The deficit hawks will undoubtedly find much to hype in the latest long-term projections from the Congressional Budget Office (CBO). After all, they move forward by a year to 2030 the date of the Social Security trust fund's depletion. That should be worth a quick war dance down at the Peter G. Peterson Foundation, but there are a few items worth noting for more serious folks.

Some folks might think that a newspapers job is to convey information to its readers: not the Washington Post. At least when it comes to budget reporting the Post firmly believes in the frat boy ritual of throwing out really big numbers that will be almost meaningless to virtually all of its readers.

It gave us one such ritualistic piece on Saturday that discussed new budget projections from the Office of Management and Budget (OMB). Among other things the piece told readers:

"The White House said Friday that the federal budget deficit will fall to $583 billion this year, the smallest deficit of President Obama’s tenure and the first to dip below $600 billion since the Great Recession took hold in 2008. ...

"The White House predicts that the nation’s finances will deteriorate markedly over the next decade, with deficits rising nearly $600 billion above previous projections. ...

"When Obama took office in 2009, the economy was in free fall and the budget deficit was soaring toward $1.4 trillion, the first of four consecutive trillion-dollar deficits that drove the national debt to the highest level as a percentage of the economy since the end of World War II. ...

"Democrats hailed Friday’s White House deficit forecast, which came on the same day as a Treasury Department announcement that the government recorded a surplus of $71 billion for the month of June. ....

"Republicans, meanwhile, noted that the long-term outlook remains gloomy, with the national debt forecast to rise to more than $25 trillion by 2024 if Obama’s policies are enacted.

"On Friday, the debt stood at $17.6 trillion."

Feel well informed? The amazing part of this story is that the reporter did not even herself have to wade through the long arduous process of dividing the numbers by GDP to make them somewhat meaningful to readers. This information was actually contained in the blogpost by OMB director Brian Deese to which the piece links.

She could have told readers that the new projections show a deficit of 3.4 percent of GDP for fiscal 2014, which is projected to fall to 3.0 percent of GDP in 2015. The size of the deficit is projected to continue to fall, hitting 2.1 percent of GDP in 2024.

While the Post piece implies that the debt situation is bad news ("remains gloomy) by just giving dollar numbers without any context, in fact it is projected to edge down slightly. The ratio of total debt (including money owed to the Social Security trust fund) to GDP is currently just over 100 percent. The latest OMB numbers project the debt to GDP ratio falls to 94.1 percent of GDP in 2024. In short, for deficit hawks the reality is the opposite of what the Post article asserts.

In addition to its frat boy use of numbers, it is also worth elaborating slightly on the pieces reference to "painful but historic spending cuts." The budget cuts were painful to millions of people who were denied work since the government was reducing demand in a badly depressed economy, therefore leaving more people without jobs. They were also painful to tens of millions of workers who were unable to secure a share of the gains from economic growth in higher wages because the weak labor market left them with little bargaining power.

The cuts probably were not painful to most business owners or highly paid professionals. The former have seen profits hit a record share of GDP, likely in part due to the fact that wages are low. The latter have benefited from being able to hire cheap help, since workers have few choices in a labor market that has been kept weak by budget cuts.

Addendum:

It is worth noting that the burden of the debt is measured by the amount of debt service, not the size of the debt. The latest OMB reports a net interest burden in 2024 of 3.0 percent of GDP. This is slightly less than its early 1990s levels. Thanks to Robert Salzberg for reminding me about this point.

 

Note: Type corrected, thanks to Rodrigo.

Dean Baker
Truthout, July 14, 2014

Dean Baker
Truthout, July 13, 2014

Brazilians may have little love for Germany following Brazil’s historic World Cup loss to the German team Tuesday, but the two countries do have something in common: both have notably been targeted for espionage by the U.S. Yesterday, U.S.-German relations suffered a new blow after Germany announced it was kicking out the CIA station chief over revelations that an employee of the German defense ministry may have passed secrets to the U.S. government. Just last week a member of Germany’s intelligence service was arrested, accused of selling information to the CIA. These scandals follow disclosures made available by Edward Snowden last year of NSA spying on Germans, including German Chancellor Angela Merkel. Snowden has also revealed extensive political and economic spying by the NSA on Brazil.

The Washington Post reported yesterday:

“The representative of the U.S. intelligence services at the Embassy of the United States of America has been requested to leave Germany,” government spokesman Steffen Seibert said in a statement Thursday.

…

Seibert said the request for the CIA official’s departure was made “against the backdrop of the ongoing investigations of the Federal Prosecutor General as well as the questions pending for months about the activities of the US intelligence services in Germany, for which the Lower House of Parliament has also established a parliamentary inquiry committee.”

German officials have also been angered by the revelations of former National Security Agency contractor Edward Snowden of widespread U.S. surveillance in Germany. Among the targets was Chancellor Angela Merkel’s cellphone, an operation that has since been halted.

Germany is a key partner for U.S. intelligence, and Germany’s allegations and response are no doubt being taken very seriously by both the Obama administration and the media. While the administration clearly hopes it can downplay the scandal -- and while the CIA chooses to Tweet about its robotic fish rather than publicly address the incident (h/t Jonathan Schwarz) -- officials have underscored the gravity of Germany’s response in anonymous comments to press.  The AP reported:

Paul Krugman took off the gloves in his column today. He said that much of the opposition to the Fed's low interest rate policy stems from the narrow interest of very rich people who earn lots of interest on their money. While we hear arguments, often from prominent economists, that low interest rates and other expansionary policies from the Fed risk hyper-inflation and other evil things, these arguments have repeatedly been disproven by the evidence. Krugman argues that the reason the argument against low interest rates continually reappears in different forms is the money that the 0.01 percent have at stake in protecting their interest income.

On its face this is a plausible story. Certainly the very rich have been especially prominent in making and backing absurd arguments that hyperinflation is just around the corner, or even already here, but we just can't see it  because the government is hiding it.

While we are on the topic of interests determining views on monetary policy, let's take a step over to a different, but arguably more important issue: dollar policy. The key point here is that the value of the dollar is the main determinant of the trade deficit. The basic point is simple. When the dollar is highly valued in terms of foreign currency (i.e. it takes a lot of euros, yen, or yuan to buy a dollar) our goods and services become more expensive relative to the goods and services produced by other countries. This means we will import lots of items from other countries, because they are cheap to us, and they will buy few of our exports, because they are expensive to them. In other words, we will have a large trade deficit. 

That is a big deal, especially now that even respectable economic types recognize the problem of secular stagnation. If we have a trade deficit of $500 billion (@ 3 percent of GDP), which we do, this is demand that we are generating in other countries rather than here. We have no simple mechanism for replacing this demand.

July 2014, Dean Baker and David Rosnick

Once upon a time, the U.S. government ran a very tight ship at the Organization of American States (OAS), a multilateral institution created by Washington at the start of the Cold War.  Though the OAS’  1948 Charter calls on its members to uphold democrac

Driven by the strong bull market in stocks and facilitated by low interest rates, private equity firms have been heeding the advice of Apollo Global Management head Leon Black to sell everything that isn’t nailed down. It was slow going for PE exits in 20

While Haitian President Michel Martelly has unilaterally scheduled long-delayed elections for October 26, 2014, the composition of the electoral council continues to cause controversy in Haiti. The current problems stem from the deeply flawed electoral process in 2010 that saw Martelly emerge victorious after the intervention of the international community. There have yet to be elections since then, with one-third of the 30 member Senate having their terms expire in 2011 while some 130 local mayors have been replaced by Martelly appointments. Another one-third of the Senate and the entire lower house will see their terms expire in January 2015 if elections are not held. In a “frequently asked questions” document released last week, the Institute for Justice and Democracy in Haiti (IJDH) provides a legal analysis of the reasons behind the delays and why the current electoral council is unconstitutional. In an accompanying press release, IJDH notes:

According to Mario Joseph, managing lawyer for the Bureau des Avocats Internationaux, “Prompt elections are much needed, but elections will only remedy Haiti’s political crisis if they are run fairly by a constitutionally-mandated electoral council. President Michel Martelly has delayed elections for three years because he does not want to lose the political control he has enjoyed without full parliamentary oversight.”

Joseph explains that “The current Provisional Electoral Council (CEP) put into place by President Martelly per the El Rancho Accord is unconstitutional.” The El Rancho Accord, which rules the government’s plan for elections, has not been approved by Parliament and the procedure for selecting a CEP conflicts with the Haitian Constitution. The CEP only has seven of the required nine members due to these legitimacy concerns. Parliamentarians and political opposition call the El Rancho Accord a political coup d’état.

Despite the problems associated with the “El Rancho Accord,” the international community has been supportive of the process. After praising the accord in March, the U.N. issued a statement in early May, co-signed with the “Friends of Haiti” grouping of countries, warning “that certain important decisions to advance toward the holding of the elections have yet to be made.” Days later Martelly announced the formation of the electoral council, unilaterally. In early June, the date of October 26 was announced by the government, even though the electoral body is tasked with scheduling elections. Last week, after meeting with Martelly, the Secretary General of the OAS committed “to back the holding of free and fair elections, in a process planned for October.” The OAS also said they would send an electoral observation mission.

Remember when Treasury Secretary Hank Paulson, Fed Chair Ben Bernanke, and Timothy Geithner, then President of the N.Y. Fed, were running around yelling that the world was about to end? Yeah, that was back in the fall of 2008 when Lehman went under and this trio demanded that Congress immediately cough up $700 billion to bail out the banks or the economy would collapse.

Neil Irwin has an interesting piece in the NYT noting how high prices for a wide variety of assets have driven returns down to historical low levels. He notes that this is a predictable outcome, and in fact an intended result, of the low interest rate policy being pursued by the Fed and other central banks.

The idea is that high asset prices make it cheap for firms to borrow to finance new investment. They also make it easier to buy a home and allow many people who had higher interest rate mortgages to refinance into lower cost ones, thereby freeing up money for other types of consumption. There is also a wealth effect whereby higher stock and house prices will translate into increased consumption. Through these channels central banks hope to provide some boost to growth.

However the flip side of this policy is that investors can anticipate lower returns on their savings, unless they want to hold exceptionally risky assets. This is the idea of there being a savings glut, or as Irwin suggests today, a shortage of adequate investment opportunities.

The idea of a savings glut is not new, Ben Bernanke first mentioned it back in 2004 when he was a member of the Board of Governors. However the implications were not fully drawn out by Bernanke at the time or by Irwin in today's piece. A savings glut implies an economy that is not producing at its capacity.

To cut through the nonsense, savings in an economic sense means not spending. From the standpoint of the economy, it is just as much savings if you put $1,000 in the stock market, a checking account in your bank, stuff it under your mattress, or burn it in your fireplace. Anything that does not involve the purchase of a newly produced good or service means saving. Saying that we have a saving glut means we have an economy that does not generate enough demand to keep the economy at full employment. This is of course the story of secular stagnation that folks like Larry Summers have recently discovered and the problem that some of us pre-mature secular stagnationists have raised for years.    

The idea that the economy could be subject to an ongoing problem of inadequate demand used to be grounds for eviction from the realm of serious economists. But anyone who is willing to look at the evidence with a straight face really can't escape this conclusion.