It’s a Bit Early for This, but . . . BOO!

With Halloween approaching, John McCain has unveiled yet another way to incite fear in his crowds: a possible Democratic House, Senate, and Presidency! Beeeee Scaaaaared. . . And truly, this vision pushes the wingnut’s fright button almost as much as an all gay Marine Corps or man-cow marriages. “Senator Obama is measuring the drapes.” Pappy McCracky intoned yesterday in Virginia, “and planning with Speaker Pelosi and Senator Reid to raise taxes [and] increase spending . . .” His crowd groaned in reply as if they’d been physically assaulted by a husky Hilary Clinton costumed trick or treater.

Well, as we always say here, they will say anything, and kudos to them, since among the dependable triggers in wingnut nation, Democrats in control of two of the three branches may just bring out those undecided wingnuts in the remaining battlegrounds like Ohio, Florida, and North Carolina. These are the Republicans (and right wing Dems) who were pitched the Palin gambit, far right loons who’d really rather stay at home than vote for the John McCain they’ve always viewed as soft on many of their issues. So, it’s a savvy choice on the McCain campaign’s behalf – if a losing bet – to pursue them. They may make the difference in some states.

Yes Boo ?

But what about the underlying message, that Democrats would revert to their stereotype as taxers and spenders? If recent history is any guide, it’s actually the Republican Congress and Presidency that fits the stereotype. Since Reagan, we’ve witnessed a period of Republican Presidential profligacy that gives the lie to their claims of fiscal responsibility. Look at the graph below. Under Reagan, the national debt literally skyrocketed, then fell during the Clinton years, only to rise again to a 50 year high under Dubya. Yes, Reagan had a split Congress (a GOP Senate from 1981 to 1987 and a Democratic House), but it actually provided less funding than Reagan requested in his budgets. Note too that in modern times the national debt has been higher before now, but that was during WWII. At other times of conflict you’ll notice a trend upwards as well (see Korean, Vietnam, and, less obviously, the Persian Gulf war years).


What Dubya did to balloon the national debt was right out of the Reagan era’s supply side book, lower taxes on the wealthy, which, contrary to supply side “voodoo” economics, leads to reduced federal tax revenue. Simultaneously, like Reagan, Dubya increased spending by increasing the deficit and debt financing (that’s where China got all those Treasury bonds and political leverage). This debt financing made it possible, in effect, to move much spending “off budget” and hide it “in plain sight” from the average American.

No Boo ?

Republicans once screamed like banshees about this kind of deficit spending, but suddenly, as Dick Cheney put it to then Treasury Secretary Paul O’Neill in 2002. they maintain that “Reagan proved that deficits don’t matter.” So much for fiscal prudence. Surely too, this is not a GOP phenomenon. Whatever happened to the fiscally conservative Democrats like Sam Nunn? They do exist, in the Blue Dogs, for example, but the intense national debate about deficits of the late 1980’s (remember H. Ross Perot’s pie charts?) largely disappeared under Dubya.

One of the explanations offered by these new believers in the debts-don’t-matter crowd is that the deficit, and the national debt itself, is unalarming as a percentage of Gross Domestic Product (GDP), i.e. the value of all the goods and services produced in the U.S. in a year. Under Dubya, for example, the national debt has doubled to nearly $11 Trillion, and that represents a move from about 57% to 72% of GDP in eight years. Keep that in mind, and that a healthy portion of this debt is held in foreign hands, particularly by China and Japan.

Now, how does the U.S. pay the interest on its national debt? Through tax revenue. So, another way to view the national debt is in terms of the necessary interest payments as a percentage of the actual on-the-books U.S. budget. In those terms, with a nearly $3 Trillion budget, the Treasury has paid approximately $450 Billion in interest payments on the national debt in FY 2008. That’s 15% of the budget. With military spending ($650 Billion) and Health & Human Services spending (primarily Medicare, so-called “welfare,” etc.) at $750 Billion there’s another $1.4 Trillion. Total these three items and you have $1.850 Trillion, or approximately 60% of the entire budget.

So how bad, really, is all this? After all, a household can manage a 15% interest expense charge per year. Yet, what happens when that household’s income drops due to a layoff or illness? The interest payments don’t get suspended, and many families face bankruptcy. On a national level, this analogy does not hold, since the U.S., unlike the average family, has a handy printing press with plenty of paper and ink to print $.

True Boo ?

When the nation is mired in a recession, as it is now, a few things happen that cause the national debt and deficit situation to worsen. Both the GDP and tax revenues fall as business revenue plummets, personal income drops, and capital gains dry up due to losses in the equity markets. Yet the debt remains, and, in fact, grows. It grows in real terms since in times of recession the government provides fiscal stimulus through further deficit spending, and issues more federal securities to fund its needs. Thus is created that “perfect storm” where the size of the national debt and the deficit grows in real terms and as a percentage of GDP since GDP declines. But still, we’ve been through recessions before, and we’ve recovered rather smartly. So how is this different?

What follows in the present fiscal “perfect storm” may cause us real problems unlike those we’ve faced in the past. Firstly, the national debt figures cited above do not include the final costs of the Rescue/Bail Out which likely will cost a trillion dollars or more. (Whether the government/taxpayer ever recovers any value for these investments remains well in the future.) So, for the foreseeable future the U.S. will be borrowing heavily to fund various bail outs and fiscal stimuli. Also, extending the present scope of the bail out plan to non-financial corporations to encourage mergers, etc. is being considered.

In any event, this coming week, the Treasury is set to sell some $160 Billion in securities into a market that is already quite saturated with our paper. And this sale is only one of many. What happens when we offer securities in a Treasury-crowded market, where buyers are both scarce and nervous? The price for those securities goes down, and when the price drops for an interest bearing security, the interest paid by the seller (us) goes up. This in turn has a double effect, both negative: it causes a rise in interest payments just as, in a recession, our tax revenue is falling, and it causes a rise in interest rates just when, in a recession, we need interest rates to decline. Boo, indeed.

Boo Hoo ?

So, John McCain’s latest attempt to shepherd the far right vote of both parties to his side rests on an untenable and simply untrue assumption about federal deficits and debt. It’s been primarily the Republican party that has ballooned those deficits, not the Dems. On one point he is right, though, it would make a truly frightening Halloween movie (at least for economists who do not get out much), but it’s one his own party has scripted, directed, produced, and starred in.

With all the unresolved banking and financial industry issues that we face, and the consequently huge financing needs of the U.S., it is difficult to foresee anything less than a Dubya recession that we will all remember. Whether in the end it is labeled the Dubya Depression remains a suckers bet, so drastic are the possibilities and so uncharted are the waters. Regardless of the ultimate title of these tough times, we will see radical changes in how we – individually and as a nation – view debt in the future. The fear now is that we will push our creditors too far, and thus see interest rates soar, and our fiat dollar thus “debased.” Should that occur our recession will be deep and long, and our Uncle Sam may, indeed, lose his shirt, and pants, and nearly all else.

But, let’s remember, it’s always a bad bet to go all in against the dollar and against the United States. We have the full attention of the financial markets and have a developing bail out plan that improves each day, and we have finally brought the other major financial powers at least partly on board. These are very good signs, and despite the fact that our national debt and deficit will soar in the years ahead, the world will likely give us the breathing room we need to once again recover

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