reminded me of a thought in this post:
From Robdar:
freydo, I sent your link to my fiance, an economics professor. He told me I could share his response, so here it is:
Interesting article. I agree with Bernanke to some extent. High interest rates are in nobody's interest right now. Nevertheless worrying about deficit over the next year or two is not the way to get out of a recession, either. Bernanke has already monetized much of this deficit by pumping trillions of dollars into the money supply through loans that he feels it unnecessary to disclose to either the U.S. public or even the public's elected representatives. I like Bernanke (and think he has the coolest beard in Washington) but he is engaged in a misdirect right now. The article does not clearly distinguish between short- and long-run, although it is implicit in the subtext. Essentially what Bernanke wants and I agree with him, is a plan to implement a process to bring future tax revenues and government expenditures more into line. I agree, that is the appropriate policy when the economy is expected to escape recession's gravity and be able to maintain loft and propel itself on its own, with more or less balanced government budgets -- very Keynesian (by the way, thanks so much for the Hayek Keynes rap, very enojoyable). So in the short-run, Bernanke is signalling continued Fed support for deficits. But in the long-run, he is essentially saying, you're on your own boys, you might want to think of some "revenue enhancers" (i.e., tax increases) or budget cuts . Now let's look at where the budget could be cut. Well the standard estimate is that defense spending is 20% to 30% of the budget. When you add in Department of Energy nuclear research, veterans' health cost (abysmally underfunded), veterans pensions, etc. you're talking about 50% of the budget. There's a lot to cut there, but seriously, nobody believes that's going to happen. That leaves 50% of the budget to play with and much of that is entitlement spending (medicaid, social security, medicaire, etc.) Medicaid and medicare are the ticking budget time bombs. Demographically either medical costs are going to have to grow as a share of GDP (even assuming that per unit cost of delivery does not rise) OR our children's generation is going to say screw you, we aren't going to pay (in which case the quality of care will decline even further). No politicial wants to touch these facts, however. Old people cost more to take care of! Social security is a false crisis. Costs are estimated to rise from around 4% of GDP to 6% of GDP which is a shitload of money, to be sure, but is less than the variance of the interest on the national debt during the 1980s. These costs also make overly pessimistic assumptions about future economic growth. There are many ways to close the gap produced by negative expectations (removing the $100,000 something ceiling on income subject to the payroll tax with correspondingly actuarially fair adjustments to those people's benefits is one of my favorites -- closes the gap to 97% not the 70% republicans are so fond of citing). In the end it all boils down to a division of output between current workers and current retirees. This is quintessentially a political decision. I could talk hours about social security, though. On the revenue side, I really don't see a problem with increasing taxes once the economy has escaped the recession. Many people assume that the pie does not grow or that fiscal responsibility might make the pie grow larger. It can! I would rather have my taxes go up 10% if that meant my income went up 15% over the same period -- I'm still better off. Fiscal responsibility, does not however, mean balancing the budget on the backs of the working class, working poor, or simply destitute. This country can afford higher taxes. We will all have more income if balanced budgets produce lower interest rates than would be expected with large deficits. We are, next to Japan , the most undertaxed industrial country on the planet. Bernanke is right to try to push Congress toward balancing the budget -- in the near future (or at least significantly reducing projected deficits). But Americans need to get over their phobia about taxes and he has said nothing about that. What he also has said nothing about is how he plans to suck out the huge injection of money he has made into the economy. In the short-run it was necessary but in the long-run it is inflationary. Now the problem is not higher nominal interest rates because 4%6% inflation would not produce higher real interest rates. [2% rates at 0% inflation = 8% rates at 6% inflation] but there is a problem with inflation. Inflation distorts price signals and tends to discourage risk while introducing uncertainty. In the long-run Bernanke will have to suck the money he pumped in out of the economy and he has given no indication of how he is going to do this. So yeah, we're being warned that we are being led to the sea. There are solutions to the problem but nobody has the cajones to implement them. My advice: Buy a life jacket or better yet a small boat. Republicans, including Rep. Spencer Bachus of Alabama, the top Republican on the banking committee, have argued that the government is now effectively guaranteeing Fannie and Freddie's nearly $5 trillion of mortgage-backed securities and other debt, so their revenues and liabilities should be included in the federal budget as obligations of the government. Taking this step would greatly bloat the federal balance sheet. This is a strange combination, revenues and libabilities, the first is from the income statement and the second from the balance sheet. That is certainly an inappropriate mixture. We should compare revenues with expenses and liabilities with assets. But then I suppose that wouldn't have made the point quite as well.
