Drowning In Debt

The United States government is drowning in debt (so is the citizenry but that is whole other mess) and the rating agencies are finally starting to figure it out. S&P cut the US's debt outlook from stable to negative. This is recognition of our worsening federal budget situation and the impending future explosion of costs.

Such a warning may be a precursor to lowering the US's credit rating from it's currently perfect AAA unless we are able to rein in rising costs. The US national debt is expected to approach or exceed 100% of our GDP (annual economic output) by late this year or early  next year by many estimates. At this point the country is technically insolvent from a fundamental stand-point. If the US were to lose it's perfect credit rating the result would likely be a spike in interest rates since most consumer rates are tied to government bond rates which would rise if our credit risk were perceived as increased. For those of you interested click here to view debt ratios and forecasts for most countries. You can also read more about S&P's change in a Wall Street Journal article by clicking here.

The current size of our deficit is truly astounding...recently in the news was the near government shut-down over the budget battle in which one of the major arguing points was whether to cut ~$30 billion in spending or ~$40 billion. Just to put that in perspective our projected deficit is ~$1.5 trillion so our leaders spent weeks arguing over what amounts to 2% of the budget problem on the low end and 2.67% on the high end...anyone see the problem with that?

If you want to get a real-time look at lot of the economic stats check out US Debt Clock.org

Nanny State Expanded!

I ran across this article while scanning headlines and I was so disgusted I just had to post it. Apparently there are some legislators that think they need to be able to dictate every minor detail of our life including whether or not it's legal to jog with ear buds in your ear or walk while you text. It seems there is no end in sight to what politicians believe they can do better than you can.

The Power of Texas

Ever wonder how a government should act if it wants a thriving private-sector with low unemployment and a better than average budget situation over the long-term? Apparently a lot like the State of Texas. Check out this article if you want to know more. While I don't believe that TX is perfect by any means it does seem to be doing better than most. Why?

In a nutshell:

• Low taxes
• Lower average regulatory burdens
• State that works hard to maintain a balanced budget
• Government that generally leaves the private sector to do what it does best - create jobs and grow!

Mortgages a Bellweather on Property Rights?

Businessweek recently ran an opening article on the recent foreclosure debacle. The center piece of the article was focused on how the mortgage industry has been unable to effectively upgrade title record systems out of paper and into a more modern system. This was one of the major contributors to the foreclosure debacle. Another point the author comments on is how the ability to enforce and rely on property rights is critical to successful, developed, capitalistic systems.

I think the author is completely right in arguing that the current mess in mortgage re-sale and packaging has weakened the sanctity of property rights. These things changed hands so often and were so poorly documented that in some cases no one can figure out who ultimately owns what and even if they can they don't have documents proving that ownership that are acceptable to the courts.

Our government has taken steps into the private system that have only served to cloud the issue of property rights. They have weakened our rights to own and benefit from the use of property in the form of regulation, taxation, and bailouts. While some of these actions can arguably be justified (more or less) by the extraordinary circumstances of the recent financial crisis - the question we need to be asking ourselves is have we undermined the very system that made our nation great?

Strong and clear property rights, along with the courts' respect for contracts, are probably the two single most important facets of our economy and legal system and they have allowed us to grow as we have. We shouldn't be messing with them unless we have very carefully thought through the consequences...which I don't believe we have done.

Economy Set To Grow in Q4?

Most economists are currently worried about deflation and are expecting tepid economic growth through the rest of this year and into next year. I just found this article, M2 Velocity Suggests A Stronger Q4 GDP, which uses the M2 measure of money supply to comment on Q4 2010 economic growth. Using this measure the author predicts somewhat higher economic growth than the current consensus among economists. The logic behind the argument is quite sound and it's an interesting approach to analyzing near-term growth forecasts. I think we are still more likely to see growth closer to the consensus, because I believe consumers and business will likely continue hoarding cash (increases in the demand for money) until after the elections end and we see what the new make up of Congress will mean for policy.

Mankiw on Taxes

Dr. Gregory Mankiw recently wrote an article that ran in the New York Times. In the article he describes how taxes impact the decisions of high-income earners regarding how much work to perform. It's a simple and quick explanation, but dead on.

Can Cutting Taxes Raise Tax Revenue?

Yes! - and if you want to know more click here. This is one of the better explanations for how cutting taxes can increase tax revenues, and lower deficits if we don't increase spending at the same time, I have seen in a while. If you are inclined to check up on it the economic principle at work here is the simple observation that people can think about logical consequences. The logic goes like this if I work very hard at running my own business and take some risks I might get rewarded with $1 million in personal income, but if I know that tax rates are increasing so I get to keep less of my $1 million then I don't have the incentive to invest the money needed to earn that million because I need to protect myself from higher taxes so I work less and put money into non-productive and non-taxable investments. The result is I earn less so the tax I pay declines in dollar terms even though the percentage is higher...multiply this effect across the economy at large (and corporations not just individuals do this too) and you get a decline in the economic activity supporting the tax base and the tax base shrinks, which means that despite higher tax rates - a higher percentage collected on a lower base still yields a lower tax revenue number!