In a daze this morning I heard NPR and an interview with Judd Gregg talking about the deficit commission and the processes it went through. He was quite pleasant in his tone and seemed earnest in his desire to be part of something that was going to set our country on a new sustainable path. He talked about needed tax increases, in the form of eliminating certain tax write offs, and needed spending cuts. All this was a bipartisan effort to address our "exploding" fiscal budget and avoid a currency collapse a few years down the road but if everyone on the panel had some of Judd Greggs misconceptions we are in trouble.
The first area where Mr Gregg was a little confused was when he talked about how govt spending was increasing as a % of GDP in the last couple years. He seemed to be arguing that this was a result of too much govt spending.
Now, whenever someone throws out ratios like that its sometimes helpful to write them down and look at it. When govt spending is at X and GDP is at Y we have an identity of X/Y to represent govt spending as a portion to GDP.
In 2008, before the downturn lets just say it was 3 trill/ 10 trill, which is 30%. This is actually pretty consistent with govt spending as % of GDP since about the 1930s.
http://www.usgovernmentspending.com/...
But heres the interesting thing. If you simply drop the lower number in half and keep the upper number the same, nominally, your ratio doubles. I know this is simple math for most all of us here but apparently Mr Gregg and his commission cannot figure this out. Our GDP tanked in late 2008 and continued falling for nine straight quarters I believe. Even if govt spending had stayed at the exact same level the ratios would have "exploded" as they say. I think we had a few quarters of negative GDP..... contraction. That would have put the ratio at infinity I believe. Would the answer have been at that time to shut down the govt and stop spending because our ratios are incalculable? So Mr Gregg seems convinced that to improve the ratio we must reduce the top number, ignoring the fact that it was a cratering of the bottom number which exploded the ratio. This is not an uncommon misconception......................... unfortunately. Does Mr Gregg and his friends not realize that the top number actually contributes to the bottom number? That govt spending IS GDP enhancing? So reducing the top number actually exacerbates the fall of the bottom number and you begin to get nowhere......... very fast. The answer to solving this ratio problem is clear, raise the GDP. The truth, in addition, is that the GDP cannot be raised with a decrease in the govts spending level because spending drives GDP, from any source.
Spending EQUALS income and income is the flow we spend from.
http://bilbo.economicoutlook.net/...
Another thing is the discussion of debt to GDP ratios. Again there are some serious flaws with this analysis.
Our debt is a stock of accumulated bond savings. These have accumulated over decades and bonds have been created to save this money and pay interest on it. These are the exact same thing as a savings account at your bank, except they are with the Fed or the Treasury. The debt to GDP ratio is presented as IF our debt is paid for out of our GDP. Can anyone see the problem with this assumption? If that were true, were there reduced payments and in some cases NO payments during the great contraction of 2008-2010? No, of course not. The payments for the stock of debt do not come out of the flow of GDP. Never have, never will. They are completely detached from each other so any effort to link them in a ratio is specious. Is a banks ability to pay the interest they pay on your savings account related to the number of loans they make in a week? No. If thinking about the debt to GDP as I've talked about here doesnt make sense yet let me try a couple of analogies. Think of the debt as the miles of highway we've built in the US and GDP as the miles that US drivers drive each year. As our driving goes down due to gas prices or whatever, will it someday be necessary to eliminate some roads? Thats an absurd proposition on its face which demonstrates the lack of linkage between the two.
Another point Gregg addressed was Social Securtiy and again, he couldnt have gotten it more wrong. I do give him props for not referring to it as a ponzi scheme, he correctly called it insurance, but he still missed some basics about insurance. He made the claim that raising the level of salary which is exempt form SS taxes would be bad because those at the upper end would never get back what they put in. He said this is supposed to be like insurance where you get back what you put in. Does anyone there know how insurance works? It is categorically false that everyone gets back what they put in with insurance. In fact the only way insurance companies make any money is for that NOT to be true. If everyone got back what THEY put in, there would not be profits left over for insurers to make. We would all be self insuring essentially. In fact many dont get close to what they put in but they participate because they cannot possibly self fund the disaster they are insuring against. How can he so misrepresent what insurance is? Here's the thing though, via SS it all depends on how long you collect, how many are working and the rate of inflation at the time you are collecting as to whether or not you get back what you put in. This is much more likely to be the case with a growing economy, increasing GDP and low unemployment. Judging the solvency (totally in appropriate word regarding SS) of SS in current times is foolish. Now I dont agree with raising the salary exemption but for entirely different reasons, mainly because its not NECESSARY to collect a single penny from anyone for the govt to provide a retirement safety net. We must get necessities and choices straight. We must understand how our monetary system operates or we will be forever falling for terrible analysis by people have agendas.