Coyote Blog

The extent to which the media is aiding and abetting, with absolutely no skepticism, the sky-is-falling sequester reaction of pro-big-government forces is just sickening.  I have never seen so many absurd numbers published so credulously by so much of the media.  Reporters who are often completely unwilling to accept any complaints from corporations as valid when it comes to over-taxation or over-regulation are willing to print their sequester complaints without a whiff of challenge.  Case in point, from here in AZ.  This is a "news" article in our main Phoenix paper:

Arizona stands to lose nearly 49,200 jobs and as much as $4.9 billion in gross state product this year if deep automatic spending cuts go into effect Friday, and the bulk of the jobs and lost production would be carved from the defense industry.

Virtually all programs, training and building projects at the state’s military bases would be downgraded, weakening the armed forces’ defense capabilities, according to military spokesmen.

“It’s devastating and it’s outrageous and it’s shameful,” U.S. Sen. John McCain told about 200 people during a recent town-hall meeting in Phoenix.

“It’s disgraceful, and it’s going to happen. And it’s going to harm Arizona’s economy dramatically,” McCain said.

Estimates vary on the precise number of jobs at stake in Arizona, but there’s wide agreement that more than a year of political posturing on sequestration in Washington will leave deep economic ruts in Arizona.

Not a single person who is skeptical of these estimates is quoted in the entirety of the article.  The entire incremental cut of the sequester in discretionary spending this year is, from page 11 of the most recent CBO report, about $35 billion (larger numbers you may have seen around 70-80 billion include dollars that were going away anyway, sequester or not, which just shows the corruption of this process and the reporting on it.)

Dividing this up based on GDP, about 1/18th of this cut would apply to Arizona, giving AZ a cut in Federal spending of around $2 billion.  It takes a heroic multiplier to get from that to  $4.9 billion in GDP loss.  Its amazing to me that Republicans assume multipliers less than 1 for all government spending, except for defense (and sports stadiums) which magically take on multipliers of 2+.

Update:  I wrote the following letter to the Editor today:

I was amazed that in Paul Giblin’s February 26 article on looming sequester cuts [“Arizona Defense Industry, Bases Would Bear Brunt Of Spending Cuts”], he was able to write 38 paragraphs and yet could not find space to hear from a single person exercising even a shred of skepticism about these doom and gloom forecasts.

The sequester rhetoric that Giblin credulously parrots is part of a game that has been played for decades, with government agencies and large corporations that supply them swearing that even trivial cuts will devastate the economy.  They reinforce this sky-is-falling message by threatening to cut all the most, rather than least, visible and important tasks and programs in order to scare the public into reversing the cuts.  The ugliness of this process is made worse by the hypocrisy of Republicans, who suddenly become hard core Keynesians when it comes to spending on military.

It is a corrupt, yet predictable, game, and it is disappointing to see the ArizonaRepublic playing along so eagerly.

I had an argument about the (economic) stimulative effect of war the other night.  As usual, I was not entirely happy with how I argued my point in real time (which is why I blog).  Here is an attempt at an improved, brief answer:

One of the reasons that people often believe that war "improves" the economy is that they are looking at the wrong metrics.  They look at unemployment and observe that it falls.  They look at capacity utilization and observe that it rises.  They look at GDP and see that it rises.

But these are the wrong metrics.  What we care about is if people are better off: Can they buy the things they want?  Are they wealthier?

These outcomes are hard to measure, so we use unemployment and GDP and capacity utilization as proxies for people's economic well-being.  And in most times, these metrics are reasonably correlated with well-being.  That is because in a free economy individuals and their choices guide the flow of resources, which are dedicated to improving what people consider to be their own well-being.  More resources, more well-being.

But in war time, all this gets changed.  Government intervenes with a very heavy hand to shift a vast amount of the resources from satisfying people's well-being to blowing other people up.  Now, I need to take an aside on well-being in this context.  Certainly it is possible that I am better off poor in a world with no Nazis than rich in one dominated by Nazis.  But I am going to leave war aims out of the concept of well-being.  This is appropriate, because when people argue that war stimulates the economy, they are talking purely about economic activity and benefits, and so will I.

What we find is that in war time, unemployment is down, but in part because young people have been drafted (a form of servitude) to fight and die.  Are they better off so employed?  Those who are left find themselves with jobs in factories with admittedly high capacity utilization, but building things that make no one better off (and many people worse off).  GDP skyrockets as government goes deeply in debt to pay for bombs and rockets and tanks.  This debt builds nothing for the future -- future generations are left with debt and no wealth to show for it, like taking out a mortgage to buy a house and then having the house burn down uninsured.  This is no more economically useful than borrowing money and then burning it.  In fact, burning it would have been better, economically, as each dollar we borrowed in WWII had a "multiplier" effect in that it destroyed another dollar of European or Asian civilian infrastructure.

Sure, during WWII, everyone in the US had a job, but with war-time restrictions and rationing, these employed people couldn't buy anything.  Forget the metrics - in their daily lives Americans lived poorer, giving up driving and even basic staples.  This was the same condition Soviet citizens found themselves facing in the 1970s -- they all had jobs, but they could not find anything to buy.  Do we consider them to have been well off?

There is one way to prosper from war, but it is a terrible zero-sum game -- making money from other people's wars.  The US prospered in 1915 and later 1941 as Britain and France sunk into bankruptcy and despair, sending us the last of their wealth in exchange for material that might help them hang on to their existence.  Ditto in 1946, when having bombed Japanese and German infrastructure into the stone age. we provided many of the goods to help rebuild them.  But is this really the way we want to prosper?  And is this sort of vulture-like prosperity even possible with our inter-woven global supply chains?  For example, I can't see a China-Japan war being particularly stimulative for anybody nowadays.

Note:  I am not an expert on the Fed or the operation of the money supply.  Let me know if I am missing something fundamental below

Kevin Drum dredges up this chart from somewhere to supposedly demonstrate that only a little bit of spending cuts are needed to achieve fiscal stability.

Likely the numbers in this chart are a total crock - spending cuts over 10 years are never as large as the government forecasts and tax increases, particularly on the rich, seldom yield as much revenue as expected.

But leave those concerns aside.  What about the Fed?  The debt as a percent of GDP shown for 2012 in this chart is around 72%.  Though it is not labelled as such, this means that this chart is showing public, rather than total, government debt.  The difference is the amount of debt held by federal agencies.  Of late, this amount has been increasing rapidly as the Fed buys Federal debt with printed money.  Currently the total debt as a percent of GDP is something like 101%.

The Left likes to use the public debt number, both because it is lower and because it has been rising more slowly than total debt (due to the unprecedented growth of the Fed's balance sheet the last several years).  But if one insists on making 10-year forecasts of public debt rather than total debt, then one must also forecast Fed actions as part of the mix.

Specifically, the Fed almost certainly will have to start selling some of the debt on its books to the public when the economy starts to recover.  That, at least, is the theory as I understand it: when interest rates can't be lowered further, the Fed can apply further stimulus via quantitative easing, the expansion of the money supply achieved by buying US debt with printed money.  But the flip side of that theory is that when the economy starts to heat up, that debt has to be sold again, sopping up the excess money supply to avoid inflation.  In effect, this will increase the public debt relative to the total debt.

It is pretty clear that the authors of this chart have not assumed any selling of debt from the Fed balance sheet.  The Fed holds about $2 trillion in assets more than it held before the financial crisis, so that selling these into a recovery would increase the public debt as a percent of GDP by 12 points.  In fact, I don't know how they get the red line dropping like it does unless they assume the current QE goes on forever, ie that the FED continues to sop up a half trillion dollars or so of debt every year and takes it out of public hands.

This is incredibly unrealistic.  While a recovery will likely be the one thing that tends to slow the rise of total debt, it may well force the Fed to dump a lot of its balance sheet (and certainly end QE), leading to a rise in public debt.

Here is my prediction:  This is the last year that the Left will insist that public debt is the right number to look at (as opposed to total debt).  With a reversal in QE, as well as the reversal in Social Security cash flow, public debt will soon be rising faster than total debt, and the Left will begin to assure us that total debt rather than public debt is the right number to look at.

I have already written that the supposed European austerity (e.g. in the UK) is no such thing, and "austerity" in these cases is being used to describe what is merely a slowing in spending growth.

Apparently the same Newspeak is being applied to spending cuts in the US.  How else  can one match this data:

With these words from President Obama (my emphasis added)

"If we're going to raise revenues that are sufficient to balance with the very tough cuts that we've already made and the further reforms in entitlements that I’m prepared to make, then we’re going to have to see the rates on the top two percent go up"

Seriously?  The only small reductions in the budget were because some supposedly one-time expenses (like TARP bailouts, war costs, and stimulus spending) were not repeated.  Allowing one-time costs to be, uh, one-time does not constitute "tough cuts."

Tough cuts are when we knock government spending back down to 19-20 percent of GDP.  Clinton level spending in exchange for Clinton tax rates.   That's my proposed deal.

I know what you are thinking -- in this post title Coyote has engaged in some exaggeration to get our attention.  But I haven't!  Felix Salmon actually says this, in reaction to a group of CEO's who wrote an open letter to the feds seeking less deficit spending.

There are lots of serious threats out there to the economic well-being and security of the United States, and the national debt is simply not one of them.  Nor is it growing. The chart on the right, from Rex Nutting, shows what’s actually going on: total US debt to GDP was rising alarmingly until the crisis, but it has been falling impressively since then. In fact, this is the first time in over half a century that US debt to GDP has been going down rather than up.

So when the CEOs talk about “our growing debt”, what they mean is just the debt owed by the Federal government. And when the Federal government borrows money, that doesn’t even come close to making up for the fact that the CEOs themselves are not borrowing money.

Money is cheaper now than it has been in living memory: the markets are telling corporate America that they are more than willing to fund investments at unbelievably low rates. And yet the CEOs are saying no. That’s a serious threat to the economic well-being of the United States: it’s companies are refusing to invest for the future, even when the markets are begging them to.

Instead, the CEOs come out and start criticizing the Federal government for stepping in and filling the gap. If it wasn’t for the Federal deficit, the debt-to-GDP chart would be declining even more precipitously, and the economy would be a disaster. Deleveraging is a painful process, and the Federal government is — rightly — easing that pain right now. And this is the gratitude it gets in return!

I seldom do this, but let's take this apart paragraph by paragraph:

There are lots of serious threats out there to the economic well-being and security of the United States, and the national debt is simply not one of them.  Nor is it growing. The chart on the right, from Rex Nutting, shows what’s actually going on: total US debt to GDP was rising alarmingly until the crisis, but it has been falling impressively since then. In fact, this is the first time in over half a century that US debt to GDP has been going down rather than up. 

So when the CEOs talk about “our growing debt”, what they mean is just the debt owed by the Federal government.

Duh.  Of course they are talking about the government deficit and not total deficit.   But he is setting up the game he is going to play throughout the piece, switching back and forth between government debt and total debt like a magician moving a pea between two thimbles.  We can already see the game.  "Look folks debt is not a threat, it is going down", but it is going down only at this total public and private debt number.  The letter from the CEO's made the specific argument that rising government debt creates current and future issues (see: Europe).  Just because all debt may be going down does not mean that the rise of one subset of debt is not an issue.

Here are two analogies.  First, consider a neighborhood where most all the residents are paying down their credit card debt except for Fred, who is maxing out his credit cards and has just taken out a third mortgage.  The total debt for your whole neighborhood is going down, but that does not mean that Fred is not in serious trouble.

Or on a larger scale, take consumer debt.  Most categories of consumer debt are falling in the US.  But student debt is rising alarmingly.  Just because total consumer debt may be falling doesn't change the fact that rising student debt is a serious threat to the well-being of a subset of Americans.

And when the Federal government borrows money, that doesn’t even come close to making up for the fact that the CEOs themselves are not borrowing money

What??  Whoever said that the role of the Federal government is to offset changes in corporate borrowing?  In his first paragraph, he already called the rise in total debt "alarming", and I get the sense that both CEO's and consumers agree and so they have been trying to reduce their debts.  So why should the Feds be standing athwart the private unwinding of an "alarming" problem?    And how does he know CEO's and their corporations are part of this deleveraging?  I see no evidence presented.  Corporate debt is but a small part of total US debt.  Corporations may be a part of this, or not.

In fact, they are not.  Corporate borrowing in the securities market has increased almost every quarter since 2008, such that total corporate bond debt is about 10-15% higher than in 2008 (see third chart here).  And here is total debt to GDP broken down by component  (this is for non-financial sectors) source.

Government debt is basically offsetting the consumer deleveraging.  Since consumers have to eventually pay this government debt off, as they are taxpayers too, then the government is basically flipping consumers the bird, forcing them to take on debt they are trying to get rid of.  Hard working consumers think they are making progress paying off debt, but the joke is on them - the feds have taken the debt on for them, and the bill will be coming in future taxes for them and their kids.

He might argue, "this is Keynesianism."  But is it?  If corporations are actually deleveraging, we still don't know how.  Is it through diverting capital investment to debt repayment (as I think Salmon is assuming) or are they raising capital from other sources and rejiggering the right side of their balance sheets?  And even if this deleveraging is coming at the expense of corporate investment, I thought Keynesians virtually ignored investment or "I" in their calculations  (you remember, don't you, from macro: C+I+G+X-M?).  In fact, if I remember right, "I" is treated as an exogenous variable in the famous multiplier "proof".

Money is cheaper now than it has been in living memory: the markets are telling corporate America that they are more than willing to fund investments at unbelievably low rates. And yet the CEOs are saying no. That’s a serious threat to the economic well-being of the United States: it’s companies are refusing to invest for the future, even when the markets are begging them to.

This is the real howler -- that "markets" are sending a low-interest signal.  Markets are doing nothing of the sort.  The Federal Government, via the Fed, is sending this signal with near-zero overnight borrowing rates and $30-$40 billion a month in money printing that is used to buy up government debt from the market.  If any signal is being sent at all, it is that the Federal Government is main economic priority is continuing to prop up the balance sheet and profitability of major US banks.

Investment is also not solely driven by the price of funds.  There must be opportunities where businesses see returns that justify the spending.  Unlike the Federal government, which is A-OK blowing billions on companies like Solyndra, businesses don't invest for the sake of spending, they invest for returns.  A soft economy combined with enormous government driven uncertainties (e.g. what will be our costs to comply with Obamacare) are more likely to affect investment levels than changes in interest rates.

 Instead, the CEOs come out and start criticizing the Federal government for stepping in and filling the gap. If it wasn’t for the Federal deficit, the debt-to-GDP chart would be declining even more precipitously, and the economy would be a disaster. Deleveraging is a painful process, and the Federal government is — rightly — easing that pain right now. And this is the gratitude it gets in return!

This is where economic thinking has ended up in 2012:  To Salmon, it does not matter where the Federal government spends this money, so long as it is spent.  He never even tries to justify that the government is running up debt in a good cause, because what it spends money on does not matter to him.  For him, the worst possible thing for the economy is for people to spend their money paying down debt.  Spend it on more drone strikes or more Solyndras or more squirrel research -- it does not matter to Salmon as long as the money is used for anything other than to pay down debt.

Here is the bottom line:  Businesses and individuals are trying to reduce their debt.  And many hard-working people think they are being successful at this.  But the joke is on them.  The government is running up trillions in debt in their name, thwarting American's desire to de-leverage.  Mr. Salmon wants us to thank the government for this.  Hah.

All-in-all, this is an awful argument to try to justify Congressional and Presidential fecklessness vis a vis  the budget.

Greek Olympic venues.  I am sure that baseball field gets a lot of use.  And that state-of-the-art man-made kayaking course and associated stadium sure seem to be contributing a lot to GDP.

The whole world patted Greece on the back for completing this boondoggle when in fact we were just enabling an alcoholic, congratulating Greece for, in effect, driving home safely after drinking a fifth of tequila.

OK, to go along with the bad study in the last chart, I will offer up a terrible chart.  From Kevin Drum:

Drum uses this chart to hammer home the point that the current deficit is Bush's, rather than Obama's fault.  I have absolutely no problem with blaming Bush for all variety of stupid spending and handing him a share of the blame for the Federal debt.   Even using this bad chart (more in a moment), I think Obama gets a lot of the blame, though.  The highlighted bars don't really substantially move the debt until 2009 and after, on Obama's watch.   His complete lack of any effort to take on the rising debt, to pare back past spending programs (or wars, or whatever) has been unparalleled.  In fact, I think it is his absolute indifference to deficit spending and the debt levels that saddles him with a lot of the blame.

Anyway, back to the chart.  Notice that these are just a few of the many components of Federal spending, all of which are increasing in this period.  Picking out which ones "caused the debt" is not a neutral procedure.  Money is fungible.  One could just as easily substitute rising Medicare and Social Security costs (or education funding or transportation funding or government employee salaries) for any of the bars above and be just as correct.  Even if one wanted to just look at Bush actions, one would reasonably need to include the debt associated with the costs of Medicare part D, something left off this chart presumably because Drum supports that particular spending.    All this chart does is demonstrate the biases or preferences of the author, showing us which categories of spending the author most opposes (or which the author feels Obama can't be blamed for, like the down economy).

By the way, the chart's construction actually worse than this, because the chart is only "public debt" rather than total debt (for example debt bought in QE is no longer public debt).  If one looks at public debt, the total number should have crossed 100% some time in the last year, rather than the 70% or so in the chart.   So there are a lot of other things, presumably that the author likes, that are also causing total debt to rise.  But these are hidden, because presumably the Fed only buys debt created by the good spending, and the public buys all the debt created by the bad spending.

Finally, my suspicion is that some of these numbers are just plain wrong.  The chart implies Fannie, Freddie, and Tarp are only going to cause a total of 1% of GDP in debt, or about $160 billion.  That is WAY below the loss numbers that Fannie and Freddie have already acknowledged, with more to come.

According to the RIAA prosecutors owned by the RIAA, it is all Kim Dotcom's fault:

Meanwhile, Megaupload founder Kim Dotcom is free on bail, living in his rented home near Auckland and awaiting extradition proceedings to begin in August. Dotcom along with Finn Batato, Julius Bencko, Sven Echternach, Mathias Ortmann, Andrus Nomm and Bram Van Der Kolk are charged with criminal copyright infringement and money laundering.

The men -- along with two companies -- are accused of collecting advertising and subscription fees from users for faster download speeds of material stored on Megaupload. Prosecutors allege the website and its operators collected US$175 million in criminal proceeds, costing copyright holders more than $500 billion in damages to copyright holders.

$500 billion is about 3.5% of US GDP.

Mike Rizzo writes:

A typical sovereign government can secure funds from three “legitimate” places.*What are these sources?

1. Taxes today.
2. Taxes tomorrow. In other words we can borrow money today in order to build our bridge and then use future tax revenues to pay for the debt tomorrow. By the way, if the government is in the business of actually producing valuable “public goods” then you can easily think of this as value enhancing.
3. Printing money. It’s not generally done this way, but in effect the monetary authorities can monetize the borrowing of a sovereign entity (how they do it is beyond the scope of this post). For simplicity, imagine instead that a central bank prints new bank notes from scratch, hands them to the Treasury, and then the Treasury spends them on goods and services. This is just another form of a tax, again beyond the scope of this post.

So, this is what the government budget identity looks like for “normal” countries:

G = T + the change in debt + the change in base money

I think this is a useful simplification, but I wanted to add a couple other refinements  (refinements by the way he did not neglect in his text, just did not put in the formula).  One other source of funds we have seen in Greece is what I would call Aid, which used to be humanitarian aid (think India in the 1970s) but today tends to be bailout money and debt forgiveness.  So we will write the equation

G = Taxes + ΔDebt  + Money Printing + Aid

But due to the Keynesian orientation of many commenters on the Greek and European situation, it becomes useful to expand the "taxes" term into some sort of base income, which I will just call GDP for simplicity, and some sort of tax rate t.  So then we get:

G = GDP x t + ΔDebt  + Money Printing + Aid

The Greeks can't print money (unless the EU does it for them) and at the moment no one in their right mind will lend to them without guarantees from stronger European countries (e.g. Germany).  If we call EU money printing for Greece or EU loan guarantee programs Aid, we get

G = GDP x t + Aid

As Rizzo noted, aid is drying up and Greek tax revenues are going down rather than up, so basically they are screwed.  The only out seems to be for Greece to exit the Euro and then, once on the drachma again, print money like crazy and inflate their way out of the debt.

But expanding the tax term reveals one more policy alternative that is being suggested.   Keynesians seem to believe there is a path out of this situation in Greece (or if Greece is too far gone, certainly in Italy and Spain) where money from some source  (aid, borrowing, whatever) is spent in the economy by the government in some way that is stimulative, thus increasing GDP and therefore taxes and allowing Greece to increase the money available to the government.  Since Aid is currently only be granted tied to "austerity" programs rather than stimulative spending, they feel Germany et al are following exactly the wrong course.

I am incredibly skeptical of this for two reasons, beyond just my general skepticism of Keynesian stimulus.  First, I have heard something akin to this in my personal experience.  For a short time in my life, during the Internet crazy period, I was brought in by some investors to look at their portfolio of languishing Internet plays (e.g. discountshoelaces.com)* and decide if they should keep pouring money in or shut down.  The plan I got from management was always - always - this stimulus approach.  They suggested that rather than cut back, the investors should give them a bunch of new money to really blow out the marketing effort, which would kick start their growth, etc. etc.

The problem was that they never, ever had a lick of evidence beyond just hope that the next $1 million would suddenly do what the last $10 million failed to do.  So we shut most of these efforts down.  Your first loss is your best loss, as they say.

Similarly, I don't think Keynesians can point to any example in history where this actually worked.   A country is drowning in debt, but suddenly a Hail Mary play of adding a huge chunk more to the debt and spending it on civil service worker salaries suddenly turned the tide.  Seriously, do people honestly think this will work?  Or are they just frustrated because they grew up with an assumption that there is always a public policy answer for everything and there just does not seem to be one here.

I have an emerging hypothesis, not backed by any evidence at this point, that the value of the Keynesian multiplier shifts as debt to total GDP increases.  I am not sure in actual practice it is ever above one, but if it were to be above 1 at 20% debt to GDP, it certainly is not going to be the same at, say, 150%.

via here

The UK line is particularly interesting, since that is the country that Krugman has declared is austerity-izing itself into a depression. As I have pointed out before, real government spending in UK has been and is still rising.  The percent of GDP of this spending has fallen a bit, but there is nothing about Keynesian stimulus theory that says changes in the percentage of government spending is stimulative, only its absolute value.

Here is one thing I would love to here Krugman et. al. opine on -- at what percentage of government debt to GDP does additional deficit spending become counter-stimulative.   I imagine there is an inverse relationship for deficit-funded stimulus, such that it has a larger effect at lower debt levels with a zero to negative effect at higher interest levels.

Update:  From another source, here is the UK in real $

It is an open question how long this bailout will plug the dam.  I continue to maintain the position that Greece is going to have to be let out of the Euro. Pulling this Band-Aid off a millimeter at a time is delaying any possible recovery of the Greek economy, and really the European economy, indefinitely.  All to protect the solvency of a number of private banks (or perhaps more accurately, to protect the solvency of the counter-parties who wrote the CDO's on all that debt).

Anyway, the interesting part for me is that with this bailout, the total cumulative charity sent the Greek's way by other European countries now exceeds Greek GDP, by a lot.

I had thought the situation in Greece would eventually hammer home for everyone the perils of reckless enlargement of the state and deficit spending.  But apparently, it is not to be.  This is how Kevin Drum describes the core problem in Greece:

the austerity madness prompted by the 2008 financial collapse

So the problem is not a bankrupt state, but the "austerity" which by the way has at best carved only a trivial amount out of spending.  And it was triggered not by a ballooning deficit as a percent of GDP and an inability to meet interest and principle payments, but by the US financial crisis.

This is willful blindness of absolutely astounding proportions.  Which means the same folks are likely just rehearsing to ride the US right into the same hole.

US government debt now larger than the GDP.

Nice tax refund you have coming .... we think we'll keep it

The [Greek] government has decided to stop tax returns and other obligation payments to enterprises, salary workers and pensioners as it sees the budget deficit soaring to over 10 percent of gross domestic product for 2011.

For all the supposed austerity, the budget situation is worse in Greece.  Germany and other countries will soon have to accept they have poured tens of billions of euros down a rathole, and that they will have to do what they should have done over a year ago - let Greece move out of the Euro.

Government workers and pensioners simply will not accept any cuts without rioting in the street.  And the banks will all go under with a default on government debt.  And no one will pay any more taxes.  And Germany is not going to keep funding a 10% of GDP deficit.  The only way out seems to be to print money (to pay the debt) and devalue the currency (to effectively reduce fixed pensions and salaries).  And the only way to do all that is outside of the Euro.  From an economic standpoint, the inflation approach is probably not the best, but it is the politically easiest to implement.

Apparently European leaders are close to an agreement that countries cannot run budget deficits higher than 3% of GDP.  If you are left to wonder, "hey, didn't they already have that rule before" the answer is yes.  Everyone had to promise a really, really stern oath not to run higher deficits before joining in the Euro group.

Of course, these promises meant nothing as there was no penalty for breaking the promise, and so the EU is proposing a new enforcement mechanism

Governments whose debts exceeded three percent of their GDP would be cited by the European Court of Justice, after which a super-majority of 85 percent of European governments would have to agree to impose some sort of sanction against the offending country.

I am not clear if the 85% is of the whole EU  (which would require a vote of 23 of the 27 members) or of just the Euro zone (which would require 15 of the 17 countries that use the Euro as currency).  Either way, I disagree with Drum and can't see how there is any hope at all here.  I am left with a number of questions

• What is the likelihood that European countries will adopt this Constitutional provision and precedent for reduced sovereignty?  Don't treaty changes have to be unanimous?
• Even if ratified, does anyone imagine the penalties will be high?  Imagine Greece today if such penalties exist.  How much are they going to worry about fines when they are already bankrupt?  And what will be the optics of the EU adding new costs to countries that are in financial crisis?  If a country in the future is doing things to endanger the euro from too much debt, the last thing the EU is going to be able to do is add to that country's burdens -- in fact, it is doing the opposite now, sending huge checks to all these countries
• How are they every going to get the votes when this comes up?  Again, think about today.  Would Italy, Belgium, Spain, Ireland, etc. vote to sanction Greece, when they know they are next?

I just can't see this going anywhere.  And I would be surprised if the folks involved do either.  My guess is that they hope this will settle the bond markets so they can kick the can down the road.  Sure, we will have to deal with this all over again the first, inevitable time a country breaches the 3%, but that is later and right now they will accept a few years, even a few months, of survival.

You decide  (origins and data for chart here)

I am generally opposed to tax increases because they never seem be matched to spending cuts -- the tax increases are passed but Congress finds ways to gut the spending cuts.  But I would accept this proposal in a heartbeat:  Return to both Clinton era tax and spending levels.  There, that's my super committee proposal.   Taxes and spending both targeted at 19% of GDP.    Problem solved.

When it comes to high speed rail, the Left tends to have a Santa Clause mentality.   They want the rail, but refuse to even discuss its costs vs. benefits, as if it is going to be dropped in place by Santa Clause.

I have actually had pro-high-speed rail writers call me a dinosaur for taking a cost-benefit approach.  After a reasoned article on why our rail system, with its focus on freight, makes more sense than China and Europe's focus on high speed passenger rail, Joel Epstein wrote me that I should get out of the country more, as if I am some backwoods rube that would just swoon if I saw a nifty bullet train.  For the record, my actual experience on a high-speed rail train in Europe confirmed that it was a nice experience (I knew it would be) and that it was a financial mess, as my son and I were the only passengers in my car.  I would be all for HSR if Santa Clause dropped in down from the North Pole, but it costs a lot of real money.

How much money?  Well take the system in China that Friedman and Epstein and many others have begged the US to emulate:

The rail ministry that builds and operates the trains has an incredible 2.1 million employees, more than the number of civilians employed by the entire U.S. government. Moreover, the ministry is in debt to the tune of 2.1 trillion yuan ($326 billion), about 5 percent of the country’s GDP.

So, should our deficit today be considered a spending problem or a taxation problem?  Kevin Drum argued yesterday it is a tax problem, and used a historic chart of spending as a percent of GDP to make his point.

I have to thank him.  I would have normally been skeptical of such an analysis yielding much that was useful, but I was forced to do the analysis to correct some obvious data errors in Drum's chart.  Having done so, I found the exercise useful and it became the basis for my column this week at Forbes.  The short answer, its a spending problem.  For more, hit the link.

Update:  Make sure to see bottom of post, I have run the numbers from the source and the chart below is proven to be totally BS.

In an effort to paint the current budget deficit as a tax shortfall (ie we don't take enough of others people's money) rather than a spending problem, Kevin Drum offers this chart:

OK, I was going to talk about how they cherry-picked the start date (which is the peak of spending at that time since WWII) and the end date (the left off the ugly 2011).  But I just can't bring myself to talk about anything else except those trendlines.  Not sure what algorithm Drum uses to create the trendlines -- they seem suspicious but surely someone in the science-based, reality-based community would not just draw them on by eye!

It is just incredibly disingenuous (and ballsy) to try to portray 2009 and 2010, which represented the highest numbers since WWII, as a declining trend line falling faster than revenues.

Postscript: Here is the longer view, from here, with projections which I presume come from the Obama budget.  I think if I took 1950 as a start point I would get pretty different trend lines.

Update: Here is the data right from the Federal web site with Excel adding a linear trend.  Sure looks like Drum is wildly exaggerating.  Just as in Drum's chart, red is outlays as a percentage of GDP, blue is collections.

So lets look at the longer trend.  WWII was obviously an anomaly, so we will jump to 1950 to make sure we are well past it.  And we will go through 2012, because those projections are probably pretty good (though optimistic on the spending side).

Here is Drum's chart, with the longer trend and actual mathematically rather than politically calculated trend lines.

Hmmmm.  Revenue or spending problem.  You make the call.

Here is some analysis of these reports. A few things I found interesting

• I have always understood the "trust funds" for these programs were a crock, that we had spent the money in these funds years ago.  But the accounting fiction is important for a reason I did not know - when the trust fund is used up from an accounting standpoint  (vs. a cash standpoint, where it is not only already used up but never existed) in 2036 or whenever, statutory authority for spending is capped at annual tax collections, which at that point will be way, way below programmed spending levels.
• Medicare alone is projected to grow to 6% of GDP.  wow.
• The reality of Obamacare's promises of cost reductions is starting to appear, as already these supposed cost reductions are being discounted by folks who have accountability for getting the numbers right.

One thing to note -- Social Security actually has some shot at being repaired, because benefits are a fixed, predictable amount (as long as your actuarial tables are right).  Medicare and Medicaid are far harder, because the benefits are open ended, and every recent "fix" has tended to shift incentives to encourage rather than discourage more spending.  Note, for an example, the political pressure to eliminate the part D donut hole that actually is there to provide incentives to camp drug spending and prices.

From Dan Mitchell

Called a “debt failsafe trigger,” Obama’s scheme would automatically raise taxes if politicians spend too much. According to the talking points distributed by the White House, the automatic tax increase would take effect “if, by 2014, the projected ratio of debt-to-GDP is not stabilized and declining toward the end of the decade.”

Pretty good evidence that the default mentality in Washington is that "all your money are belong to us" and whatever is leftover that the government does not happen to spend, you are welcome to use for yourself.

From Slate.com via Carpe Diem:

"Maybe it is not the growth that is deficient. Maybe it is the yardstick that is deficient. MIT professor Erik Brynjolfsson explains the idea using the example of the music industry. "Because you and I stopped buying CDs, the music industry has shrunk, according to revenues and GDP. But we're not listening to less music. There's more music consumed than before." The improved choice and variety and availability of music must be worth something to us—even if it is not easy to put into numbers. "On paper, the way GDP is calculated, the music industry is disappearing, but in reality it's not disappearing. It is disappearing in revenue. It is not disappearing in terms of what you should care about, which is music."

As more of our lives are lived online, he wonders whether this might become a bigger problem. "If everybody focuses on the part of the economy that produces dollars, they would be increasingly missing what people actually consume and enjoy. The disconnect becomes bigger and bigger."

But providing an alternative measure of what we produce or consume based on the value people derive from Wikipedia or Pandora proves an extraordinary challenge—indeed, no economist has ever really done it.

Ditto Facebook, free flash games, ichat, etc.  I think the point is dead on, though I have no idea how to fix it.  Maybe as a value of the consumer's time?  If your time is worth $15 an hour, and you spend it on Facebook, then your benefit must have been at least $15?

Thinking about this, it strikes me that there is no GDP credit for leisure time, either.  There is almost nothing more valuable to me .  If everything in my life stays the same but I can use technology or other factors to restructure my time to get one extra hour of leisure, isn't that of huge value?  But there is no credit for it in GDP or earnings accounts.

The article discusses consumer surplus, which strikes me as the heart of the matter.  GDP and earnings metrics track what we pay, not how much value we receive.  If one hypothesizes that consumer surplus is rising as a percentage of purchase price, then we are missing a lot of wealth creation.

Last year, there were about 3.2 trillion passenger miles driven by urban drivers in cars in the US.  My point about light rail is that we can barely afford it for just a few people, given that we spent $1.3 billion to build a rail line for just 17,000 daily round trip riders in Phoenix.  If it were truly a sustainable technology, it could be applied to all commuters.  But at a national average taxpayer subsidy per light rail passenger mile of about $2**, this means that to roll light rail out to every urban commuter would cost $6.4 trillion a year in government spending, almost half our annual GDP.  If it required the subsidy rates we have in Phoenix per passenger-mile, such a system would cost over $12 trillion  year.  In fact, the numbers would likely be even higher in reality, because light rail in most cities is almost certainly built on the highest populated corridors with the most bang for the buck (though some of the diminishing returns would be offset by network effects).

Light rail only works today because we drain resources from millions of taxpayers to benefit just a few generally middle class commuters.    This is not a model that will scale.

** This includes both service on the debt, which is payment for the original construction costs, as well as annual operating losses.  This subsidy is required essentially forever.  After 20-30 years when the original bonds are paid off, by that time systems generally have to be rebuilt in their entirety   (as folks in places like Washington DC are learning).  There are probably only 5-6 cities in this country that have the urban population densities to make rail systems come even in the ballpark of working financially, and places like Phoenix, Seattle, Houston, Portland and LA are NOT among them.

Let me offer up a definition of sustainability that I think most environmentalists and progressives would accept:

We are acting in a sustainable manner if we are achieving our goals in a way that does not hamper the ability of other people in the world, or of future generations, to achieve their goals.

Most environmentalists and progressives would call light rail lines in US cities a "sustainable" technology because of its notional impact on fuel use and CO2 output (yeah, I know, but we are not going to address those assumptions today).

Let me present one fact, from Federal Transit Administration's 2009 survey of public transit authorities, whose data is linked in various ways here.  Or you can download the summary spreadsheet here.  For all US light rail systems in total:

User fares paid per passenger-mile:           $0.18

Total cost per passenger-mile:                     $2.22

Taxpayer subsidy per passenger-mile:       $2.04

Since I live in Phoenix and the Phoenix light rail system seems to get particular praise as a "success" from light rail supporters, here are the Phoenix light rail numbers;

User fares paid per passenger-mile:          $0.07

Total cost per passenger-mile:                     $3.89

Taxpayer subsidy per passenger-mile:       $3.82

So there, folks, is your sustainable technology.  As I have written before about sustainability, "I do not think that word means what you think it means."

Nationwide, non-users of light rail pay for 92% of its costs.   In Phoenix, non-users pay for 98% of the costs.  Taking the Phoenix system as an example, resources are drained from literally millions of people so that 17,000 or so people can ride it round trip each day.   Using resources from millions of people, and building up debts that will last into the next generation, to support the transit of just a few people, seems to be the antithesis of sustainability.

If there is any common denominator among progressives, it is that they have little respect for how individuals spend their money.  So they might be unmoved by the loss of resources from so many.  So lets just look narrowly at transit, which I presume the do care about.

Before Valley Metro operated a light rail system in Phoenix, they also operated a bus transit system.  This system still requires a subsidy, but it is much lower than the light rail subsidy.  In 2009, the bus subsidy was $0.74 per passenger-mile.  This means that for the same amount of taxpayer funds, Valley Metro can provide 1.0 passenger-mile by train or 5.2 by bus ($3.82/$0.74).   I can guarantee that cities building light rail are not having their budgets quintupled.  So the result is that, as light rail gets built, total transit ridership falls in most cities as rail costs crowd out existing bus services.

Update: Most light rail articles in our local papers, which have been mindless boosters of the system, generally consist of asking riders if they like the system, who inevitably answer "yes!"  This is somehow a proof the system is great.  Well, duh.  I too am likely to be happy with a service where I only pay 2% of the costs.

Update #2:  Last year, there were about 3.2 trillion passenger miles driven by urban drivers in cars in the US.  My point about light rail is that we can barely afford it for just a few people, given that we spent $1.3 billion to build a rail line for about 17,000 daily round trip riders in Phoenix.  If it were truly a sustainable technology, it could be applied to all commuters.  But at a national average taxpayer subsidy per light rail passenger mile of about $2, this means that to roll light rail out to everyone would cost $6.4 trillion a year, almost half our annual GDP.  If it required the subsidy rates we have in Phoenix per passenger-mile, such a system would cost over $12 trillion  year.  In fact, the numbers would likely be even higher in reality, because light rail in most cities is almost certainly built on the highest populated corridors with the most bang for the buck (though some of the diminishing returns would be offset by network effects).

I love maps like this one, and a year or two ago I linked an earlier version.  This one is from the Economist via Carpe Diem, and shows the name of the country whose GDP is similar in size to that of the state.

I have to criticize the map-maker, though.  They used Thailand at least four times on this map -- the original version managed to do it without repeats.  But I am amazed that Arizona ranks right there with Thailand.  This is not to diss the rest of the state, which has a lot going for it, but in terms of population and economic activity, a huge percentage in in just one city, Phoenix.

I do have to wonder whether New Mexico being matched up with "Angola" is really very flattering, and pairing Mississippi with Bangladesh is funny on a couple of levels.