Larry Kudlow is the most dangerous conservative economic pundit. He is one of he prime architects of the “phrase tax cuts pay for themselves.” Obviously, he has never bothered to examine these tables from the Congressional Budget Office – especially table 3 which clearly prove tax cuts decrease revenue. Never let the facts get in the way of a fiscal agenda that has racked up nearly 5 trillion in debt in 17 of the last 25 years. (By the way Larry – it took 200 years to get to the first trillion. Way to over-achieve). Now he is arguing that the increased debt load from hurricane Katrina relief is “no big deal”.
First, here is a link to Larry’s editorial.
In this new spending environment, total U.S. debt held in public hands will rise a little more quickly to the $4 trillion mark. But that’s a small fraction of our nation’s wealth. The Federal Reserve recently indicated that total family net wealth — which includes the value of our nation’s businesses, bonds, stocks, and real estate — just hit an all-time high of $50 trillion. This illustrates the firepower of the free nation and economy that the radical Islamic fundamentalists desire to overthrow.
Here Larry makes a classic Republican argument that is wrong. He only uses the debt held by the public to calculate the national debt. Here’s the problem with using only that figure: there is a second category of debt called intra-governmental debt. According to the General Accounting Office:
Intragovernmental Debt Holdings represent federal debt issued by Treasury and held by certain federal government accounts, such as the Social Security and Medicare trust funds.
Intragovernmental debt holdings represent balances of Treasury securities held by federal government accounts, primarily federal trust funds, that typically have an obligation to invest their excess annual receipts over disbursements in federal securities. Most federal trust funds invest in special U.S. Treasury securities that are guaranteed for principal and interest by the full faith and credit of the U.S. government. These securities are nonmarketable; however, they represent a priority call on future budgetary resources.
…debt held by the public and intragovernmental debt holdings are very different. Debt held by the public approximates the federal government’s competition with other sectors in the credit markets. Federal borrowing absorbs resources available for private investment and may put upward pressure on interest rates. In addition, interest on debt held by the public is paid in cash and represents a burden on current taxpayers. It reflects the amount the government pays to its outside creditors.
In contrast, intragovernmental debt holdings perform an accounting function but typically do not require cash payments from the current budget or represent a burden on the current economy. In addition, from the perspective of the budget as a whole, interest payments to federal government accounts by the Treasury are entirely offset by the income received by such accounts-in effect, one part of the government pays the interest and another part receives it. This intragovernmental debt and the interest on it represents a claim on future resources and hence a burden on future taxpayers and the future economy. However, these intragovernmental debt holdings do not fully reflect the government’s total future commitment to trust fund financed programs. They primarily represent the cumulative cash surpluses of those trust funds and also reflect future priority claims on the U.S. Treasury. They do not have the current economic effects of borrowing from the public and do not currently compete with the private sector for available funds in the credit markets. However, when trust funds redeem Treasury securities to obtain cash to fund expenditures, and Treasury borrows from the public to finance these redemptions, there is competition with the private sector and thus an effect on the economy.
Notice some key words from the GAO. Intra-governmental holdings are represented by special issue government securities. These are guaranteed by the “full faith and credit of the US government.” They are non-marketable (they can’t be sold) – but they have a priority claim. This simply means they jump to the front of the line when new revenues come into the federal treasury to get paid-off.
Here’s the somewhat over-simplified translation. Intra-governmental debt is essentially an IOU. Suppose the VA is running short of funds and Social Security has a surplus. SS sells its surplus to the Treasury for a special issue IOU. The cash from the transaction goes to the VA. The IOU has a priority claim on future government revenues. In other words, it is still a debt that must be paid. Because these holdings are debt instruments, they are entirely relevant to a discussion of national debt.
Now, according to the Bureau of Public Debt total public and intra-governmental debt holdings are 7.9 trillion. Notice how this figure is nearly twice the 4 trillion Larry quoted in the article? Isn’t that amazingly convenient he finds a lower figure to quote to make his master look good.
Larry continues:
In this new spending environment, total U.S. debt held in public hands will rise a little more quickly to the $4 trillion mark. But that’s a small fraction of our nation’s wealth. The Federal Reserve recently indicated that total family net wealth — which includes the value of our nation’s businesses, bonds, stocks, and real estate — just hit an all-time high of $50 trillion. This illustrates the firepower of the free nation and economy that the radical Islamic fundamentalists desire to overthrow.
Bankers often talk about debt-to-equity ratios when it comes to financing corporate deals. Well, our federal-debt-to-national-wealth ratio is a paltry 8 percent — a metric that would make any M&A specialist gleeful. Of all the commentary I’ve seen about the so-called fiscal crisis of hurricane-recovery spending, only Nick Danger of the RedState blog has had the sense to argue the issue like a banker. Global financing markets will underwrite new U.S. spending without a drop of perspiration.
Isn’t this wonderful? The national debt/equity ratio is a paltry 8%? Hell, let’s keep that wonderful federal credit card going! Borrow and squander our future!!!!!!
Here, once again, Larry is involved in the big smoke screen. The standard metric used to determine the size of the national debt is debt/GDP ratio, not the national debt/equity ratio. According to the CIA factbook, the US’ 2004 estimated GDP was 11.75 trillion. That makes the 8 trillion total debt (pre-Katrina spending) 68% of the total US GDP. This is the measurement every other economist uses. However, Larry decides to drive off the range and make the rules up as he goes along.
I just watch Sin City again and was again totally amazed by the movie. There is a scene in the movie when the politician is talking to Bruce Willis while Willis is in the hospital. The politician says something to this effect: “I deal in lies. And when you get people to believe the lie, you have them by the balls.” This is the central problem with right-wing talking head economic pundits. They make up all sorts of ways to justify their party’s policies.
Larry has of course conveniently overlooked the standard economic measure of national debt because it doesn’t look good for Bush’s policies. Larry has conveniently overlooked warnings from current Fed chief Greenspan, ex-fed chief Volcker and the International Monetary Fund about the US’ reckless spending habits, fiscal and international trade balance situation. Instead, Larry has decided it is better to go along with Bush instead of standing up and saying this is a situation that cannot continue without some serious economic pain. I would say I feel sorry for him. But I don’t. He is in a position to tell the truth – however damn ugly it really is – to help the country fix the problem instead of denying it exists. Funny how many religious people overlook the lying commandment.