December 1, 2004


The 9/11 Bubble (THOMAS L. FRIEDMAN, 12/02/04, NY Times)

I can't recall a time when the Treasury Department has been so emasculated by a White House. I went by the Treasury the other day and noticed a big sign outside saying it was being remodeled. Why bother? Who would know if it was gutted? The country would get more fiscal benefit by renting out the Treasury rooms for weddings, graduations and bar mitzvahs than it's gotten in the past four years from any advice coming from there.

Here's a trivia question for you: Who is the deputy Treasury secretary? It's a pretty important job, but I have no clue who it is.

This is a time when we really need a strong Treasury secretary capable of speaking up for fiscal sanity. We are about to embark on a 10-year period in which recent tax cuts and runaway spending are expected to add $5 trillion to the cumulative deficit. In my lifetime we will have gone from the Greatest Generation to the Profligate Generation to the Bankrupt Generation.

Here's a test: take a piece of paper and a pencil and name every deputy Treasury secretary in the nation's history who you can think of? Mine's blank--how 'bout yours? Now name all the Treasury Secretary's you can? Hamilton, Morgenthau, JFK had some Republican, Snow, Rubin, Regan, that aluminum wrap guy before Snow, Nick Brady maybe... Now all the current deputy Secretary's you can think of in any department of the government? Are Armitage and Wolfowitz deputies?

Okay, that's a silly enough exercise, now try this: the GDP is $12 trillion and the economy is growing in the 3 to 4% range, what is the total GDP over the next ten years? What percent is $5 trillion of that? under 3%? At the end of that decade when the total U.S. debt is $12.5 trillion, giving Mr. Friedman his numbers, what percent will that be of the annual GDP?

There must be some reason to listen to this guy once in awhile on foreign affairs--he does write for the Times and have all those awards--but he'd appear to not know the first thing about economics.

Posted by Orrin Judd at December 1, 2004 10:57 PM

In the first place, the $ 5 trillion number is complete and total garbage, having no basis in reality whatsoever. That would mean an average Federal budget deficit of $ 500 billion a year, every year, for a decade.

Unless Mr. Friedman is prophesying a second Great Depression or WW III, that won't happen.

From 1929 to 2004, a period which included the Great Depression and WW II, the Cold War, Vietnam, and the Korean War, as well as the full integration of minorities and women into the workforce, and the widespread utilization of micro and minicomputers, the US' GNP grew 300% per capita, in constant dollars.
That works out to an average of 2% growth, year over year.

Given the enormous events that occurred between '29 and '04, some primarily negative and some positive for the economy, it seems safe to use 2% as the average baseline over long periods.
However, it seems very unlikely that the US' economy will suffer a Great Depression or total war effort during the next ten years, which suggests that projecting an average growth rate of 4% a year isn't a fantasy...

If the US' economy were to grow at an average rate of 3% over the next decade, the total combined Federal budget deficits over the same period would likely total no more than $ 2 trillion, (probably less), but let's use the delusional $ 5 trillion figure.

Total GNP '05 - '14, 2% growth: $ 135 trillion.
Total GNP '05 - '14, 3% growth: $ 140 trillion.
Total GNP '05 - '14, 4% growth: $ 150 trillion.

$ 5 trillion is 3.6% of $ 140 trillion.

At an average growth rate of 3%, the US' GNP would be $ 16 trillion in '14; $ 12.5 trillion is 78% of $ 16 trillion.

Posted by: Michael Herdegen at December 2, 2004 12:20 AM

Some guys have the best years of their lives in high school. After that they just sit around talking about glory days and waiting to die.

Tom's best days were in the early 80's in Beirut. He was a young reporter trying to come to grips with a truly strange world. The chapter in Beirut to Jerusalem on Hama is still very affecting. You can walk around the city with him, wide-eyed whistling "holy-$h;t are these creatures human beings?" After he went to Jersualem it was all down hill. He became full of himself.

Now the times has Friedman opining on Economics, Paul Krugman on Foreign Policy, and Frank Rich on Politics and Maureen Dowd on anything. Its like the old joke about hell being a place where the cooks are English and the politicians are French.

Maybe what the NYTimes should do is go to the city drunk tank every morning and hire the first ten guys out to write columns. It won't get worse.

Posted by: Robert Schwartz at December 2, 2004 12:26 AM

OJ, you're doing it again. Comparing CUMULATIVE debt to CUMULATIVE GDP doesn't really make sense because we consume the vast majority of GDP but the deficits really do accumulate.

If the additional CUMULATIVE debt over the next 10 years really were $5T, you would have to add that to the current public debt of approx $4T and get $9T. You would then look at that as a percent of GDP in ten years, not the cumulative GDP for ten years. $9T/$16T (from Michael's comment above) is about 55%. Still not bad, especially if we fix SS. Compare to currently almost 70% for France and over 150% for Japan.

Posted by: Bret at December 2, 2004 12:49 AM

Back in those glorious 80s. he was finding
excuses for Hezbollah's bombing of the Embassies, the Marine barracks and the French foreign legion
headquarters (a toss up between Sabra & Shatila
and the shelling of the Druze by the New Jersey).
and pressuring the retreat of US forces that Bin
Laden, would use as his argument of US vulnera
bility. By the way, the unit Tom, visited
in Iraq, recently was MEU 24, the same unit at
the Marine barracks' they more than anyone no the price of retreat

Posted by: narciso at December 2, 2004 12:51 AM

Bret: Granted, but it is also important to look at the yearly deficit against yearly GDP. Are we deficit spending because we have to, or because we choose to? As we clearly could spare another 3 or 4% of GDP, obviously it's because we choose to.

Also, without including Social Security as if it were a budget item, and without looking at new SocSec liabilities, the whole discussion is irrelevant, anyway.

Posted by: David Cohen at December 2, 2004 7:58 AM

Sure, though you need to consider average growth then too. A 4% deficit's no big deal with 5%+ nominal growth, but with a 0% average nominal growth could lead to problems.

Posted by: Bret at December 2, 2004 9:07 AM

Good point. And I take it we're all agreed that Friedman's column is a waste of good ink.

Posted by: David Cohen at December 2, 2004 10:22 AM


Posted by: Bret at December 2, 2004 10:47 AM

I'm disappointed - Friedman should have been able to name Peter Fisher (Deputy Treasury Secy. under Clinton AND Bush).

Obviously, Tom needs to get out of NY more.

Posted by: jim hamlen at December 2, 2004 10:48 AM

No Gallatin? Not even Lloyd Bentsen? Sigh . . .

Posted by: AC at December 2, 2004 2:56 PM

How come compounding works in every instance but this one?

Posted by: at December 4, 2004 12:08 AM

Because the interest is so low and we never have to repay the principal.

Posted by: oj at December 4, 2004 8:32 AM