio.

The federal government can only tax that revenue if the political environment is favorable to that. Theres only a loose correlation between government revenue and GDP.

It makes way more sense to look at what the government is ACTUALLY ABLE TO COLLECT. And even THAT isnt constrained enough... because the money they are able collect is already being spent on stuff... only a small portion can be used for debt maintenance.

BTW... I changed that post a lot while you were replying... sorry. Please re-read

The US federal government has the power to take as much money as it wants from people like Warren Buffet, Steven Spielberg, James Cameron, Bill Gates and so on.

That kind of talk reminds me about a harbor... with some tea in it

They CANNOT take "as much money as they want". Its possible in theory but not practice. If they take too much the economy will contract. And if they even mention the words "tax hike" theyll be turfed out of office on their asses.

[August1991]

The federal government can only tax that revenue if the political environment is favorable to that. Theres only a loose correlation between government revenue and GDP.

It makes way more sense to look at what the government is ACTUALLY ABLE TO COLLECT.

...

That kind of talk reminds me about a harbor... with some tea in it

The US has had a stable State for almost 250 years. The IRS is now arguably the most important and credible government institution. Americans know that if they don't pay their taxes, they will go to prison.

----

But dre, this is not the point of my OP. I agree that the US federal government should not be spending money. (This propensity to spend is exacerbated by the US federal government's ease in borrowing - given its secure revenue stream.)

In general, I am against government spending. But many Americans are afraid right now, they are reticent to take chances, and so they are not trading/dealing with one another.

If the US federal government can overcome this fear - even by borrowing - then it would be a good thing. Once Americans get back to work, trust one another, the debt will easily be repaid. But if Americans stay in this funk, then the cost will be great and it may last for years.

Bush Jnr put $700 billion of borrowed money in with TARP in 2008 as did Obama in 2009 with his $750 billion stimulus package. IMV, America could use another dose.

And lastly BTW, I think Buffet, Spielberg, Cameron and Gates all vote Democrat.

Edited October 28, 2010 by August1991