"Budget For A Declining Nation"
That was the title of today's luncheon talk to the National Economists Club by Urban Institute Fellow and former Deputy Assistant Treasury Secretary Gene Steuerle. A video and slides will be posted here. These are the main points he made.
"What makes this fiscal crisis unique is that we can no longer depend upon economic growth to get out of it."
"World War II is always held up as an example of running the national debt over 100%, but no one remembers that we drove it down below 70% within 6 years by the end of the Truman Administration."
"We have a budget for a declining nation because we're increasing federal spending on consumption, and we're cutting federal spending for education and investment."
"The enormous budget squeeze of 2009 saw revenues fail to cover entitlement spending and interest for the first time."
"I call it my 'Index of Fiscal Democracy,' how much revenue is left after subtracting mandatory (entitlement) spending and interest."
"There is no give in this budget."
"The federal government has signed all of these contracts that can't be kept."
Check out Gene's many articles and publications at this Urban Institute web site.
"World War II is always held
"World War II is always held up as an example of running the national debt over 100%, but no one remembers that we drove it down below 70% within 6 years by the end of the Truman Administration"
Ahem, Q: How was it, exactly, that we were able to do that? A: Three years worth of *Heavy Inflation*. Mostly from 1946 to 1948, where it hit over 20% at it's peak, and again during most of 1951. Truman's term ended in early 1953.
So what kind of cumulative inflation are we talking about, and what was the effect on savers?
War bonds, which composed the vast majority of the national debt at the end of WWII (the last sold in early 1946, I think), were 2.9% percent (annual) ten year bonds. You could put your 75 quarters ($18.75) into a cardboard cutout and get a bond that paid $25 in a decade.
The government eventually allowed the terms to be extended for several decades, but let’s say you bought one during the war and you took out your money in the 1950’s. Here are the relevant decadal inflation rates: Jan 1942-52: 68.8%, 43-53: 57.4%, 44-54: 54.6%, 45-55: 50%. (It could have been worse, as it was in Europe, and the US decadal inflation from Jan 1973-83 was 130%!)
But the bonds only got 33% after a decade, so no matter when you bought your liberty bonds you lost real value. And a lot of people lost a big chunk of their savings - so popular was the program and so trusted (naively and mistakenly, as it turned out) were the monetary authorities. Over half the country – or 80 million people – invested in the bonds, and at over $2,000 worth per saver (in 1940’s money! and in the midst of a world war!)
Though they got to contribute to the war efforts, their "investments" were essentially unknowing donations, and they would have been better off buying gold or some other durable commodity and burying it in the back yard. They all experienced a significant real loss (and the government got a significant escape from war indebtedness) when they collected their proceeds. Notice that the worst losses were suffered by those who were the earliest participants in the bond program - talk about injustice.
So, yeah, we can work off our debts the way Truman did, which was the equivalent of unilateral default in real terms by means of extremely high inflation. Does anyone think we should do that again this time?
Simple question - simple answer
"Does anyone think we should do that again this time?"
Yes.
And, btw, comparing inflation to default is a rather pathetic rhetorical trick, strongly suggesting that the speaker is a d-bag.
thanks, it is so seldom that
thanks, it is so seldom that you see something that makes you rethink your entire analysis of something that when you do see it one should at least show your appreciation of the author.
War Bonds Purpose
It was primarily to soak up the huge amount of money that would otherwise chase goods and result in raging inflation during the war. Given the fairly restricted supply of goods during the war otherwise you would have had much greater inflation during the war. (Look at the Civil War for comparison I believe greenbacks went to 2.85 to a gold dollar at the worst point of the civil war). So the feds decided to sop up the extra money before it created inflation. (Recall that after 1933 us money was essentially the domestic equivalent of greenbacks during the civil war)