Robert M. Liu, click here
to update your web pages on AuthorsDen.
Blogs by Robert M. Liu
A Message to Lawrance G. Lux 12/9/2003 1:04:21 AM
Originally posted at Roundtable as a response to Lawrance G. Lux's comments, this note touches upon recent economic data and the political left's alarmist "economic theories". In the author's opinion, it is much too early to worry about "high interest rates damaging the economy". Hi, LGL:
In 1943 in the middle of World War II, the United States ran a budget deficit that accounted for more than 30% of GDP.
In fiscal 2003 which ended on September 30 (again in the middle of a global war, i.e. the War on Terror), the U.S. ran a budget deficit of US$370 billion or so, accounting for only 3.5% of GDP -- way below earlier estimates.
In the meantime, there is no sign of inflation. Cheap imports from China keep prices low. Core CPI growth is about 1%. This gives the Federal Reserve a good reason to worry about inflation falling too low. All this is an indication that current budget deficits are manageable. They are not excessive at all.
So, the question is: Why is the political left so excessively "concerned" about budget deficits?
In my view, it is nothing but a left-wing trick. Left-wing Democratic politicians want the public not to see the wood for the tree. They exaggerate the effects of the deficits, saying "future generations will have to pay the debts" and "the deficits will lead to very high interest rates, severely damaging the economy".
This is 100% nonsense. True, in dollar terms, America's national debt has been growing all these years and decades. But no generation has ever had to repay the national debt, because America's GDP has been growing as well, keeping the debt-GDP ratio at a manageable level.
As to deficits leading to high interest rates, the fact that both interest and inflation rates are low means the federal government's budget deficits are not as large as the political left wants the public to believe. It belies the left wing's alarmist "economic theories".
With the industrial capacity utilization rate standing at about 74% and millions of people looking for jobs, there is a lot of slack for the economy to absorb, before we can justify any concern about "economic overheating" and "inflationary pressures" leading to "very high interest rates". Why should we count the chickens before they are hatched?
As to the national debt, the Federal Reserve can create as much money as it sees fit to "repay the national debt".
As long as the amount of liquidity created by the Fed does not cause rampant inflation, there is no need to worry about "future generations having to pay the debts".
The political left is a fear-monger trying to fool those who want to be fooled. So, if you want to buy those left-wing "economic theories", go ahead.
As to "economic data", I don't invent them. Whatever data I have, I have learned them from media reports.
For example: America's GDP grew by 8.2% in the third quarter of 2003. The manufacturing index of the Institute for Supply Management rose to 62.8 in November from 57 in October -- anything above 50 is an indication of economic growth. Non-farm payrolls were up 125,000 in September, up 126,000 in October, and up 57,000 in November.
Well, you can say all this good news is not true and only your "sources" are reliable. But who can verify your "sources"?
There is a general consensus on Wall Street that the economy has moved into a strong recovery mode because of the Bush tax cuts and the Fed's accommodative monetary policy.
That's why the Dow (which closed at 9965 Monday, Dec. 8, 2003) may break out above the 10000 mark before the end of the year.
Anyone who thinks this Wall Street consensus is wrong is free to sell stocks short. What about you? Put your money where your mouth is.
What about those left-wing Democratic politicians? They are free to sell short if they really believe the economy is going in the wrong direction.
As the economic recovery gathers momentum, the government's tax revenues are rising. This is because the strong nationwide GDP growth has caused the tax revenue base to expand, not only for the federal government, but also for state and local governments.
According to one recent media report, overall state and local tax receipts kept rising to hit $1.419 trillion at the end of the third quarter, a new quarterly record -- up $90 billion from 18 months earlier. This means the national "deficit" in state and local budgets has shrunk to less than $10 billion.
