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Some Modest Good News About the Government’s Deficit

January 14, 2013 Leave a comment

The data is now available measuring the federal government’s deficit for the last calendar year. Here are the numbers for the last two years.

Calendar Year 2011: $1.25 Trillion

Calendar Year 2012: $1.06 Trillion

Source: Financial Management Service (www.fms.treas.gov)

The data actually reveals an approximate 15 percent reduction in the deficit for 2012. Are we now going to hear politicians tell us that the deficit is no longer a problem?

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A Trillion Dollar Coin

January 10, 2013 Leave a comment

A new economics story making the rounds of blogs and even coming up at a White House press conference is the idea that the government could mint a trillion dollar platinum coin, thus circumventing the need to engage in any contentious debt ceiling negotiations. Indeed, this is such a hot topic that I was confronted with this possibility by the guys at the gym where I exercise (these guys know I am an economist and so I get to answer every economics question that occurs to them).  Here is the answer that I gave them.

We operate what is known as a fiat money monetary system. The coin and currency which we all use and carry around in our pockets is money because the government says that it is money. The value of the goods and services bought by a piece of paper currency is much greater than the cost of producing that piece of paper.

The coin-printing story seems to have originated on some left-wing blogs (see this New York Times article) where the originator(s) came up with the bright idea that printing a coin eliminates the need to argue over the debt ceiling. The fact that a government can print money to cover a government deficit is not news to economists (it is well known to economists that it has been done by governments in the past). But my reaction to these bloggers is that they probably do not realize that if the U.S. were to do this, two things would now be true.

One is that the U.S. would be making a public statement that it has now degraded itself to the status of a banana republic where the government prints money because it cannot or will not raise tax revenue to pay for its spending.

Second, if the government were to do this (and there seems to be no serious chance that it will), the U.S. will experience an enormous inflation in the prices of all goods and services produced in its economy. In fact, to continually print money would ultimately lead to a hyperinflation (defined to be an enormously hight inflation rate) and, eventually, people would no longer use money for economic transactions. People would revert to barter. This would generate a staggering loss of economic welfare.

My guess is that the bloggers who came up with what they thought was a bright and clever idea have no clue about the damage that could be done to the U.S. if their idea were actually the policy of the U.S. government. Fortunately, even the politicians in this country seem to know that we should not be printing money to cover government deficits. At least I hope they know.

The Fiscal Cliff and Reality

January 4, 2013 1 comment

The recently-completed budget deal was yet another exercise in delusion. The President claimed to be asking for additional tax revenue of $1.6 Trillion. Sounds like a big number doesn’t it? Well that is the revenue over a ten year period so it is useful to ask how $160 Billion per year stacks up against our monthly budget deficit. The comparison is startling.

Below you will find some deficit numbers obtained from the Financial Management Service, a bureau of the Treasury Department (www.fms.treasury.gov).  These numbers are remarkable.

Fiscal Year 2011                                              Fiscal Year 2012

October 2010: $98.5 Billion                       October 2011: $120 Billion

November 2010: $137.3 Billion                 November 2011: $172.1 Billion

The federal government operates on a fiscal year that begins in October, ending in September of the next year. So in the data above, we are looking at the first two months of the last two fiscal years. For the entire 2011 fiscal year, the deficit totaled $1.1 Trillion. Notice first how large the deficit is in each month. More startling is the fact that the deficit is accelerating in size. If the first two months of the 2012 fiscal year are translated into annual totals, the annual deficit would be $1.75 Trillion! And this acceleration should be expected to continue as Obamacare is implemented and more baby boomers collect Social Security and are covered by Medicare. These numbers make clear how serious the situation has become. No economist can predict the future but it seems safe to say that the government’s fiscal problems are staggering in size and unsustainable.

President Obama’s $1.6 Trillion demand for additional revenue is obviously trivial. The government’s deficit dwarfs any additional tax increases brought in by the latest budget deal. The debt ceiling discussion will reveal if there is any hope of avoiding a debt crisis. My guess is that the denial of reality will continue. I hope I am wrong.

Minimum Wages to Rise in 2013

January 3, 2013 3 comments

There are reports in the news media that minimum wages, a type of price control, will rise in a number of U.S. states in 2013 (here is a link to one such article). This is yet another example of the destruction of economic lives by governments. There is a substantial body of evidence compiled by labor economists that minimum wages create unemployment beyond what would otherwise occur. This is a classic “winners and losers” scenario as there will be workers earning higher incomes as a result of the policy but those losing their jobs will also not acquire the human capital (knowledge) that they could use to improve their economic prospects in the future. Yes, the reason for minimum wages is the desire to help those at the low end of the income scale (although not everybody favors minimum wages for this reason). But as they say, the road to hell is paved with good intentions. There are other ways to improve the prospects of low-wage earners that do not require the creation of more unemployment. For example, a negative income tax would do the job (government gives money to individuals below some level) or the government’s subsidies for education can be viewed as an attempt to raise incomes.

The minimum wage is also an example of a market intervention by economic illiterates. As I have argued elsewhere on this blog, many people practice economics without a license. When this happens, there are always unintended consequences and, sadly, young people at the low end of the wage scale will experience these unintended consequences caused by minimum wages.

 

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