Five Mainstream Economists Sound A Warning

Tea Party Economist

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The Wall Street Journal ran an article the likes of which I have never seen. “The Magnitude of the Mess We’re In.” It was written by five well-known economists. It warns readers about a series of highly destructive outcomes of the federal government’s present fiscal policies. The article says that these problems are close to being unmanageable.

The first economist involved is George Schulze. He taught at the University of Chicago and MIT. He served as the Secretary of the Treasury under Nixon and Secretary of State under Reagan. He served as the Head of the Office of Management and Budget under Nixon, and also Secretary of Labor under Nixon. I can think of no other economist with comparable experience at the highest level. He is an insider’s insider. He is 92 years old – a true elder statesman

The second economist is Michael Boskin. He teaches at the Hoover Institution. He used to teach at Stanford. He was the head of the Council of Economic Advisers under the first Bush. Then there was John F. Cogan of Hoover and Stanford. Then there was Allan Meltzer, who is the most respected historian of the Federal Reserve System. Finally, there was Stanford’s John Taylor, of “Taylor rule” fame, one of the most respected academic economists in the USA.


The problem with this article is it is na‹ve. It is Pollyanna to the core. It begins with the on-budget deficit: a mere $1.2 trillion a year. The on-budget deficit is peripheral to the real federal deficit, which reflects the unfunded liabilities of the federal government, primarily in Social Security, Medicare, and Medicaid. This deficit dwarfs the on-budget deficit. It is rising at $11 trillion a year.

This deficit has a present value of $222 trillion. This means that the federal government, today, must invest $222 trillion in market investments that will return about 5% per year for the next 75 years. No such investments exist, and the federal government does not have $222 trillion in reserve. The Federal Reserve system could print that, of course, but then that would only lead to hyperinflation.

In other words, by starting with the on-budget deficit, the five economists low-balled the problem. This makes look as though the problem can be dealt with by Congress. It cannot, except by one technique, namely, default. They mention unfunded liabilities only briefly, and they offer no numbers.

Nevertheless, in a na‹ve sort of way, the five economists do point out that present politics makes it virtually impossible for the on-budget deficit not to escalate, and if it does, it is going to lead to a series of inevitable disasters. The five economists go into the details about these disasters, and it is a good thing that somebody bothered to do this.

The article began with a good question: “Where are we now?” Answer: a lot worse off than the article says.

It asks this question: “Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion?” I do. You do. Who doesn’t?

They list the deficits: $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 in 2012. “The four-year increase in borrowing amounts to $55,000 per U.S. household.”

Recall that the unfunded liability’s present value grew by $11 trillion over the past 12 months. So, the article low-balls the magnitude of the mess we are in.

The Treasury must raise $4 trillion this year to pay the interest on the on-budget debt. They warn: “. . . the debt burden will explode when interest rates go up.” Quite true.

The government cannot tax upper-income people. The top 1% pay 37% of the incomes taxes. (That is because they make most of the income, which the authors do not mention.)

Did you know that, during the last fiscal year, around three-quarters of the deficit was financed by the Federal Reserve? Foreign governments accounted for most of the rest, as American citizens’ and institutions’ purchases and sales netted to about zero. The Fed now owns one in six dollars of the national debt, the largest percentage of GDP in history, larger than even at the end of World War II.

This is true. But this means that the Treasury will get back most of the $4 trillion it pays as interest. The FED repays most of this at the end of the year. This is an accounting device.

Conclusion: “By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended economic consequences.” This is true. It lies at the heart of the mess we are in.

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