Just how dangerous are stimulus-driven deficits in the long run?
Economist J. Brad DeLong, for example, recently raked a journalist over the coals for suggesting deficits might cause long-term harm to the economy. Accusing the journalist of "not doing the arithmetic," the economics professor at the University of California, Berkeley launched into a questionable string of assumptions to reach the dubious conclusion that massive federal borrowing will add a mere $5 per year to every taxpayers' future tax burden.
DeLong, a former U.S. Treasury official in the Clinton Administration, assumes $80 billion in new taxes collected for every $160 billion spent in stimulus -- a claim wildly unsupported by recent data, which shows tax revenues collapsing at both the state and federal level, even as the federal government spent hundreds of billions of dollars in stimulus.
Others who have done their arithmetic, such as investment advisor Mish Shedlock, have concluded that each job saved/created (the data is a bit fuzzy on the difference between the two) cost taxpayers $323,739.83. Here are the numbers: Stimulus funds paid out so far = $83.8 billion + $52.1 billion + $71.4 billion = $207.3 billion. So, you get $207,300,000,000 / 640,329 (number of jobs created) = $323,739.83 per job created. (These statistics were drawn from Recovery.gov.)
DeLong is flat-out wrong on many other counts. He touts the fact that the U.S. Treasury can borrow at low rates -- "The Treasury can now borrow through its TIPS program for 20 years at an interest rate of 2 percent plus inflation" -- blithely assuming inflation will stay missing in action for the next two decades.
What happens if inflation rises to historically average rates such as 8 percent? Then the Treasury will be paying 10 percent interest -- far from DeLong's implicit assumption that inflation will stay near-zero for an entire generation.
DeLong appears not to have done his math on just how much the federal deficit costs us now, never mind if inflation does rise at some point in the future. According to the federal government's own website for tracking interest payments, Treasury Direct, the interest this year will certainly exceed $400 billion -- a staggering figure which DeLong purposefully trivializes with his absurd contention that hundreds of billions in federal borrowing to fund stimulus will only result in $5 more a year in additional taxes for each U.S. citizen.
About half the government-owned debt is owed to the Social Security Trust Fund -- what is called intergovernmental debt. But the interest on the so-called "external debt" owed to other owners of federal bonds is estimated to be $260 billion in fiscal 2009 -- a sum larger than the combined budgets of the entire alphabet soup of federal agencies below Defense, Social Security and Medicare/Medicaid: Education, Veterans Administration, Housing and Urban Development, Energy, Interior, Justice, Agriculture, Interior and so on.
Those claiming "deficits don't matter" should have to answer this question: what else could be done with that $260 billion paid in interest every year? That's over $1 trillion every four years.
DeLong is also being less-than-honest about the makeup of federal debt. Relatively modest sums of those trillions of dollars are in the long-term TIPs he heralds; much is short-term debt which must be rolled over every few years. Indeed, foreign buyers of U.S. T-bills have recently shown a preference for short-term bonds -- they would rather not take a chance that inflation will remain near-zero for decades to come.
If interest rates rise -- which they must if buyers decide not to buy T-bills paying absurdly low rates of return -- then the interest paid on Federal debt could jump within a relatively short period of time. DeLong and other stimulus proponents conveniently ignore the risks or probabilities of this occurring.
Even worse (if that's possible), backers of trillion-dollar stimulus spending plans ignore the de facto nationalization of Freddie Mac and Fannie Mae (FNM), which hold $5 trillion or roughly half of all the mortgages in the nation. The losses incurred by these two mortgage giants could run into the hundreds of billions -- money which will come out of future borrowing or the taxpayers' hides.
Total federal debt exceeds $10 trillion, roughly comparable to the $11 trillion in total household debt (mortgages and consumer debt). Federal debt actually rose by over $1 trillion in 2008 alone. With tax revenues plummeting far below rosy estimates and stimulus spending adding to ever-larger federal spending on defense and Medicare, $1 trillion might be added to the federal debt every year for years to come.
Perhaps the most pernicious aspect of all this governmental borrow-and-spend, which DeLong and others applaud as necessary and cost-effective, is that it draws no distinction between necessary commercial lending and lending which goes to speculative bubble-blowing.
In a classic financial panic, risks that were downplayed or ignored raise their ugly heads, and lenders limit credit to those with the lowest-risk profiles who are willing to pay substantial rates of interest for the use of the money. In severe crises, then lending simply dries up and commercial enterprise grinds to a halt. This was the precipice that the Federal Reserve and Treasury feared we were approaching in late 2008.
Global and domestic business need short-term credit to operate. This has been the case since the 1500s, when merchants borrowed money to fund long and risky voyages to the Indies and Asia and bought insurance against the loss of the ships. But this commercial lending is entirely different from the mortgage market or long-term lending, and it is also different from the sort of speculative lending which funds gambles in the stock market and highly leveraged bets in other markets.
But the Fed and Treasury have not made much distinction between fostering easy credit and lending for commercial purposes and pure speculation, and apparently neither do the economists who believe that the answer to all our economic problems is more federal borrowing and spending, more nationalization of risk and bad debt, and more easy credit for whatever purposes the borrower might pursue -- including leveraged risky bets with what is essentially taxpayers' money.
Indeed, those who see the $8,000 tax credit for new home buyers as more beneficial stimulus seem blind to the fact that the program has engendered massive fraud and abuse and may well be propping up a housing market which by all accounts was an epic bubble.
Should future taxpayers be paying essentially forever to prop up housing prices now -- a campaign which may well fail in any event?
Should our children be paying hundreds of billions of dollars in interest to create jobs at $223,000 a pop now (let's be generous and knock $100,000 off the $323,000 per job as currently calculated) via stimulus programs, which will require adding another $1 trillion to the national debt every year if taxes don't fill the gap?
Sorry, Mr. DeLong -- those additional costs won't add a mere fiver to each taxpayers' future burdens. Perhaps you should sharpen your pencil and deal with reality rather than fantasy.
Charles Hugh Smith writes the Of Two Minds blogand is the author of numerous books, most recently Survival+: Structuring Prosperity for Yourself and the Nation.