Tuesday, February 12, 2013

Extending the Absurd to it Most Logical Conclusion

Investor's Business Daily did a column this morning called "The Federal Deficit Chart That Should Embarrass The Budget Hawks."   I am not sure why it should bring smiles to our faces but the author, one Jed Graham (who also authored a book called "A Well Tailored Safety Net: Social Security and Old Age Risk Sharing" - more on that later) seems to be one of those offshoots called a "deficit denier."  Ezra Klein was quick to republish this fanciful drawing in the WP.

Graham revels in the fact that the deficit (as a percentage of GDP) is falling faster (by 50%) than it did in the 1990s.   He also boldly asserts (without any evidence) that "History suggests that there's little good to be gotten from cutting the deficit much faster than 1% of GDP per year. "

Mr. Graham should be reminded that the real problem of out out of control spending is not the momentary deficit but the accumulated debt.  Here is another chart that might explain the problem.   Note that nothing good happens when the ratio of GDP to accumulated debt exceeds 100%.    Over the last four years, the growth of accumulated debt - contributed to be the colossal increases in annual deficits produced in the last four years - has been substantial.  It is also important to understand that the chart at the right does not include the accumulated unfunded liabilities for all sorts of long term entitlements.

His book on Social Security seems to be an argument that any of the problems of the program can be handled.   That is true, if we take care with both thinking carefully about the issues and then taking corrective actions.  

Both Klein and Graham caution us that reducing federal spending will encourage the economy to contract.   So if you carry the logic forward, increasing spending by government will increase GDP - or to carry the logic to its' most reliable conclusion - if we had the government spend 100% of the GDP we would have almost unlimited economic growth.

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