Friday, December 05, 2003

The Budget Outlook

Max has a long post on the budget outlook. He has a lot of good points, but I still think he's a bit too sanguine about the whole thing. He's right that we're not Argentina and we're not Indonesia which makes us much much much less likely to have a total meltdown. But, the thing is you don't actually have to have a total meltdown for things to be fairly bad. All of the forecasts are made under fairly rosy assumptions, which is fine for their purposes, but at some point higher interest rates will start choking off that growth pretty severely, and that's when things begin to spiral out of control. A big problem is that the Fed has nothing left - if we hit a minor bump for whatever reason and are running huge structural deficits then fiscal policy won't be an option either. I wonder if Alan Greenspan is trying to figure out a way to increase inflation expectations (and therefore inflation) in the economy. Part of the reason he's rather limited in his powers right now is that inflation is so low. If inflation were higher, the zero bound on nominal interest rates would provide for a much lower real interest than we have now (But, the other reason is that it is unclear how low interests are going to spur much investment spending in a period of severe excess capacity, and consumers maxed out their credit due to a combination of easy availability of credit and the illusory wealth effect of the market boom.) It also has the added bonus of reducing the real value of the US debt. It would be amusing if anti-inflation Greenspan ends his career by having to bring it on partially because of his obscene support of the Bush tax cuts.

We aren't Argentina and Indonesia - we're the US of fucking A and we goddamn deserve to have our cake and eat it and everyone else's too. I also worry about the broader impact of even a fairly "minor but serious" economic downturn. While our country has no shortage of poverty and a sizeable underclass, much of the "rest of us" are a few too many degrees of separation from any notion of real poverty. It's quite hard to imagine the effects of a year or so of 9-10% unemployment across the socioeconomic spectrum.

Anyway, as I see it there are two bullets - the short term disaster bullet and the longer term disaster bullet. I'm not convinced we've dodged the short one yet, but come April 1 or so if things are still humming along I'll be more than happy to admit I'm wrong about that. And, as for the longer term disaster bullet, that one's pretty easy to dodge if there's any will. Cut some corporate pork, cut a few loopholes and broaden the base a bit. Put the estate tax back. Oh, and up those top rates a few points.

With those happy thoughts, it's time to brave the snow and find a drink somewhere...