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The gridlock-and-debt index

Tyler Cowen weighs in on the Krugman/Rogoff argument over the highest debt-to-GDP ratio America can hit before the debt becomes a drag on growth. I happen to have no opinions on this topic, and so will leave it alone. But I'd add one thing: Maybe debt-to-GDP isn't the best measure.

The market's primary -- though not sole -- worry about America's debt load is whether we can pay it back. If we can't, and we decide to inflate or default our way out of some of the debt, that's what scares the market. But the driver behind that question is not how much debt we have, it's whether our political system can make the difficult choices to deal with that debt. So long as the political system is working reasonably well, we can get out from even quite a lot of debt. But the more it breaks down -- the more the market see things like the deficit commission rejected by its Republican sponsors in Congress, the more it hears threats to repeal the deficit reduction in health-care reform, the more it seems likely that Democrats will become just as unreasonably obstructionist when they become the minority -- the more it has reason to worry.

As everyone knows by now, the threat is long-term, not short-term, debt. So if the market is going to produce the short-term panic that some expect, the trigger is more likely to be political events that convince investors that our system won't be able to agree on deficit reduction. Call it the gridlock-and-debt index. If political paralysis and polarization get high enough, and debt gets high enough, then there's real reason for the market to worry. And though some find comfort in the fact that debt-to-GDP isn't likely to rise much in the next few years, it's entirely possible that evidence of political dysfunction is about to skyrocket.

By Ezra Klein  |  July 23, 2010; 9:12 AM ET
 
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Comments

"As everyone knows by now, the threat is long-term, not short-term, debt." If only wishing made it so. If that were the case, then we'd have a huge stimulus bill being passed in conjunction with long-term cuts to social security and medicare. Everyone I talk to about this says the problem is the deficit, and they mean this year's deficit.

Posted by: Levijohn | July 23, 2010 9:46 AM | Report abuse

"As everyone knows by now, the threat is long-term, not short-term, debt."

What kind of false tautology is that? Short term debt adds up year after year to long term debt.

As to whether or not there will be political will to raise the revenue needed to pay for the Democrats manic spending spree....I guarantee you it will all have to come from the Democrats. There is absolutely no way the Republicans are going to dig them out of their hole.

Posted by: bgmma50 | July 23, 2010 9:47 AM | Report abuse

There's been some tension lately between competing claims that the Senate has never been more gridlocked and that this has been the most productive Congress in decades.

The two issues aren't ofted talked about in the same story, but I think it's pretty clear that both are true. Never has the filibuster been used as extensively as it has been during this Congress, and that has led to a lot of slow downs or "slow walks" of the process. On the other hand, Democrats have had large enough majorities that they've been able to push through the filibusters with no or minimal support of Republicans. It will be really interesting, and I'm sure extremely frustrating, to see how things play out when the Republicans pick up a few more seats.

My guess is that Repubicans will filibuster just as much, but with much more effect. No major legislation will get passed, though there might be some minor accomplishments here and there. Especially with a presidential election coming up after the next Congress, I imagine getting major policy done is almost out of the question.

Posted by: MosBen | July 23, 2010 9:50 AM | Report abuse

In Republican eyes, Democrats have been engaged in a course of "Gorging the Beast", deliberately embarking on a ruinous course of spending in order to force Republicans to raise taxes to reduce the deficits and debt. The Republicans aren't going to play.

Posted by: bgmma50 | July 23, 2010 9:51 AM | Report abuse

My first thought was to disagree, because gridlock does reduce discretionary spending, but we haven't seen either side willing to make the cuts in Medicare and Social Security spending that we need, regardless of gridlock. The whole concept of the definition of a deficit commission is a farce as long as those politicians addicted to power refuse the give up the votes of those that want to steal from the future (when they'll be dead) to get benefits today. The baby boomer generation failed to elect governments that would adequately provide for their future when they were earning. They don't deserve access to unlimited, overpriced medical care.

Posted by: staticvars | July 23, 2010 9:53 AM | Report abuse

bgmma50, even if what you say is true, and the Democrats have been purposely engaging in a grand conspiracy to force Republicans to raise taxes, you're telling me that Republicans care so little about the deficit that they'll kick the can down the road on addressing the debt because they "aren't going to play"? And don't tell me spending cuts, because Republicans ran away from Ryan's proposal like it was a pinless grenade.

Posted by: MosBen | July 23, 2010 10:00 AM | Report abuse

@Levijohn:

Ever stop to consider that the people you talk to don't know what they're talking about?

@MosBen:

Of course they did. It's not a shock that they ran from a proposal that combined massive cuts to Social Security and Medicare AND the biggest tax hike in American history.

Posted by: jldarden | July 23, 2010 10:04 AM | Report abuse

Almost all of the current deficits were created by Bush.

Almost all of the debt was created by the last three GOP presidents.

Those are irrefutable facts (that I am sure Republicans will nevertheless deny).

Yet, I feel the Earth's political axis may have tilted.

Conservatives demand the status quo yet unwittingly argue for low taxes and (while Dems are in office) low spending. Liberals are demanding keynesian investments during the Great Republican Recession in order to save jobs and stimulate growth.

Oddly, the conservatives are therefore demanding (unintentionally, mind you) an economy based less on growth, which means we will be forced to make do in a more sustainable way, long a liberal ideal. And liberals are oddly trying to shore up a corrupt, growth based system that is inherently unsustainable.

For reasons totally unrelated to conservative dogma and talking points, I am now leaning to cutting taxes and spending even more, as this may be the only way to de-fund a corrupt system and end our global military adventures. Yes, I think I now believe that, in the current environment, the things the GOP demands are the things we need to achieve the most important progressive goals. All progressive goals will never be met, so nothing is perfect.

Posted by: lauren2010 | July 23, 2010 10:05 AM | Report abuse

My recollection is that the last time we had gridlock in the 1990's with the Republican Congress and President Clinton was also the last time the deficit situation improved. Prior to that, it was G.H.W. Bush and the Democratic Congress from 1989 - 1992.

One party government whether it's Bush and the Republican Congress or Obama and the Democratic Congress seems to be the recipe for out of control spending, deficits, and debt.

I'll take the gridlock thank you.

Posted by: jnc4p | July 23, 2010 10:17 AM | Report abuse

"Almost all of the current deficits were created by Bush."

Lauren2010, I'll readily admit Bush was hardly a fiscal conservative, but Democrats have been in charge of Congress since 2007 and the current deficit is being run under a unified Democratic government.

There was a really tough recession that started at the end of Bush's term, but he didn't create the recession. In any case, if your party has the Presidency and Congress, you own your budgets. Harding inherited an economy that had fallen into depression back in 1921, but nonetheless he decided to cut spending, taxes and actually managed a budget surplus.

Outside of that argument, the Administration projects deficits of 4% of GDP even when we return to full employment. If the administration's predictions are accurate, there will be more debt added under Obama (assuming a 2 term presidency) than the three Republican presidents you cite as so damaging.

"Conservatives demand the status quo yet unwittingly argue for low taxes and (while Dems are in office) low spending."

I'll agree nearly all conservative politicians are hypocrites, as are most politicans.

"Liberals are demanding keynesian investments during the Great Republican Recession in order to save jobs and stimulate growth."

How did Republicans, as a collective, cause the recession? How do we know stimulus actually works? It might just create temporary make work at best, and then were are left with a pile of debt afterwards. To the extent there are necessary public investments that need to be made, by all means make them. But what I see in my area are perfectly fine roads getting torn up and repaved again by workers who are overpaid (Davis-Bacon). More broadly, the projects being funded in my area per recovery.gov are less than encouraging.

"I am now leaning to cutting taxes and spending even more, as this may be the only way to de-fund a corrupt system and end our global military adventures."

I am in complete agreement here. The military-industrial complex is a huge part of the spending problem. The wars accomplish nothing and run up huge bills that we will have to pay in the future. It's a disgrace.

Posted by: justin84 | July 23, 2010 11:01 AM | Report abuse

Ezra Klein writes
"Maybe debt-to-GDP isn't the best measure."

I agree, but I think Klein makes only half the argument. The other half is that we're not the only country offering debt. The debt market is relative - so our ability to sell our bonds isn't influenced soley by our debt-to-GDP ratio, or the vagaries of our political process, but also whether we're still the safest game in town, so to speak.

Posted by: bsimon1 | July 23, 2010 11:33 AM | Report abuse

Justin

A confluence of factors, most related to Bush, caused the Great Recession.

The Iraq War is a huge one. It caused energy prices to skyrocket and that put a crimp on economic activity by thrift minded consumers.

Debt creation by Bush also had an impact. It reduced capital needed to fund the non-military economy. The defense budget doubled under Bush and so did the national debt.

Bush's preoccupation with Iraq caused him to lose focus on domestic management of various things that led to, among other things, an out of control subprime housing situation. Bush could have fixed any mistakes made in prior administrations but chose to foolishly believe the economy was "sound" until one month before Lehman collapsed though signs were abundant it was not.

There are many other factors, all related to Bush. For example, 100s billions were stolen from western states in 2001 by the Enrons as Bush gleefully cheered them on.

You believe what you want. I am not trying to convince you. There is adequate material from objective economists and others that all point to gross mismanagement and outright ideological blunders by Bush.

Most of the mistakes made by Clinton were pushed by Reaganistas like Phil Graham and Gingrich as compromises to achieve other progressive ends. Again, Bush had ample warning to "manage" Clinton mistakes, yet instead he amplified those mistakes, cut even more regulations, vastly increased derivative leverage ratios, eliminated stock regulations, ramped up subprime lending, etc..

The GOP successfully starved the beast. I don't think any more that traditional keynesian policies will be helpful. Too much corruption and momentum for a now deeply flawed system.

In the same way Bush gets my blame for the recession, if Obama does not soon correct his ways (end wars, etc), he will inherit full blame. Not yet fair to blame Obama for the current problems, but he is showing signs of digging the hole deeper instead of turning away from voodoo policies.

Posted by: lauren2010 | July 23, 2010 11:37 AM | Report abuse

"Almost all of the current deficits were created by Bush."

Deficits have two sides. Revenue and spending. What Democrats love to overlook is that revenues increased under the Bush tax cuts. So did spending. Before Democrats raise taxes or mess with the Bush tax cuts, they'd best be very certain that revenues will increase.

MosBen, I'm sure the Republicans would be more amenable to increasing taxes if Democrats would go back to square one on Obamacare and freeze the rest of the stimulus package. :)

Posted by: bgmma50 | July 23, 2010 11:38 AM | Report abuse

Obamacare health care increases is massively affecting all forms of insurance. Such as property and auto insurance that pay for medical claims. Obama says he is attempting to reduce Medical expenses. Yet Medicare and Medicaid increase in cost. Yet he cuts payments for Medicare. And the bush tax cuts will most certainly affect doctors and for profit hospitals and facilities.

Defense is an expensive cost we must have. Go to Hawaii and sit and review what it was like when the Japs bombed Pearl Harbor and our lookout man was asleep on the job. Let alone visiting the site of 9/11. How does USA defend itself from these monsters?

Posted by: OptionJohn | July 23, 2010 11:38 AM | Report abuse

@j84:There was a really tough recession that started at the end of Bush's term, but he didn't create the recession.

Really? really???
-7 years of deficit exploding spending?
-2 unpaid for wars?
-Massive redistribution of wealth to the top 1%?
-Allowing Wall St. and the mortgage markets to "regulate themselves"?

And that is just for starters....

Aren't these EXACTLY the causes of the great recession?

Posted by: srw3 | July 23, 2010 11:38 AM | Report abuse

jldarden, well, I don't think it's so obvious that they would run away from Ryan's proposal. It's clearly identifiable as an attempt to address the deficit primarily through the levers prefered by conservatives. It's harsh, yes, but it's certainly a serious attempt to reduce the long term deficit, and it doesn't use means prefered by liberals. If it's true that "of course" conservatives ran away from it, then that says to me that conservatives either prefer A) Addressing the long-term deficit through liberal means, but won't do so for political reasons, B) Want some kind of middle ground solution that pulls from liberal and conservative ideas, but won't do so for political reasons, or C) not to address the long term deficit.

I think "C" is the most obviously likely answer, though the reasons for why may be debatable. Still, what it really means is that when conservatives complain about Democratic spending and the deficit, we shouldn't believe them.

Posted by: MosBen | July 23, 2010 11:40 AM | Report abuse

Okay first GOVERNMENT, not just the Feds spent $6.1 trillion dollars last year. That amounts to approx $55,000.00 per household. Out of which the military was a paltry $7,500.00 of that spending.

The deficits that accumulated under Bush were not from military increases. Oh the military did increase, don't get me wrong but 90% of the deficit was a result of an increase in social spending NOT military, oh yes the tax cuts added to the deficit SLIGHTLY but the increase in economic activity at the time pretty much offset the amount of differential that was not slated to occur, it would have gone up REGARDLESS.

Now unfortunately when you are spending $55,000.00 per household you do need a way to pay for it. The Median income in 2009 was $52,000.00. It is my opinion we are spending too much money on Government.

Now you can argue that the Deficit spending is ALL Bush's fault but that does show a bit of partisanship on your part. The truth is both sides are responsible for allowing this extreme amount of money to be spent. And if you look to see what has happened under the Obama administration there has been NO attempt to bring the GOP on board. Rather it has been a constant assault along partisan lines.

The best kind of government is not one where you 'GET THINGS DONE'. The main question when writing a bill is not how much of something should be done, but rather, should anything be done at all?

I am a proponent of a non progressive tax, let me explain why briefly. 1) all citizens regardless of income receive equal treatment under the law in respect to taxation in this case. 2) People would DEMAND less from the government since what they demand is in direct response to what they have to pay. This allows people to actually feel the affect of legislation passed in government. 3) Corporate taxes should be done away with. This has to do again with the people feeling the weight of taxation and understanding what it will cost them.

I know these things will never be implemented. I know the justification used for taking more from the rich. I simply find them morally indefensible. Again for those that BELIEVE that the military is too much of our budget please also understand that back 100 years ago it used to be almost ALL of the budget ( it was the only thing besides the postal service the Federal government did )

Thanks for reading, please understand this is opinion and I may be wrong but it is, after viewing the facts that I have, how I feel about the situations, please if I am wrong help me understand how I am wrong.

Posted by: Innocentiousxii | July 23, 2010 11:54 AM | Report abuse

bgmma50, what, over the last two years has led you to believe that the Republicans are willing to compromise on anything with the Democrats? They killed the debt commission because, as I remember, taxes weren't going to be taken off the table.

If the last two years prove anything it's that the current Republican legislators love to play a shell game where a few of their more moderate members pull legislation to the right by flirting with supporting it, then pull out at the last minute and let the Dems vote for it.

Posted by: MosBen | July 23, 2010 12:01 PM | Report abuse

@MosBen:

C is the answer. Republicans love to talk about the deficit, but always oppose serious proposals to address it.

@bgmma50:

That's simply not true. Revenues dropped by a considerable amount after the Bush tax cuts were enacted.

Posted by: jldarden | July 23, 2010 1:23 PM | Report abuse

Really? really???
"-7 years of deficit exploding spending?"

How did this cause a recession? Please explain the transmission mechanism. If it does, how is the Obama strategy of even more deficit exploding spending going to help?

"-2 unpaid for wars?"

World War II was an 'unpaid for war'. Wasn't aware of a recession from 1941-1945. Most wars are unpaid. I don't like the unpaid wars because they are quite often a waste of lives and wealth, but they were not proximate causes of the recession.

"-Massive redistribution of wealth to the top 1%?"

This doesn't cause recessions either. There was lots of "redistribution to top" going on during the Clinton years as well.

"-Allowing Wall St. and the mortgage markets to "regulate themselves"?"

There was and is a ton of regulation on Wall Street. The existing army of regulators wasn't able to forsee and step in to prevent the crisis. Politicians on both sides of the aisle foolishly cheered the housing bubble on. Various regulations - particularly with regards to the rating agencies - almost certainly made the problem worse. The problem is the ability of banks to create credit out of thin air. As long as they can do that, you will have the occasional spectacular bust no matter what the regulators do.

"And that is just for starters....

Aren't these EXACTLY the causes of the great recession?"

No. The cause of the great recession is credit creation which led to unsustainable spending patterns. Today's economic weakness is the combination of deleveraging and redirecting economic resources to new uses.

Bush could have mandated 20% down on mortgages and that might have stopped the bubble had he done so in 2003, but in all probability a bubble would have been blown elsewhere. To the extent that Bush was okay with credit being created out of thin air, he is culpable, but then nearly all politicians are.

Posted by: justin84 | July 23, 2010 1:32 PM | Report abuse

"The Iraq War is a huge one. It caused energy prices to skyrocket and that put a crimp on economic activity by thrift minded consumers."

Lauren,
But economic growth was strong from 2003-2007 despite high and rising energy prices. The Iraq war did take supplies offline and from that perspective prices were surely higher than what they would have been, but soaring energy prices is largely a demand story. In any case, how would a negative supply shock in energy cause a deflationary recession? To the extent the shock was supply driven you'd expect to see stagflation.

"Bush's preoccupation with Iraq caused him to lose focus on domestic management of various things that led to, among other things, an out of control subprime housing situation. Bush could have fixed any mistakes made in prior administrations but chose to foolishly believe the economy was "sound" until one month before Lehman collapsed though signs were abundant it was not."

By the time it was obvious to a consensus of observers that subprime was going to be a disaster, not much could be done. Even Bernanke thought the subprime crisis would be 'contained' as late as 2007, and Bernanke is a far brighter guy than Bush.

I'll admit Bush could have stopped the housing bubble, but regulations were/are not going to be a permanent solution. Brilliant regulators can easily be bamboozled. I'm not convinced that a President Gore would have been any better - for all we know a Gore Administration would have worked with the Barney Franks and Chris Dodds of the world to increase the ability of subprime borrowers to afford ever pricer homes as the bubble grew - that's speculative, but very few presidential candidates understand the problem was unconstrained credit creation. They see rising prices and homeownership as something to boast about, something likely to get them reelected, and an excuse to create a new program to allow ever more people into the game. I can count on one hand the number of politicians who reacted with horror as housing prices soared.

"You believe what you want. I am not trying to convince you. There is adequate material from objective economists and others that all point to gross mismanagement and outright ideological blunders by Bush."

I don't think Bush was a good President. He wasted a lot of money, built up debt and started unneccessary wars. His administration seemed hostile to scientific evidence on a number of issues. He thought throwing money at problems would solve them. His tax cuts probably only slightly increased the rate of growth during his terms, and we have a lot of debt now as an offset to that growth.

The proximate cause of the collapse was an unrestrained credit bubble, and that type of problem is more of a politician problem than a Bush problem.

Posted by: justin84 | July 23, 2010 1:55 PM | Report abuse

The current deficits are due mostly to:

- Bush tax cuts
- unfunded wars
- Medicare part-D
- lower tax revenues due to Great Republican Recession

People here who claim Bush's debt increases are primarily due to social spending are not very well informed.

Justin, The Iraq War was itself a "stimulus". It provided SHORT-TERM economic benefits only. Eventually, the entirety of Bush's follies overwhelmed that short-term gain. Wars are not a good way to create a sustainable economy. WWII was also a war that provided short-term benefits. But the long-term benefits came after WWII when the USA was the only major player left to rebuild and resupply the entire planet.

The Iraq War in the long-term contributed to the Great Recession because of debt and money shortages and increased energy prices and increased home construction prices due to shortages of wood and concrete and other materials, as well as other factors.

Posted by: lauren2010 | July 23, 2010 2:32 PM | Report abuse

Ezra, you can talk all you want about ratios, taxing, spending,etc. What you have not discussed and should is the creditability of the government. When the population as a whole loses trust in their government, your theory of ratios is meaningless. Just look what happened to the Weimar Republic, prior to Hitler taking power. Germany just kept printing money, people lost faith in their government and anarchy resulted. If you don't believe this could happen in the U.S., then you truly are in the 'Twilight Zone'. As a retired banker, who has lend to every type of business and person over 40 years, I know that ratios are interesting measures, but the thing that counts in the end in lending is the 'Character' of the borrower. This government is losing its creditability. Unless they get spending under control we are in for a scary time.

Posted by: hstad | July 23, 2010 2:43 PM | Report abuse

"That's simply not true. Revenues dropped by a considerable amount after the Bush tax cuts were enacted.

Posted by: jldarden"

jldarden, you are simply misinformed.

Bush took office amidst a recession the resulted from the dotcom bust, followed in short order by 9/11. He had two major sets of tax cuts, one in 2001, and one in 2003. Federal revenues for the Bush years were as follows (in millions):

2001 $1,991,142

2002 $1,853,149

2003 $1,782,321

2004 $1,880,126

2005 $2,153,625

2006 $2,406,876

2007 $2,568,001

2008 $2,523,999



Posted by: bgmma50 | July 23, 2010 5:26 PM | Report abuse

You want to see something REALLY SCARY?

Receipts Outlays Surplus/Deficit

2004 $1,880,126 $2,292,853 -$412,727

2005 $2,153,625 $2,471,971 -$318,346

2006 $2,406,876 $2,655,057 -$248,181

2007 $2,568,001$2,728,702 -$160,701

2008 $2,523,999 $2,982,554 -$458,555

2009 $2,104,995 $3,517,681 -$1,412,686

2010est $2,165,119 $3,720,701 -$1,555,582

Posted by: bgmma50 | July 23, 2010 5:37 PM | Report abuse

"bgmma50, what, over the last two years has led you to believe that the Republicans are willing to compromise on anything with the Democrats?"

MosBen, considering that Republicans anticipated numbers such as the ones I just posted would result from the manic spending spree on which the Democrats have been indulging the last two years, I think the Republicans have been entirely justified in not compromising. And I think they are entirely justified in telling the Democrats to dig themselves out of this hole.

"I am now leaning to cutting taxes and spending even more, as this may be the only way to de-fund a corrupt system and end our global military adventures.' posted by lauren2010

Ah Hah! I suspected as much. In fact I told somebody just the other day that I strongly suspected the Democrats had concocted their very own answer to "Starve the Beast", although they hadn't yet given it a name. I named it "Gorge the Beast", the principal being that the Democrats wish to feed the beast until it is so large and overwhelming that no one will have the courage to do anything but feed it. The only difference is, lauren2010 wishes to simply force the Republicans to accept a cut in defense spending. Her friends wish to force the Republicans to increase taxes.

Posted by: bgmma50 | July 23, 2010 5:46 PM | Report abuse

"The current deficits are due mostly to:

- Bush tax cuts
- unfunded wars
- Medicare part-D
- lower tax revenues due to Great Republican Recession"

The current deficits are due entirely (entirely) to the current government being unable to match revenues and outlays. If the Democrats wanted to balance the budget there would be no stopping them. Three of those four on your list could be gone tomorrow but for the grace of the Democrats.

"The Iraq War was itself a "stimulus". It provided SHORT-TERM economic benefits only."

What did the war stimulate? I thought guns and butter were trade offs. Wars do nothing but destroy wealth.

"The Iraq War in the long-term contributed to the Great Recession because of debt and money shortages and increased energy prices and increased home construction prices due to shortages of wood and concrete and other materials, as well as other factors."

Right, so the housing market collapsed because the Iraq War created a shortage of wood and concrete? Really?

Money shortage? How did Iraq create a 'money shortage'? There is a lot more money now - however measured - than there was in 2002. If anything, depending on how measured, too much money was the problem.

How much, really, did Iraq contribute to energy price increases vis-a-vis Asian demand? Did the Iraq war cause gold to rally in the 2000s too?

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