Sunday, January 15, 2006



The primary reason I voted for Bush over Gore was that Bush's budget made much more sense to me. Bush advocated paying down the national debt, as did Gore, but Bush's plan payed down more and started out more slowly. It just seemed more considered.

Gore's paydown, on the other hand, was front loaded. It didn't make sense to me to pay down the national debt at a time when interest rates were low, the job market had evaporated, and we were clearly about to enter a recession.

The thing I've come to realize is that deficits matter when interest rates are high. It's the cost of capital that matters. It almost doesn't make sense to run a surplus or balance the budget when rates are so low. What we should really be concerned with is what the money is spent on. Is it being used for education and infastructure, or is it being wasted on inflationary, non-value added projects?

Only recently have interest payments on the debt began to increase as a percentage of GDP (there was a large drop after interest rates dropped). Question is, as interest rates rise, can the budget deficits be cut before interest payments excede 1990s levels.

What it at now? 10%? 11%? of the budget goes to paying the debt? I think the record during the 80s was around 15%?
Interest looks like it will be about 16.5% of tax revenues for 2005.
Aaron -

Aside from the brief budget surplus, two factors drove down the interest payments:
1) The fed aggressively cut interest rates to stimulate the economy
2) The Bush administration reduced the average maturity of the treasury debt issued in order to get lower interest rates.

The interest rate hikes have been almost entirely reversed, and the Bush administration's decision to short-fund the debt makes interest payments more vulnerable to exactly those types of swings in the interest rate market.

Expect the interest rate expense to rise very quickly both because we continue to run large deficits but also because we have so much debt issued in the last 3 years that's maturing and will have to be rolled over at higher rates. If memory serves, we have something like $1 Trillion in debt maturing this year.
Also, it's real interest rates that matter, not nominal ones, and those are at roughly their 40-year average.

Point 1 was exactly my point, plus that foreign interest rates were very low.

Point 2 is definately something to be concerned about. The fact that interest rates have returned is good reason to get rid of deficits. Additionally, the short maturity rate means that we must pay down some of the debt, or else refinance at a higher rate (which I agree is very likely and something to be concerned about). It's incentive to pay down the debt and not run more deficits.

Interest rates will only rise if we don't cut out deficits. The maturity of debt should be part of our budget (am I right?). Not paying it means running a deficit.

My point was the recent defecits haven't really hurt us, but not cutting them fast will. Your concern about debt maturing earlier would make the problem worse. It all depends on the structure of the debt.

As an aside, my point was also that while I didn't consider running a deficit a problem, I implied that I was conserned that the much of spending we have done has been wasteful.
What percent of the debt is 1 trillion? And, when will it mature ( this year of over the next 10)?

Would that need to be included in the budget, or do they hide that from us?
Here are some stats I dug up at the end of 2005. They should still be valid:

Average Maturity, 2000: 4.6 years
Average Maturity, 2005: 3.0 years
Avg Maturity of Issuance, 2000: 6.5 years
Avg Maturity of Issuance, 2005: 3.1 years
Total Debt, ex-Trust Funds: $4.7 Trillion
% of Debt Maturing in next 36 months: 60%
As to the maturity of the debt being included in the budget ...

The short answer is that it's not.

The Congress passes a budget and sets the debt ceiling (the maximum amount that the Treasury can borrow). Aside from that, the Treasury is tasked with making the books balances. Whenever the government has to spend more money than it has, the Treasury has to issue bonds to raise money to make up the difference. Congress has no say in this (although it probably could, if it wanted to).

The Bush Treasury stopped issuing 30-year bonds completely. Of the remaining maturities, it focused its issuance at the short end (13-week to 5-year) and neglected the 10-year bonds.

As a result, much of the debt issued in the early part of the decade to finance the deficit is maturing and has to be renewed now. Since we can't even pay for our current operations (2005 budget deficit was $300 billion), we have no choice but to reissue those maturing bonds and the much higher interest rates prevailing now.

The only hope of avoiding this is to quickly turn the budget to surplus in order to begin retiring the debt as it matures. I don't see any indication that the administration is considering this.
Thanks for the info.

I guess all we can do is hope that interest rates don't go up too much soon and that there is a sudden change in spending. I've expected the president to suddenly break out the veto pen, but this looks increasingly unlikely. He seems overly loyal to his party right now. I think that he is kind of hamstrung by Iraq; if he doesn't sign what congress gives him, it could be disasterous.
Do you have any insights into why they neglected the 10 yr bond (beyond making interest look a little lower than it is)? I thought that the 10 yr had very low rates.

Issuing short-term debt is like getting a variable rate mortgage, you don't do it when rates are low and you only do it if you are liquid.
I think that there are 3 reasons that they have neglected 10-year issuance:

1) Issuing long term debt put the lie to their claims that we'd be returning to surplus soon

2) They were determined to minimize the interest cost so as to make it appear that the damage from deficits wasn't as bad as it was.

3) They wanted to keep the interest rates on 10-years low in order to keep mortgage rates (which are based off of them) low. Limiting the supply of 10-years causes their interest rate to decline.

Your original post is evidence that at least part 2 of this strategy worked. However, I think that we'll be paying $100s of billions more in interest costs over the next several years than we needed have because of these short-sighted policies.
I'm guessing that 3 is the primary reason, 2 is an added benefit, and I don't think 1 flies, no one could reasonably expect us to significantly pay down the debt in 3 years.
Hmmm.. So taxes will slightly subsidize the loans of people who bought their property before interest rates climb. Now, who is driving this policy, when did it start?
Aaron -

I included reason number 1 because when they announced in 2001 that they'd no longer be issuing the 30-year, the reason they gave was that they "wouldn't need it" because of the surplus. I think the conventional wisdom on Wall Street is that false pride kept them from bringing it back because it would put the lie to that statement.

Also, your original post was about the speed with which Gore would have paid down the debt. I think that if the tax cuts had not been enacted and spending had been held in check (by divided government), you'd see much of the public debt paid off by now -- thus, no point in issuing 10-year bonds.
But the tax cuts didn't cause the deficits, they just made them larger.

I still think that poor policy is the biggest factor in the potential problems we face. Borrowing money when rates are low isn't bad, but spending instead of investing it is.

I really see two possiblities:

1) The goverment locks in the interest rate by moving toward longer term debt over the next 3 years (slowing down the building and housing market).

2) The yield curve further inverts, short-term interst rates, and taxes rise because deficits become impractical without moving toward longer-term debt.

I think tax increases can be palatable if they can be focused on disposable income of highincome individuals.
Unfortunately not only is executive loyal to the legislator for partisan reasons, the legislator has a lot of leverage over the executive because of the war (I think we'd still be in Iraq if Gore was in office).
I guess it's hard to discuss causation, but the timing is pretty clear

The change that preceded the surplus going into deficit was the tax cuts. However, subsequent spending increases have been so large that, even if all the tax cuts were rescinded, the budget would still be in deficit.

As for the idea that we would have invaded Iraq under a Gore presidency, that completely boggles my mind. I can not imagine what makes you think that.
The reasons for going into Iraq were so compelling that I don't think it was possible to justify not doing so. It would have been the case for any administration.
I don't think that anybody outside of a small circle in the Bush White House and Defense Department was even considering going to war with Iraq in summer 2002. That group drew opposition from the old-line realists in the Republican Party (e.g. Brent Scowcroft), from the uniformed military (e.g. Eric Shinseki), the career professionals in the national security community (e.g. Richard Clarke), and from the intelligence community at large. I think it's doubtful to say that any other Republican administration would have gone to war in Iraq. I think it's crazy to say that a Gore administration would have. The Democrats as a party opposed the whole idea of preemptive war.

In today's WaPo there's a story about a top expert questioning how compelling the case for war was, even without the benefit of hindsight:
That some people don't like the way WMD intel was presented to the public has nothing to do with the reasons for going to war. That was simply salesmanship for popular support.

The war was justified because of Iraq's failure to coorperate. WMD provided a pretext for the inernational community. Strategic regional considerations, humanrights, security, and political aspects were the core of reasons to invade Iraq. Also creating a cultural exchange with the region and employing the military at a time when costs were extrememly low and benefits were high (high unemployment, low interest, recession, perception of weakness...).
Also providing a demographic which was facing high unemployment with experience and pride that will later envigorate the economy.
Saying that the war was justified is completely different than saying that it was inevitable or that any other administration would have done the same thing.

History proved that JFK was justified and ultimately right in putting an embargo in place in response to the Cuban Missile Crisis; however, I think most historians agree that if any number of other top figures at the time (Nixon, Johnson, etc) had been President, we likely would have had a military response -- airstrikes and possible invasion. For all we know, those would have also worked out well. There were very few people in 1962 with such a strong desire to avoid military action, and the guts to stand up for it, but one of them was President, so we got the embargo.

Similarly, there were relatively few people in mid 2002 with the desire to prompt an immediate military confrontation with Iraq. However, many of them were in the White House and the civilian leadership at the Pentagon, so we got a war.

Whatever the virtues of the war, the fact remains that it was not widely supported in most of the circles of power, especially on the left. It took a concerted selling effort to convince the Congress and the American people to support the war. There's no reason to believe that a Gore administration would have undertaken that effort.

Almost all of the people who had been supporting the invasion of Iraq in the late 1990s ended up in the Bush II administration. Together they had enough force to convince the administration to undertake the effort to sell the war to the people and the Congress and to do so over the objections of the military brass, the intelligence community and the career national security community. Those people (Rumsfeld, Perle, Wolfowitz, Cheney, Feith) were the key players in making the war happen and none of them would have been employed in a Gore administration. I challenge you to point to any Democratic national security experts who were making a similar case in the late 90s.

I think that George Packer does a better job of telling this story in "Assassins' Gate," but the Woodward book "Plan of Attack" is also informative.
There are many wars we could get into now that would be justified, but none were are strategically beneficial. It simply didn't make sense not to go into Iraq. I don't believe any reasonable person could have convinced himself not to go in.
Actually, I believe most of the planning was done back in 1998.
I'd like to think that Gore would have looked at the situation objectively and not simply cowed to the people surrounding him.
Clearly you think it was a good idea to have gone to war in Iraq. You're saying that anyone who thinks otherwise isn't thinking objcetively or being reasonable.

I don't wish to debate you on whether going was good idea, but I don't think that it's to your credit that you that the case is so clear that anyone who disagrees with you must have something wrong with them. Keep in mind that that list includes people like Richard Clarke, Colin Powell, Lawrence Wilkerson and Eric Shinseki, who have risen to the absolute tops of their national security-related fields. I submit that it's not as simple as you make it.
We had 4 main concerns at the time. Korea, al Queda, Iraq, and Iran. Military action in Korea would have made public an unimaginable refugee problem. Al Queda was and is being adress, futher, invasion of Iraq increases our ability to fight al Queda. Military action in Iran would not have been very practical, especially without having deposed Sadam and disbanding his army first.
There will always be very highly credentialled people who agree and disagree with policies.
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