WEBVTT NOTE The Debt Bomb 1 00:00:00.000 --> 00:00:05.700 There's one of the current news magazine shows on TV 2 00:00:05.700 --> 00:00:11.100 that plays a game each week that they call Timeline. 3 00:00:11.100 --> 00:00:16.400 They tell you the events that happened a particular year and you guess the year. 4 00:00:16.400 --> 00:00:21.800 So I thought maybe we'd start out by playing a round of that this afternoon. 5 00:00:21.800 --> 00:00:26.100 And given that it's associated with the talk on the debt bomb, 6 00:00:26.100 --> 00:00:29.600 you might be able to guess the year from there. 7 00:00:29.600 --> 00:00:33.840 But hold your guesses until I've given the clues, 8 00:00:33.840 --> 00:00:38.480 after which point I assume everybody will know the right answer. 9 00:00:38.480 --> 00:00:42.040 The year I have in mind was the year that General Motors 10 00:00:42.040 --> 00:00:46.280 introduced a new luxury car, personal size luxury car, they called it 11 00:00:46.280 --> 00:00:49.400 the Monte Carlo. It was the year 12 00:00:49.400 --> 00:00:53.680 that Dwight Eisenhower passed away. 13 00:00:53.680 --> 00:00:56.960 It was the year that the Vice Presidency passed 14 00:00:56.960 --> 00:01:08.320 from Hubert Humphrey to Spiro Agnew, and it was the year of the first landing on the moon. 15 00:01:08.320 --> 00:01:14.520 Now, does everybody know what that year was? 1969, which turns out, of course, not only 16 00:01:14.520 --> 00:01:21.400 to be the year of the first landing on the moon, but also the last year in which we had 17 00:01:21.400 --> 00:01:25.520 a balanced budget in this country. 18 00:01:25.520 --> 00:01:31.000 I think I and probably most of the audience remember all those other events even at the 19 00:01:31.000 --> 00:01:32.000 time. 20 00:01:32.000 --> 00:01:36.160 We knew, we're aware at the time about Eisenhower, about the moon landing, I even knew about 21 00:01:36.160 --> 00:01:40.280 the Monte Carlo, I was in the market for a car that year. 22 00:01:40.280 --> 00:01:46.040 I don't think I knew even at the time that the federal budget was in balance, nor did 23 00:01:46.040 --> 00:01:53.940 And I have the slightest idea that that would be the last year that we would see that result. 24 00:01:53.940 --> 00:01:58.300 So it's been a long time since we've had anything close to a balanced budget. 25 00:01:58.300 --> 00:02:05.180 More importantly, over the last 15 years or so, the budget has been dramatically and chronically 26 00:02:05.180 --> 00:02:06.640 out of balance. 27 00:02:06.640 --> 00:02:14.640 One of the messages I have for you today is not some message that the budget has to be 28 00:02:14.640 --> 00:02:20.360 be balanced absolutely all the time every year without fail, but rather that there are dire 29 00:02:20.360 --> 00:02:30.880 consequences of chronic and dramatic imbalance in the federal government's budget. 30 00:02:30.880 --> 00:02:37.400 I can remind you that over the last several years, there have been a spate of books, I'm 31 00:02:37.400 --> 00:02:44.080 sure that this audience has read several of them, dealing with the potential prices that 32 00:02:44.080 --> 00:02:48.080 might be caused by the imbalance. 33 00:02:48.080 --> 00:02:54.080 One entitled Bankruptcy 1995 by Harry Figge, 34 00:02:54.080 --> 00:02:59.080 which presents some very stark figures that causes you to sit up and take notice. 35 00:02:59.080 --> 00:03:04.080 A number of others, so many that they even compete for titles. 36 00:03:04.080 --> 00:03:07.080 You have to look twice to see that the titles are different. 37 00:03:07.080 --> 00:03:11.080 There's one book out called The Bankrupting of America 38 00:03:11.080 --> 00:03:14.040 and another book called The Bankruptcy of America. 39 00:03:14.040 --> 00:03:16.840 To look very close, crowding in there, 40 00:03:16.840 --> 00:03:19.440 dealing with this particular topic. 41 00:03:19.440 --> 00:03:21.440 And for this group, those are the books 42 00:03:21.440 --> 00:03:25.360 you're likely to know about and to have read some, 43 00:03:25.360 --> 00:03:27.400 particularly the Figge book. 44 00:03:27.400 --> 00:03:29.480 One thing that I'll be able to tell you today 45 00:03:29.480 --> 00:03:33.520 is that those books are virtually ignored in academics. 46 00:03:33.520 --> 00:03:37.520 And I want to let you know that in academics, 47 00:03:37.520 --> 00:03:40.280 so the deficit seems not to be a worry at all. 48 00:03:40.280 --> 00:03:43.280 That fact in itself is something of a worry. 49 00:03:43.280 --> 00:03:49.280 I think that when the history of thought of this period comes to be written, 50 00:03:49.280 --> 00:03:53.280 the economics profession will be recorded as sleep at the switch. 51 00:03:53.280 --> 00:03:56.280 Why did they miss that problem? 52 00:03:56.280 --> 00:03:58.280 And let me try to make it real for you. 53 00:03:58.280 --> 00:04:05.280 I'll go on to say that in addition to the bankruptcy 95 and a few other books of similar title, 54 00:04:05.280 --> 00:04:11.280 Even the popular press has picked up on the dramatic imbalance in the budget. 55 00:04:11.280 --> 00:04:18.280 For a time, I haven't noticed it lately, but for a time, CBS News was running a Monday evening regular 56 00:04:18.280 --> 00:04:23.280 where they would show the deficit figures in the accumulating debt. 57 00:04:23.280 --> 00:04:27.280 They even had a little debt meter, I guess you would call it, 58 00:04:27.280 --> 00:04:33.280 kind of like the odometer in your car that was keeping track of the growing debt. 59 00:04:33.280 --> 00:04:39.420 and to give you a feel for the rate of increase if that really was an odometer in your car 60 00:04:39.420 --> 00:04:43.440 racking up miles instead of racking up dollars. 61 00:04:43.440 --> 00:04:49.800 And if you tend to trade cars about once every 100,000 miles, you'd be getting a new car 62 00:04:49.800 --> 00:04:52.720 every nine seconds, okay? 63 00:04:52.720 --> 00:04:57.280 So that's been run up at a pretty good rate. 64 00:04:57.280 --> 00:05:01.820 But this all seems to be lost in academic circles. 65 00:05:01.820 --> 00:05:04.820 There's no hint of much of a problem here. 66 00:05:04.820 --> 00:05:10.580 In fact, what we see in academics is debates of a very different kind. 67 00:05:10.580 --> 00:05:16.220 Debates sit around the question of how best to measure the deficit anyhow. 68 00:05:16.220 --> 00:05:21.460 A lot of journal articles devoted to this question and follow on questions of is the 69 00:05:21.460 --> 00:05:30.220 deficit high or is it low in some sense, or is it possibly a surplus in disguise? 70 00:05:30.220 --> 00:05:33.860 And we'll look at that view of the deficit as we go along too. 71 00:05:33.860 --> 00:05:40.780 Beyond this, the debate seems to have resolved itself in a question of whether the deficit 72 00:05:40.780 --> 00:05:43.380 is a good thing or merely benign. 73 00:05:43.380 --> 00:05:49.140 There seems to be an important conclusion that gets left out, an important possibility 74 00:05:49.140 --> 00:05:52.020 that gets left out of this debate. 75 00:05:52.020 --> 00:05:53.240 Is it a good thing? 76 00:05:53.240 --> 00:05:54.820 Some people think it is. 77 00:05:54.820 --> 00:06:00.100 There's another book out that some of you may have seen, Robert Barclay, who works 78 00:06:00.100 --> 00:06:04.700 for the Wall Street Journal, writing about the boom of the 1980s, 79 00:06:04.700 --> 00:06:11.300 something I talked about yesterday and connected it with the recession of the 1990s. 80 00:06:11.300 --> 00:06:18.300 Barclay wrote a book entitled The Seven Fat Years and How We Can Do It Again, 81 00:06:18.300 --> 00:06:25.800 not having learned the lesson that there was a connection between good times then and bad times more recently. 82 00:06:25.800 --> 00:06:30.300 Another book worth mentioning that's more in line with mainstream thinking, 83 00:06:30.300 --> 00:06:36.200 written by Robert Eisner of Northwestern, a very, very significant member of the economics profession, 84 00:06:36.200 --> 00:06:41.000 recent president of American Economic Association. 85 00:06:41.000 --> 00:06:45.200 And his book, widely read at least in the economics profession, 86 00:06:45.200 --> 00:06:49.400 is How Real Are the Federal Budget Deficits? 87 00:06:49.400 --> 00:06:54.900 And having that question as a title almost hints at the answer. 88 00:06:54.900 --> 00:06:59.220 You know, in one sense you could say, well, they're unreal, meaning that the amazing hides. 89 00:06:59.220 --> 00:07:05.460 But of course, that's not what he had in mind, that he argued, and I'll show you how shortly, 90 00:07:05.460 --> 00:07:10.420 that the deficits aren't anything to worry about at all. 91 00:07:10.420 --> 00:07:15.220 So one of the things I want to do for you today is look at some other views of the deficit, 92 00:07:15.220 --> 00:07:22.660 because if you read the kind of material that those of us with the Mises Institute typically read, 93 00:07:22.660 --> 00:07:31.660 We find it almost incredulous that people could find that deficit is either benign or a good thing and yet that's exactly what happens. 94 00:07:31.660 --> 00:07:43.660 Robert Eisner, self-identified Keynesian, has set out virtually to rewrite the macroeconomic history of the post-war era 95 00:07:43.660 --> 00:07:48.660 and rewrite it on a basis of an alternative definition of the deficit. 96 00:07:48.660 --> 00:07:55.660 Isner is upset about the way that economists tend to measure the deficit. 97 00:07:55.660 --> 00:07:59.660 He refers to the old conservative curmudgeon way of measuring a deficit. 98 00:07:59.660 --> 00:08:01.660 Well, let's look at this. Let's get it straight. 99 00:08:01.660 --> 00:08:03.660 How do we measure the deficit? 100 00:08:03.660 --> 00:08:11.660 Current government spending is somewhere on the order of $5 trillion. 101 00:08:11.660 --> 00:08:14.660 It hasn't gotten quite that high yet, $4.5 trillion. 102 00:08:14.660 --> 00:08:19.060 4.5, but I'm going to make the numbers easy and call it 5 trillion. 103 00:08:19.060 --> 00:08:24.860 So, government spending, yeah, that's what I'm going to put it into. 104 00:08:24.860 --> 00:08:30.700 What I want is government spending, which we'll call, how's this, trillion 5, is what 105 00:08:30.700 --> 00:08:32.700 I had in mind. 106 00:08:32.700 --> 00:08:37.860 Government spending is about a trillion 5, so each year the government spends about ... 107 00:08:37.860 --> 00:09:03.860 Do I hear a bid for any more zero? 108 00:09:03.860 --> 00:09:05.860 Hey isn't my note right? 109 00:09:05.860 --> 00:09:18.860 Government spending, about a trillion five, and the level of taxation is somewhere around a trillion two, okay. 110 00:09:18.860 --> 00:09:28.860 I'll let you imagine the rest of the zeros there, call it 1,200 billion, which is the way I had intended initially to write it. 111 00:09:28.860 --> 00:09:39.460 And the difference then, it turns out to be 300 billion, okay, do it that way, which is G minus T, okay, 300 billion. 112 00:09:39.460 --> 00:09:45.060 Well, now this, as identified by Eisner, is sort of the old curmudgeonly way of measuring the deficit, 113 00:09:45.060 --> 00:09:49.060 the old-fashioned way, and the way that he disputes. 114 00:09:49.060 --> 00:09:57.460 And he offers instead a new way of measuring the deficit, which does wonders for the calculus, it turns out. 115 00:09:57.460 --> 00:10:00.160 We get different answers all together. 116 00:10:00.160 --> 00:10:06.060 So here we've supposed the government spending of $1,500 billion and taxes of $1,200 billion, 117 00:10:06.060 --> 00:10:10.960 taking the difference to be the deficit, conventional definition. 118 00:10:10.960 --> 00:10:15.660 And now what I want to do is do a little more supposing following Eisner 119 00:10:15.660 --> 00:10:19.460 and see how he gets a modified deficit. 120 00:10:19.460 --> 00:10:24.660 Let's take the total outstanding debt. 121 00:10:24.660 --> 00:10:26.460 And again, I'm going to use rounded numbers. 122 00:10:26.460 --> 00:10:31.460 In other words, this is what I want to call about $5 trillion, it's actually about $4.5 at this time. 123 00:10:31.460 --> 00:10:40.460 So the debt itself is about $5 trillion, let's say $5,000 billion, like that. 124 00:10:40.460 --> 00:10:49.460 And then suppose, as we did before, that taxes are in the neighborhood of $1,200 billion, 125 00:10:49.460 --> 00:10:53.460 so that the government needs to borrow $300 billion. 126 00:10:53.460 --> 00:10:58.460 And let's assume that the government borrows it largely from the Federal Reserve. 127 00:10:58.460 --> 00:11:04.460 In fact, let me put this example slightly in the future, we'll say fiscal year 97, 128 00:11:04.460 --> 00:11:10.460 after which Clinton has appointed a different chairman of the Federal Reserve Bank, 129 00:11:10.460 --> 00:11:14.460 one that's more cooperative and more willing to monetize. 130 00:11:14.460 --> 00:11:20.460 And so we'll assume that that borrowing is forthcoming 131 00:11:20.460 --> 00:11:25.960 by the Treasury selling bonds to the Federal Reserve, 132 00:11:25.960 --> 00:11:28.960 which of course causes inflation. 133 00:11:28.960 --> 00:11:32.960 And let's say the inflation is as much as 10%, 134 00:11:32.960 --> 00:11:36.460 which might be not all that far-fetched for 97. 135 00:11:36.460 --> 00:11:40.960 In fact, it was what we experienced in the late 70s, that and a little more. 136 00:11:40.960 --> 00:11:44.960 But if you get an inflation rate of 10% because of the Federal Reserve 137 00:11:44.960 --> 00:11:47.460 extending credit to the Treasury, 138 00:11:47.460 --> 00:11:52.460 Then that erodes the real value of the outstanding debt, alright? 139 00:11:52.460 --> 00:11:59.460 So what counted as outstanding debt of 5 trillion at the beginning of the physical year 140 00:11:59.460 --> 00:12:03.460 is actually less by 10% at the end because of the inflation. 141 00:12:03.460 --> 00:12:08.460 The debt has been eroded away to the tune of 10%, okay? 142 00:12:08.460 --> 00:12:16.460 So the first adjustment we'll make is to subtract the 500 billion associated with the inflation 143 00:12:16.460 --> 00:12:25.460 And that gives you $4,500 billion, to which, of course, we do have to add the current borrowing, which is $300. 144 00:12:25.460 --> 00:12:33.460 And that gives us a net of, in real terms, $4,800 billion, $4,800 billion. 145 00:12:33.460 --> 00:12:36.460 Which is less, it turns out, than what you started with. 146 00:12:36.460 --> 00:12:41.460 You started with $5 trillion and you ended up with $4.8 billion. 147 00:12:41.460 --> 00:12:47.140 So this, when Eisner rewrites the book, is declared a surplus, okay? 148 00:12:47.140 --> 00:12:51.660 It's a surplus in the amount of 200 billion. 149 00:12:51.660 --> 00:12:57.740 And this is the most common usage of even the definition of deficits in the journals. 150 00:12:57.740 --> 00:13:03.860 Eisner first introduced this several years ago, and much of the empirical work in the 151 00:13:03.860 --> 00:13:08.660 journals would use the Eisnerian-measured deficit. 152 00:13:08.660 --> 00:13:14.380 And sometimes I'd have a little asterisk indicating that this measure factored in the erosion 153 00:13:14.380 --> 00:13:18.100 of the debt as a result of inflation. 154 00:13:18.100 --> 00:13:22.100 But in more modern times, in the profession, it hasn't even been thought necessary to put 155 00:13:22.100 --> 00:13:23.100 in the footnote. 156 00:13:23.100 --> 00:13:28.800 You just talk about the deficit or the surplus, whichever it is, and it's understood that you're 157 00:13:28.800 --> 00:13:31.300 measuring it in Isnerian terms. 158 00:13:31.300 --> 00:13:38.020 Now, to me, this is a little bit troubling, it defines the deficit away, in fact, one 159 00:13:38.020 --> 00:13:42.540 One of the bad consequences of the deficit is precisely the fact that the government 160 00:13:42.540 --> 00:13:48.820 tends to monetize it, and yet by their monetizing it, they reduce the deficit and possibly turn 161 00:13:48.820 --> 00:13:51.620 it into a surplus. 162 00:13:51.620 --> 00:13:59.020 Eisner uses this particular reformulation of the deficit in order to rewrite the whole 163 00:13:59.020 --> 00:14:04.700 Keynesian episode during the Carter administration, where Carter was running high deficits for 164 00:14:04.700 --> 00:14:12.060 of the Time, 50 and 60 billion dollars in his last two years of office and yet the economy 165 00:14:12.060 --> 00:14:17.780 was somewhat sluggish. Now Eisner and others are going back and reworking the history of 166 00:14:17.780 --> 00:14:23.620 that period and saying no wonder, no wonder the economy was sluggish, the government was 167 00:14:23.620 --> 00:14:31.700 running a surplus and that dampened the economy and they needed to have run a deficit in order 168 00:14:31.700 --> 00:14:32.700 to Stimulate. 169 00:14:32.700 --> 00:14:36.980 And of course, if you see the dynamics of this, you wonder if it actually would have 170 00:14:36.980 --> 00:14:38.980 been possible to run a deficit. 171 00:14:38.980 --> 00:14:47.980 Once you've got the debt so high and maybe $5 trillion will do, then it becomes difficult 172 00:14:47.980 --> 00:14:53.740 to run a deficit because the inflation erodes away the real value of the debt and keeps 173 00:14:53.740 --> 00:14:55.700 a step ahead of you. 174 00:14:55.700 --> 00:15:02.900 Now, this idea of measuring deficits that way is not all that new. 175 00:15:02.900 --> 00:15:08.060 It's fairly new in academic circles for the president of the American Economic Association 176 00:15:08.060 --> 00:15:11.380 to argue this is what's new. 177 00:15:11.380 --> 00:15:18.180 But I can remember during the Carter administration itself, representatives of the Treasury making 178 00:15:18.180 --> 00:15:19.860 exactly this same argument. 179 00:15:19.860 --> 00:15:25.660 While I was a graduate student at the University of Virginia, we had one of our seminar sessions 180 00:15:25.660 --> 00:15:30.660 One of his sessions on a Friday afternoon was done by an economist from the Treasury. 181 00:15:30.660 --> 00:15:34.660 He had come down from Washington. This was during the Carter administration. 182 00:15:34.660 --> 00:15:39.660 And he came down to give us his view, or the Treasury view, of the deficit. 183 00:15:39.660 --> 00:15:45.660 I wasn't too surprised, I guess, by a Treasury bureaucrat giving us his view. 184 00:15:45.660 --> 00:15:49.660 I am surprised at Eisner. 185 00:15:49.660 --> 00:15:54.660 But I remember that particular episode well because I was a graduate student at the time 186 00:15:54.660 --> 00:15:59.020 I actually read the paper before the seminar, something that's a rare faculty 187 00:15:59.020 --> 00:16:02.620 didn't read papers before seminars and I don't think too many graduate students 188 00:16:02.620 --> 00:16:07.220 did either but I'd read it I knew what his argument was going to be and it 189 00:16:07.220 --> 00:16:13.300 struck me that it was Orwellian doublespeak or very close to it and so 190 00:16:13.300 --> 00:16:17.520 I managed to slip into the seminar room before the seminar started we had a one 191 00:16:17.520 --> 00:16:22.540 single blackboard in front of the room with a traditional map that you could 192 00:16:22.540 --> 00:16:35.540 I wrote a message on the board from Orwell. I wrote war is peace, slavery is freedom, and deficit is surplus. 193 00:16:35.540 --> 00:16:50.540 And then I pulled the map down. Knowing full well, of course, that no economist could talk very long on the deficit without going to the board to show us an example. 194 00:16:50.540 --> 00:16:55.540 So, he talked for five minutes, went to the board, and when he raised the map, there it was, 195 00:16:55.540 --> 00:16:59.540 he was never quite able to recover in that session. 196 00:16:59.540 --> 00:17:07.540 He was sent packing back to Washington. 197 00:17:07.540 --> 00:17:11.540 I'll come back shortly to the idea of some of Eisner's ideas, 198 00:17:11.540 --> 00:17:15.540 but I want to go on now to consider the monetarists, 199 00:17:15.540 --> 00:17:21.220 who typically say things that you can warm up to. 200 00:17:21.220 --> 00:17:23.020 Monitors have some good things to say. 201 00:17:23.020 --> 00:17:29.620 Friedman has done a lot in clearing up the relationship between the Fed and the economy over the years. 202 00:17:29.620 --> 00:17:34.420 He's done battle with the Keynesians and effectively so in many areas. 203 00:17:34.420 --> 00:17:41.420 And I can go a long ways with Friedman and yet I'll stop just short of endorsing his conclusions. 204 00:17:41.420 --> 00:17:48.180 A freedman can be credited with pointing to government spending rather than the amount 205 00:17:48.180 --> 00:17:52.780 of taxation as a better measure of the size of government. 206 00:17:52.780 --> 00:17:57.780 If you want to know how big government is, how much influence government has, don't just 207 00:17:57.780 --> 00:18:02.820 look at the taxes that they take from you, that's big enough in and of itself, but look 208 00:18:02.820 --> 00:18:06.260 at how much they spend, look at how much they spend. 209 00:18:06.260 --> 00:18:09.720 And what they spend is actually a better measure of their influence because they're getting 210 00:18:09.720 --> 00:18:39.720 They're either getting the money from somewhere, they're either getting it from you, or they're borrowing it, or they're getting it, or they're printing it out, but however they're getting it, they're spending it and allocating resources, real resources, that otherwise would have been available for the private sector, and if the government's in command of those resources, then those resources are not available to you and me, and the dollar magnitude, dollar value of those resources is a much better measure of how big an impact the government's having on the economy, 211 00:18:39.720 --> 00:18:50.720 Friedman is to be credited with this insight. Look beyond taxes, per se, and look to government spending. 212 00:18:50.720 --> 00:19:00.720 I'm inclined to say he's right up to a level. So long as the deficit is relatively small, 213 00:19:00.720 --> 00:19:04.560 and we can talk later about what constitutes relatively small. 214 00:19:04.560 --> 00:19:06.080 But as long as the government, 215 00:19:06.080 --> 00:19:08.280 or as long as the deficit is relatively small, 216 00:19:08.280 --> 00:19:10.800 then that's probably the beginning and the end of it. 217 00:19:10.800 --> 00:19:12.800 Just look at government spending and don't worry 218 00:19:12.800 --> 00:19:16.120 about just exactly how the government got the money. 219 00:19:16.120 --> 00:19:19.880 But I'll go on to argue that we have to part company 220 00:19:19.880 --> 00:19:24.880 with Friedman during periods where the deficit is large 221 00:19:25.600 --> 00:19:27.820 and chronically so, where year after year 222 00:19:27.820 --> 00:19:33.820 We have huge deficits measured in the hundreds of billions of dollars. 223 00:19:33.820 --> 00:19:36.620 But before I turn to that part of the lecture, 224 00:19:36.620 --> 00:19:45.420 I'll say a few things about the supply-siders who also are allies in so many different areas. 225 00:19:45.420 --> 00:19:50.620 And yet, I think supply-siders have gotten it wrong when it comes to issues of deficits. 226 00:19:50.620 --> 00:19:54.120 Supply-siders have simply argued that deficits don't matter. 227 00:19:54.120 --> 00:19:55.820 They just don't matter. 228 00:19:55.820 --> 00:19:59.980 and they're picking up to some extent on Friedman saying only government spending matters 229 00:19:59.980 --> 00:20:05.100 and yet if you look at their policy recommendations it's recommendations that allow the government 230 00:20:05.100 --> 00:20:12.940 to collect more taxes by lowering rates and increasing the tax take as the lower rates 231 00:20:12.940 --> 00:20:19.100 spur on production and make for efficiencies of one sort or another. 232 00:20:19.100 --> 00:20:25.420 Here I think they've allowed their policy conclusions to drive their analytics. 233 00:20:25.420 --> 00:20:29.140 In other words, they're basically against raising tax rates. 234 00:20:29.140 --> 00:20:30.740 They don't want to do that. 235 00:20:30.740 --> 00:20:34.060 They're not quite sure that government spending can be cut. 236 00:20:34.060 --> 00:20:37.820 It's been tried with little success at this point. 237 00:20:37.820 --> 00:20:43.840 And if they admit that deficits are harmful, well, they might be led willy-nilly to recommend 238 00:20:43.840 --> 00:20:46.940 a tax increase, which is not what they want to do. 239 00:20:46.940 --> 00:20:50.180 And so they simply argue that deficits don't matter. 240 00:20:50.180 --> 00:20:54.200 I think this is a shaky way of going about things. 241 00:20:54.200 --> 00:21:00.400 They also argue that cutting tax rates will increase the tax take, and there's an element 242 00:21:00.400 --> 00:21:04.600 of truth to that, although it has a time dimension to it that the supply-siders aren't too quick 243 00:21:04.600 --> 00:21:07.700 to incorporate into their analysis. 244 00:21:07.700 --> 00:21:13.340 It's true that at lower tax rates, production will grow, and eventually, eventually, sometime 245 00:21:13.340 --> 00:21:19.620 in the future, both output and the total tax take will be larger than it otherwise would 246 00:21:19.620 --> 00:21:21.300 have been. 247 00:21:21.300 --> 00:21:26.720 But it's not true that in the immediate period you can lower the rates and increase the tack 248 00:21:26.720 --> 00:21:35.720 takes. The statistics are certainly against that as well as the logic of it itself. In 249 00:21:35.720 --> 00:21:41.620 fact, this idea that lowering the rates would immediately increase the take was the Trojan 250 00:21:41.620 --> 00:21:47.460 horse that got David Stockman in such trouble during the early Reagan administration, where 251 00:21:47.460 --> 00:21:56.460 It was admitted fairly candidly that nobody in the Reagan administration with the possible exception of Reagan himself believed that this would be the case. 252 00:21:56.460 --> 00:22:05.460 So what I'm suggesting is that both the monetarists and the supply fighters seem to be saying that deficits don't matter, 253 00:22:05.460 --> 00:22:10.460 while the Keynesians actually think that they ought to be higher. 254 00:22:10.460 --> 00:22:16.460 This leaves room for an alternative view, one that I think that Austrians can warm up to. 255 00:22:16.460 --> 00:22:22.460 If you look at all of these different views of the deficit, 256 00:22:22.460 --> 00:22:30.460 you see articles that come out of both monetarism and the supply side school 257 00:22:30.460 --> 00:22:32.460 that tend to downplay the deficit. 258 00:22:32.460 --> 00:22:37.460 One line that I can put you on notice to watch out for 259 00:22:37.460 --> 00:22:41.460 is maybe the second paragraph or so in an article. 260 00:22:41.460 --> 00:22:47.460 So it starts out, let's put the deficit in perspective, okay? 261 00:22:47.460 --> 00:22:50.460 When you read that, watch out, okay? Watch out. 262 00:22:50.460 --> 00:22:57.460 I've learned to view that line as the same as one size fits all, 263 00:22:57.460 --> 00:23:00.460 and of course I'll respect you in the morning, okay? 264 00:23:00.460 --> 00:23:04.460 And let's put the government deficit in perspective. 265 00:23:04.460 --> 00:23:08.460 Now, the way it typically gets put in perspective is by expressing the deficit, 266 00:23:08.460 --> 00:23:14.060 not as an absolute number of 1,500 billion 267 00:23:14.060 --> 00:23:17.160 with all the zeros that I finally got up there, 268 00:23:17.160 --> 00:23:22.060 but rather as a ratio, the deficit to something ratio. 269 00:23:22.060 --> 00:23:24.060 And of course, if you divide that huge number 270 00:23:24.060 --> 00:23:27.660 by another number that's even huger, 271 00:23:27.660 --> 00:23:29.560 it can look relatively small. 272 00:23:29.560 --> 00:23:32.060 And let's look at the few things that get put in the denominator 273 00:23:32.060 --> 00:23:34.660 and that will steer us towards some notion 274 00:23:34.660 --> 00:23:36.260 of what ought to be in the denominator 275 00:23:36.260 --> 00:23:42.260 If you want to express deficits as a ratio of something, the most common thing that typically 276 00:23:42.260 --> 00:23:50.160 is used almost without any justification is the deficit to G and P ratio. 277 00:23:50.160 --> 00:23:56.940 Deficit isn't too large when you compare it to total G and P. Well, of course it's not. 278 00:23:56.940 --> 00:23:57.940 Why should it be? 279 00:23:57.940 --> 00:24:04.680 Gross national product, as you learn in economics 101, measures effectively everything. 280 00:24:04.680 --> 00:24:09.400 Almost anything, including the deficit, is small compared to everything. 281 00:24:09.400 --> 00:24:10.720 Almost goes without saying. 282 00:24:10.720 --> 00:24:16.520 Everett Dirksen, one of the most colorful politicians from Illinois, used to remark 283 00:24:16.520 --> 00:24:24.080 that the main purpose of the figure we call gross national product is to give politicians 284 00:24:24.080 --> 00:24:32.160 a way of making any other number look small by comparison, including, it turns out, the 285 00:24:32.160 --> 00:24:33.160 deficit. 286 00:24:33.160 --> 00:24:39.440 Another ratio that's used fairly commonly, watch out for this one, is the deficit as 287 00:24:39.440 --> 00:24:41.880 a percentage of total indebtedness, okay? 288 00:24:41.880 --> 00:24:46.320 We're not really borrowing that much compared to the total accumulation of all that we've 289 00:24:46.320 --> 00:24:49.400 borrowed before, okay? 290 00:24:49.400 --> 00:24:53.200 And I grant you, that number is small and getting smaller, right? 291 00:24:53.200 --> 00:24:59.440 But that's not a cause for lack of concern, quite to the contrary, the smaller that number 292 00:24:59.440 --> 00:25:05.600 gets as that total indebtedness grows, the worse off we are. 293 00:25:05.600 --> 00:25:12.840 Still another ratio, government borrowing as compared to private borrowing, all right? 294 00:25:12.840 --> 00:25:17.760 And now why this number should have a special claim on our attention, I'm not quite sure. 295 00:25:17.760 --> 00:25:24.360 But again, it causes us to worry more rather than worry less because when you talk about government borrowing, 296 00:25:24.360 --> 00:25:28.960 you're talking about all the demands that the government is putting on the credit markets, okay? 297 00:25:28.960 --> 00:25:39.560 And how can you claim that there's no worry about that because lots of other people are putting lots of other demands on those same credit markets at the same time, right? 298 00:25:39.560 --> 00:25:42.160 Makes the worry all the more. 299 00:25:42.160 --> 00:25:48.260 U.S. borrowing compared to the borrowing of other Western countries, okay, were better than some and worse than others. 300 00:25:48.260 --> 00:25:53.160 But still the message is that not only is the U.S. government borrowing tremendous amounts of money, 301 00:25:53.160 --> 00:25:59.160 So is the private sector, so are the governments of other Western countries. 302 00:25:59.160 --> 00:26:02.660 There's tremendous demands put on credit markets all around. 303 00:26:02.660 --> 00:26:07.160 These are reasons to worry more, not worry less. 304 00:26:07.160 --> 00:26:13.160 But it actually leads us to a reasonable measure of the deficit, 305 00:26:13.160 --> 00:26:15.160 if you want to measure it as a ratio. 306 00:26:15.160 --> 00:26:19.160 Let's take the deficit as it relates to total saving. 307 00:26:19.160 --> 00:26:21.160 In other words, look at the total demands, 308 00:26:21.160 --> 00:26:28.160 In fact, quite to the contrary, it's large and rising, and for both reasons, the deficit's going up and savings is going down, okay? 309 00:26:28.160 --> 00:26:31.160 The U.S. has a particularly low savings rate. 310 00:26:31.160 --> 00:26:37.160 If you look at one of the more recent periods and consider total private savings, 311 00:26:37.160 --> 00:26:42.160 you'll see that the U.S. has a particularly low savings rate. 312 00:26:42.160 --> 00:26:46.160 The U.S. has a particularly low savings rate. 313 00:26:46.160 --> 00:26:54.160 If you look at one of the more recent periods and consider total private savings, savings by individuals in this country, 314 00:26:54.160 --> 00:26:57.160 the government borrows well over half. 315 00:26:57.160 --> 00:27:04.160 The total amount of government borrowing is greater than half of total personal savings in this country. 316 00:27:04.160 --> 00:27:10.160 And no one claims that that ratio is small and it's getting worse. 317 00:27:10.160 --> 00:27:16.160 Now of course the government doesn't literally borrow half of U.S. savings 318 00:27:16.160 --> 00:27:21.160 and the reason it doesn't is because it also has access to world capital markets. 319 00:27:21.160 --> 00:27:28.160 It also is borrowing savings from the Japanese, it's borrowing savings from the Europeans. 320 00:27:28.160 --> 00:27:35.160 And it's only because it has access to world capital markets that domestic interest rates aren't sky high 321 00:27:35.160 --> 00:27:40.160 as it accommodates its own demand for credit in the U.S. 322 00:27:42.160 --> 00:27:48.160 Now, recognizing that the government has a few different alternatives for borrowing 323 00:27:48.160 --> 00:27:52.160 also puts us onto a problem associated with the deficit 324 00:27:52.160 --> 00:27:58.160 that goes above and beyond the insights of the monetarist, Milton Friedman. 325 00:27:58.160 --> 00:28:02.160 It shows us why we should worry about the deficit 326 00:28:02.160 --> 00:28:06.760 has something more than more spending for the government, right? 327 00:28:06.760 --> 00:28:09.560 It's true that when the government borrows, it spends, 328 00:28:09.560 --> 00:28:12.160 and we don't particularly want the government spending, 329 00:28:12.160 --> 00:28:14.560 but given a certain level of spending, 330 00:28:14.560 --> 00:28:18.560 I'll argue that the part that's been asked by the deficit 331 00:28:18.560 --> 00:28:21.160 is actually more harmful by good measure 332 00:28:21.160 --> 00:28:26.160 than the part that is collected by taxes. 333 00:28:26.160 --> 00:28:27.760 Let me put it this way, 334 00:28:27.760 --> 00:28:30.760 and I'll go back to my original example here 335 00:28:30.760 --> 00:28:37.760 of Government Spending, Taxes and the Difference of 300 Billion. 336 00:28:37.760 --> 00:28:44.760 When the government is spending at this level and it's collecting 1200 billion in taxes, borrowing the rest, 337 00:28:44.760 --> 00:28:49.760 we can make a sharp distinction between these two figures, the 1200 and the 300. 338 00:28:49.760 --> 00:28:56.760 In the case of the 1200, that's funds that are collected in accordance with a tax code. 339 00:28:56.760 --> 00:29:02.560 Now, the tax code itself is changing, we can talk about that, actually I think that is 340 00:29:02.560 --> 00:29:06.820 deficit related as well. 341 00:29:06.820 --> 00:29:12.000 Tax code is changing some, people complain about changes from year to year, but for the 342 00:29:12.000 --> 00:29:16.420 most part, you know what the tax code is, or you hire an accountant who knows what the 343 00:29:16.420 --> 00:29:17.800 tax code is. 344 00:29:17.800 --> 00:29:25.760 You can prepare your plans with an eye towards minimizing your taxes, what your tax strategy 345 00:29:25.760 --> 00:29:43.760 There is a tax code, but the government is saying that we're going to get $1200 by means of this tax code and we're going to get another $300 but we're not saying just how or just when or just whose. 346 00:29:43.760 --> 00:29:52.760 Have you ever heard of a deficit code? This is the thing to think about. You know what the tax code is. You regret it changes from time to time. 347 00:29:52.760 --> 00:29:58.140 But you've never even heard of a deficit code. There is no such code. There is no such 348 00:29:58.680 --> 00:30:05.880 pre-announcement on the part of government that it intends to appropriate these funds in a particular way that you can know about in advance 349 00:30:05.880 --> 00:30:11.720 and plan your own activities around. And therein lies the problem of the deficit. 350 00:30:11.960 --> 00:30:16.260 Okay, that's why it's more than just part of the total that gets 351 00:30:16.260 --> 00:30:24.260 And let's look at the different things that the government can do in order to finance this deficit. 352 00:30:24.260 --> 00:30:33.260 One is, of course, that it can borrow domestically. It can borrow from you and me or borrow from U.S. financial institutions. 353 00:30:33.260 --> 00:30:36.260 In which case, interest rates will be high. 354 00:30:36.260 --> 00:30:39.260 Now, if you knew that in advance, if that's how it's going to get its funds, 355 00:30:39.260 --> 00:30:42.260 well, you plan your affairs on the basis of facing high interest rates. 356 00:30:42.260 --> 00:30:47.460 and high interest rates. Corporate planners, entrepreneurs, business planners would factor 357 00:30:47.460 --> 00:30:51.100 this into their own plans. And that's what the government might do and that's what you 358 00:30:51.100 --> 00:30:56.020 might be faced with. But it might be something else instead. The government might be able 359 00:30:56.020 --> 00:31:01.900 to borrow abroad from Germany and Japan. If so, that will take the pressure off of domestic 360 00:31:01.900 --> 00:31:09.040 interest rates. But it has other effects. It will affect export markets. If the foreign 361 00:31:09.040 --> 00:31:13.560 When trading partners are selling their goods here and buying treasury bills instead of 362 00:31:13.560 --> 00:31:19.800 lumber and machinery and agricultural products and so on, then all of a sudden our export 363 00:31:19.800 --> 00:31:26.720 markets are weak, weaker than we would have guessed had the government borrowed domestically. 364 00:31:26.720 --> 00:31:31.260 Again, that needs to be factored into your plans, but you can't do that unless you know 365 00:31:31.260 --> 00:31:35.940 just what the source of funds of the government might be. 366 00:31:35.940 --> 00:31:42.020 The government also could resort to monetization, could get its funds directly from the Federal 367 00:31:42.020 --> 00:31:43.020 Reserve. 368 00:31:43.020 --> 00:31:48.140 And right now that's a bigger aspect of the uncertainty than it has been in recent years. 369 00:31:48.140 --> 00:31:52.180 Again, because you know that you'll have a different, or might have a different Federal 370 00:31:52.180 --> 00:31:56.040 Reserve Chairman next year and you're not quite sure what he will do. 371 00:31:56.040 --> 00:32:00.100 If that's the source of funds, then it's going to be inflation rates that you have 372 00:32:00.100 --> 00:32:01.100 to cope with. 373 00:32:01.100 --> 00:32:04.140 Somehow you've got to factor that into your plans, but you're not sure just how because 374 00:32:04.140 --> 00:32:14.140 And there are a few other alternatives as well. There are possible new taxes or changes in the tax code. 375 00:32:14.140 --> 00:32:23.140 In fact, one of the reasons the tax code has changed so much in recent years is precisely to try to collect more funds and reduce the deficit. 376 00:32:23.140 --> 00:32:33.140 Value added taxes that get talked about or all sorts of adjustments going to a sales tax or going to flat income tax 377 00:32:33.140 --> 00:32:39.180 Tax, and all this discussion about changing the tax code as another element of uncertainty 378 00:32:39.180 --> 00:32:41.580 that you have to plan against. 379 00:32:41.580 --> 00:32:46.860 I remember hearing on the news, again, this is clear back during the Reagan administration, 380 00:32:46.860 --> 00:32:50.900 when a second or third round of tax changes were in the works. 381 00:32:50.900 --> 00:32:54.940 They called them Treasury 1, Treasury 2, and Treasury 3, the different proposals and so 382 00:32:54.940 --> 00:32:55.940 on. 383 00:32:55.940 --> 00:33:02.840 And there were all sorts of jitters on Wall Street and falling prices and uncertainties. 384 00:33:02.840 --> 00:33:07.160 One of the administration spokesmen got on one of the Sunday morning talk shows and he 385 00:33:07.160 --> 00:33:10.480 says, I don't know why everybody's upset, we haven't actually done this, this is just 386 00:33:10.480 --> 00:33:15.560 a proposal and doesn't Wall Street understand that it's written on a word processor. 387 00:33:15.560 --> 00:33:19.560 We've got this now just written on a word processor, the implications being it could 388 00:33:19.560 --> 00:33:22.960 be something different tomorrow, okay, we can change it tomorrow, it doesn't have to 389 00:33:22.960 --> 00:33:23.960 stay this way. 390 00:33:23.960 --> 00:33:30.000 And of course the message is, that's the worry, that's the worry, it's on a word processor, 391 00:33:30.000 --> 00:33:45.000 An era of high budgetary deficits gives you continuing uncertainty over and above what's normally found in the marketplace. 392 00:33:45.000 --> 00:33:48.000 And that's very apparent, I think, in the recent period. 393 00:33:48.000 --> 00:33:56.000 Let me just mention what's going on in the profession trying to record this or dispute this. 394 00:33:56.000 --> 00:34:03.400 The fact that financial markets are relatively unstable these days seems not to be in dispute. 395 00:34:03.400 --> 00:34:08.600 But any connection with the deficit does seem to be in dispute. 396 00:34:08.600 --> 00:34:13.400 And I think I have an answer for this. I think I see what's going on. 397 00:34:13.400 --> 00:34:21.200 You'd think that government would sort of collect its funds in ways that were halfway predictable. 398 00:34:21.200 --> 00:34:26.600 In other words, it gets some from taxes, it prints some, and it borrows some. 399 00:34:26.600 --> 00:34:32.400 You'd be real surprised if it would swear off of any one of those ways of raising money. 400 00:34:32.400 --> 00:34:35.300 And you would think that it would sort of equalize at the margin, 401 00:34:35.300 --> 00:34:39.900 where it would collect dollars in each of the three ways 402 00:34:39.900 --> 00:34:42.700 until they were sort of equally costly at the margin. 403 00:34:42.700 --> 00:34:45.300 And that would be the solution, all right? 404 00:34:45.300 --> 00:34:50.300 But that's not quite the solution because when it looks how costly it is to collect 405 00:34:50.300 --> 00:34:57.300 In fact, at this margin, or that margin, or the other margin, most of the costs from the government's standpoint are political costs. 406 00:34:57.300 --> 00:35:05.300 How much is it going to cost me in election time to increase taxes, or to increase borrowing, or to increase inflating? 407 00:35:05.300 --> 00:35:11.300 And the political costs change as people become more sensitized to inflation, or to deficits, or to taxes. 408 00:35:11.300 --> 00:35:16.300 Which means the government tends to binge, first one way, then the other way. 409 00:35:16.300 --> 00:35:20.900 will borrow domestically until people complain about high interest rates and then they'll 410 00:35:20.900 --> 00:35:27.060 inflate until people complain about inflation. Then they'll sell debt abroad until people 411 00:35:27.060 --> 00:35:33.020 complain about weak export markets. These are the things that you have to try to predict. 412 00:35:33.020 --> 00:35:40.060 Well, many of the studies, the empirical studies, capture the history of this, but they miss 413 00:35:40.060 --> 00:35:45.140 the conclusion. In other words, we could line up these different ways that the government 414 00:35:45.140 --> 00:35:49.340 gets money with with recent history we could say in the 1960s there was a lot 415 00:35:49.340 --> 00:35:54.260 of domestic borrowing and we had credit crunches I remember 69 I could have 416 00:35:54.260 --> 00:35:59.140 included in my timeline a credit crunch high interest rates and businesses had 417 00:35:59.140 --> 00:36:04.860 trouble competing for funds in the 1970s the recourse was to the printing press 418 00:36:04.860 --> 00:36:09.380 monetized we had double-digit inflation that was under Carter especially in the 419 00:36:09.380 --> 00:36:13.740 80s we had borrowing abroad and that gave us the so-called twin deficits in 420 00:36:13.740 --> 00:36:18.740 in the budget and international trade and weak export markets. 421 00:36:18.740 --> 00:36:20.740 So we had first one, then the other. 422 00:36:20.740 --> 00:36:25.740 But as I look at the empirical studies in the literature that try to capture this, 423 00:36:25.740 --> 00:36:26.740 they miss it every time. 424 00:36:26.740 --> 00:36:34.740 Because the empirical studies tend to use the entire time series of data from about World War II, 425 00:36:34.740 --> 00:36:40.740 about end of World War II, 1946 is usually the start of the data points, until present. 426 00:36:40.740 --> 00:36:45.240 And if you get onto these studies, you can see how they work. 427 00:36:45.240 --> 00:36:56.240 They say, well, we tested in this study, this particular study, to see if government borrowing has a systematic effect on domestic interest rates. 428 00:36:56.240 --> 00:36:59.240 But they use all the data from 46 to the present. 429 00:36:59.240 --> 00:37:06.240 And of course, the one period where it did have a dramatic effect was in the 60s when that's where the government was borrowing us money from domestic credit markets. 430 00:37:06.240 --> 00:37:10.240 But if you look at it over the whole period, you miss that effect. 431 00:37:10.240 --> 00:37:16.080 and the conclusion is that well the results are weak and mixed and if 432 00:37:16.080 --> 00:37:19.480 there's a worry about deficits it shouldn't be related to domestic interest 433 00:37:19.480 --> 00:37:23.480 rates. Well someone else will do a study and they'll say well we'll test to see 434 00:37:23.480 --> 00:37:28.360 whether inflation tends to get monetized or where deficits tend to get 435 00:37:28.360 --> 00:37:33.000 monetized and cause inflation. Well that's what happened during the 70s but 436 00:37:33.000 --> 00:37:37.280 they use the whole data set from 46 to present. What do you suppose the results 437 00:37:37.280 --> 00:37:44.220 Deficits are weak and mixed. It's a technical term. If the deficits are a worry, there shouldn't 438 00:37:44.220 --> 00:37:49.160 be no worry about inflation. We can't find it in the data. You can guess what the studies 439 00:37:49.160 --> 00:37:54.480 look like to test for the twin deficits. Is there really a relationship between the budget 440 00:37:54.480 --> 00:37:59.000 deficit and the trade deficit? Some people think there are. Of course, there was during 441 00:37:59.000 --> 00:38:05.800 the 1980s when Reagan was borrowing abroad. But they used the whole data set from 46 on. 442 00:38:05.800 --> 00:38:10.800 Sometimes the budget deficit is going up and the trade deficit is going down. 443 00:38:10.800 --> 00:38:13.800 And so the results are weak and mixed. 444 00:38:13.800 --> 00:38:15.800 And if there's any worry about the deficit, 445 00:38:15.800 --> 00:38:17.800 it's certainly not connected with international trade. 446 00:38:17.800 --> 00:38:21.800 So, if you look at it on a piecemeal basis, 447 00:38:21.800 --> 00:38:25.800 and you see that there's no connection in each of these different areas, 448 00:38:25.800 --> 00:38:30.800 then you conclude that the worries that come from each of these areas are misplaced. 449 00:38:30.800 --> 00:38:34.800 And then the summary conclusion is that there's no basis for worry at all. 450 00:38:34.800 --> 00:38:36.800 This doesn't seem to cause anything. 451 00:38:36.800 --> 00:38:38.800 There's an article by Paul Craig Roberts 452 00:38:38.800 --> 00:38:42.800 where he talks about unwarranted hysteria about the deficit. 453 00:38:42.800 --> 00:38:44.800 And this is his point. 454 00:38:44.800 --> 00:38:47.800 It doesn't seem to systematically cause anything in particular. 455 00:38:47.800 --> 00:38:49.800 And yet, that's the problem. 456 00:38:49.800 --> 00:38:50.800 That's the problem. 457 00:38:50.800 --> 00:38:54.800 The problem that it causes, you know, one damn thing after another. 458 00:38:54.800 --> 00:38:56.800 And if you're a businessman, you've got to guess what 459 00:38:56.800 --> 00:38:58.800 and plan your affairs accordingly. 460 00:38:58.800 --> 00:39:01.800 And if you guess wrong, you can lose big. 461 00:39:01.800 --> 00:39:03.800 Alright, that's the bottom line. 462 00:39:03.800 --> 00:39:08.800 and therein lies the problem of the deficit. 463 00:39:08.800 --> 00:39:13.800 At the end of my time slot I have one thing to conclude with. 464 00:39:13.800 --> 00:39:18.800 I have done my own study which tries to sort of leap over all these others 465 00:39:18.800 --> 00:39:21.800 and my own study which is empirical. 466 00:39:21.800 --> 00:39:23.800 I don't do much in the way of... 467 00:39:23.800 --> 00:39:25.800 There are two things I don't like to do in academics. 468 00:39:25.800 --> 00:39:27.800 I don't like to do empirical studies. 469 00:39:27.800 --> 00:39:30.800 This data is pretty messy data to begin with. 470 00:39:30.800 --> 00:39:32.800 I also don't like to co-author. 471 00:39:32.800 --> 00:39:38.800 by myself. I don't use co-authors. But if I violate one of those dislikes, I violate both. 472 00:39:38.800 --> 00:39:44.800 I co-author with somebody who likes to work with data, you see, which I've done in this case. 473 00:39:44.800 --> 00:39:50.800 So what I try to measure is the uncertainty that's caused in the marketplace. 474 00:39:50.800 --> 00:40:00.800 And I do that by looking at the interest rate on BAA bonds. That's the most risky but nonetheless rated bond. 475 00:40:00.800 --> 00:40:07.520 okay so you got good statistics on that and then I look at the interest rate on T-bills 476 00:40:07.520 --> 00:40:13.520 which as I explained last night has no premium on it there's no default risk premium on T-bills 477 00:40:13.520 --> 00:40:18.120 okay so this is going to be a lower rate than this the difference between the rates is going 478 00:40:18.120 --> 00:40:25.680 to express how risky business is in general okay the general riskiness in the in the economy 479 00:40:25.680 --> 00:40:30.480 and the difference, I simply call it the spread. 480 00:40:30.480 --> 00:40:32.380 In other words, the spread between those two rates, 481 00:40:32.380 --> 00:40:34.380 the difference between those interest rates. 482 00:40:34.380 --> 00:40:40.080 And then I show a statistical correlation between that 483 00:40:40.080 --> 00:40:42.080 and deficits over that whole period. 484 00:40:42.080 --> 00:40:44.280 So if you look from 46 to present, 485 00:40:44.280 --> 00:40:47.180 what you see is that periods of high deficits 486 00:40:47.180 --> 00:40:49.780 are periods in which this spread is great, 487 00:40:49.780 --> 00:40:52.480 which captures the uncertainty in the private sector 488 00:40:52.480 --> 00:40:57.280 are associated with uncertainty about how those deficits will be accommodated. 489 00:40:57.280 --> 00:41:02.080 That's the problem of the deficit that I want to tell you about today. 490 00:41:02.080 --> 00:41:05.980 And I'll just conclude by saying that seeing that as a problem 491 00:41:05.980 --> 00:41:10.780 doesn't imply that you raise taxes in order to reduce the deficit. 492 00:41:10.780 --> 00:41:13.680 Far from it. Taxes are too high as they are. 493 00:41:13.680 --> 00:41:15.480 It suggests that you lower government spending. 494 00:41:15.480 --> 00:41:20.480 In fact, you need to lower spending and taxes, spending more so than taxes.