U.S. debt

Federal Budget Deficit Hits $1,270,000,000,000

by Ryan Young on August 14, 2009

in Bailout Watch, Deregulate to Stimulate, Economy, Politics as Usual, Regulation, Stimulus to Nowhere

Federal spending is going up. Tax receipts are going down. 2009′s federal budget deficit is now up to $1.27 trillion as a result. That’s about triple what even big-spending George W. Bush could manage. Total federal debt now stands at over $11.66 trillion.

Many other developed countries have built debt loads twice ours and more, and without apocalyptic consequences. So it appears such enormous shortfalls do not pose an existential threat to the economy. At least, not yet. But high long-run deficits do slow growth. To help end the recession, government should reduce the deficit by spending less. Three reasons why:

-Today’s deficit is tomorrow’s tax increase. Deficits are paid for by borrowing. What the government borrows, it has to pay back. Sometimes it puts off that taxation by borrowing money to pay back previously borrowed money. But some day, borrowed money ultimately has to paid back by taxpayers. Increasing deficits necessarily means increasing future taxes.

-Government borrowing crowds out private borrowing. The higher the deficit, the more crowding out. This point is underappreciated. There are only so many investor dollars to go around. The $1.27 trillion the government is borrowing to pay for this year’s spending is $1.27 trillion that now cannot go towards job-creating corporate bond issues or stock IPOs. Imagine the opportunity costs.

-More spending begets more regulation. Government money comes with strings attached, as GM now knows. And once a rule is in the books, it’s in there for good, usually. When government spends so fast that it has to borrow, the process accelerates.

The budget deficit is expected to rise even higher as 2009 runs its course. There are already 1,270,000,000,000 reasons for government to cut spending to levels it can afford. How many more do Congress and the president need?

“Leveling the playing field” with border taxes (read “bring down the economy”)

by Fran Smith on June 25, 2009 · 1 comment

in Energy, Environment, International

In Washington, beware any proposal that attempts to “level the playing field.” What is usually meant is hobbling competition with restrictive rules and regulations that often raise costs for consumers. On the international playing field, such “leveling” can have broader disastrous consequences.

That’s likely to be the case with the House Ways and Means’ misguided proposals to impose carbon taxes on imports from countries that haven’t taken stringent measures to control greenhouse gas emissions.

It turns out that the huge and complex energy bill – the Waxman-Markey bill – is scheduled to be voted on Friday. It sets up a “cap and trade” system by setting a limit on carbon emissions and issuing tradable allowances. The bill got some carbon-intensive industries realizing the high costs they would have to pay under the program and then pass on to their customers. They and environmental groups eager to suppress energy use talked about “leakage,” that is, firms in countries that didn’t have strict emission standards would be able to offer lower prices, and other firms might move to those countries as well. Their solution? Hit those foreign imports with a hefty tax too, and Ways and Means is figuring out a way to do that.

China, India, and other powerhouse developing countries are the main bugbears. Yet going down that road to protect domestic industries could put our fragile economy in a tailspin. CEI and others have written about the increased costs to consumers from suppressing the use of fossil fuels that supply more than 80 percent of U.S. energy. At a time when many families are struggling with bills, adding these new costs will be a hefty burden. Assessing carbon taxes on imports from certain countries would mean that consumers would get no relief from those increased costs.

Perhaps the main threat, however, is to the whole economy of the U.S. Countries like China and India won’t sit back and take this blow to their exports. They will likely retaliate with trade measures against the U.S. possibly affecting a broader range of products. In fact, China’s top climate change official Li Gao had suggested that countries importing goods from China might themselves pay for the emissions created in their production. Those large developing countries point out that they have only recently been experiencing rapid industrialization and economic growth, in contrast to the developed world, and do not want to be penalized and have their growth curtailed, as millions of their people are still living at a subsistence level.

The U.S. border measures – and perhaps the free allowances offered under cap-and-trade –will undoubtedly face challenges in the World Trade Organization, which can go on for years and further disrupt the world trading system.

Also, the threat is real that retaliation might be initiated outside the trading system. Currently, China holds almost one-quarter of all U.S. debt held by foreign countries. Suppose China threatened to dump some of its holdings?

Let’s hope policymakers have more sense than to vote “yea” for this economically destructive bill.