The Debt Bomb

0:00There's one of the current news magazine shows on TV that plays a game each week that they call Timeline. They tell you the events that happened a particular year and you guess the year. So I thought maybe we'd start out by playing a round of that this afternoon. And given that it's associated with the talk on the debt bomb, you might be able to guess the year from there. But hold your guesses until I've given the clues, after which point I assume everybody will know the right answer. The year I have in mind was the year that General Motors introduced a new luxury car, personal size luxury car, they called it the Monte Carlo. It was the year that Dwight Eisenhower passed away.

0:53It was the year that the Vice Presidency passed from Hubert Humphrey to Spiro Agnew, and it was the year of the first landing on the moon. Now, does everybody know what that year was? 1969, which turns out, of course, not only to be the year of the first landing on the moon, but also the last year in which we had a balanced budget in this country. I think I and probably most of the audience remember all those other events even at the time. We knew, we're aware at the time about Eisenhower, about the moon landing, I even knew about the Monte Carlo, I was in the market for a car that year.

1:40I don't think I knew even at the time that the federal budget was in balance, nor did And I have the slightest idea that that would be the last year that we would see that result. So it's been a long time since we've had anything close to a balanced budget. More importantly, over the last 15 years or so, the budget has been dramatically and chronically out of balance. One of the messages I have for you today is not some message that the budget has to be be balanced absolutely all the time every year without fail, but rather that there are dire consequences of chronic and dramatic imbalance in the federal government's budget.

2:30I can remind you that over the last several years, there have been a spate of books, I'm sure that this audience has read several of them, dealing with the potential prices that might be caused by the imbalance. One entitled Bankruptcy 1995 by Harry Figge, which presents some very stark figures that causes you to sit up and take notice. A number of others, so many that they even compete for titles. You have to look twice to see that the titles are different. There's one book out called The Bankrupting of America and another book called The Bankruptcy of America. To look very close, crowding in there, dealing with this particular topic.

3:19And for this group, those are the books you're likely to know about and to have read some, particularly the Figge book. One thing that I'll be able to tell you today is that those books are virtually ignored in academics. And I want to let you know that in academics, so the deficit seems not to be a worry at all. That fact in itself is something of a worry. I think that when the history of thought of this period comes to be written, the economics profession will be recorded as sleep at the switch. Why did they miss that problem? And let me try to make it real for you. I'll go on to say that in addition to the bankruptcy 95 and a few other books of similar title, Even the popular press has picked up on the dramatic imbalance in the budget.

4:11For a time, I haven't noticed it lately, but for a time, CBS News was running a Monday evening regular where they would show the deficit figures in the accumulating debt. They even had a little debt meter, I guess you would call it, kind of like the odometer in your car that was keeping track of the growing debt. and to give you a feel for the rate of increase if that really was an odometer in your car racking up miles instead of racking up dollars. And if you tend to trade cars about once every 100,000 miles, you'd be getting a new car every nine seconds, okay? So that's been run up at a pretty good rate.

4:57But this all seems to be lost in academic circles. There's no hint of much of a problem here. In fact, what we see in academics is debates of a very different kind. Debates sit around the question of how best to measure the deficit anyhow. A lot of journal articles devoted to this question and follow on questions of is the deficit high or is it low in some sense, or is it possibly a surplus in disguise? And we'll look at that view of the deficit as we go along too. Beyond this, the debate seems to have resolved itself in a question of whether the deficit is a good thing or merely benign.

5:43There seems to be an important conclusion that gets left out, an important possibility that gets left out of this debate. Is it a good thing? Some people think it is. There's another book out that some of you may have seen, Robert Barclay, who works for the Wall Street Journal, writing about the boom of the 1980s, something I talked about yesterday and connected it with the recession of the 1990s. Barclay wrote a book entitled The Seven Fat Years and How We Can Do It Again, not having learned the lesson that there was a connection between good times then and bad times more recently. Another book worth mentioning that's more in line with mainstream thinking, written by Robert Eisner of Northwestern, a very, very significant member of the economics profession, recent president of American Economic Association.

6:41And his book, widely read at least in the economics profession, is How Real Are the Federal Budget Deficits? And having that question as a title almost hints at the answer. You know, in one sense you could say, well, they're unreal, meaning that the amazing hides. But of course, that's not what he had in mind, that he argued, and I'll show you how shortly, that the deficits aren't anything to worry about at all. So one of the things I want to do for you today is look at some other views of the deficit, because if you read the kind of material that those of us with the Mises Institute typically read, We find it almost incredulous that people could find that deficit is either benign or a good thing and yet that's exactly what happens.

7:31Robert Eisner, self-identified Keynesian, has set out virtually to rewrite the macroeconomic history of the post-war era and rewrite it on a basis of an alternative definition of the deficit. Isner is upset about the way that economists tend to measure the deficit. He refers to the old conservative curmudgeon way of measuring a deficit. Well, let's look at this. Let's get it straight. How do we measure the deficit? Current government spending is somewhere on the order of $5 trillion. It hasn't gotten quite that high yet, $4.5 trillion. 4.5, but I'm going to make the numbers easy and call it 5 trillion.

8:19So, government spending, yeah, that's what I'm going to put it into. What I want is government spending, which we'll call, how's this, trillion 5, is what I had in mind. Government spending is about a trillion 5, so each year the government spends about ... Do I hear a bid for any more zero? Hey isn't my note right?

9:05Government spending, about a trillion five, and the level of taxation is somewhere around a trillion two, okay. I'll let you imagine the rest of the zeros there, call it 1,200 billion, which is the way I had intended initially to write it. And the difference then, it turns out to be 300 billion, okay, do it that way, which is G minus T, okay, 300 billion. Well, now this, as identified by Eisner, is sort of the old curmudgeonly way of measuring the deficit, the old-fashioned way, and the way that he disputes. And he offers instead a new way of measuring the deficit, which does wonders for the calculus, it turns out.

9:57We get different answers all together. So here we've supposed the government spending of $1,500 billion and taxes of $1,200 billion, taking the difference to be the deficit, conventional definition. And now what I want to do is do a little more supposing following Eisner and see how he gets a modified deficit. Let's take the total outstanding debt. And again, I'm going to use rounded numbers. In other words, this is what I want to call about $5 trillion, it's actually about $4.5 at this time. So the debt itself is about $5 trillion, let's say $5,000 billion, like that. And then suppose, as we did before, that taxes are in the neighborhood of $1,200 billion, so that the government needs to borrow $300 billion.

10:53And let's assume that the government borrows it largely from the Federal Reserve. In fact, let me put this example slightly in the future, we'll say fiscal year 97, after which Clinton has appointed a different chairman of the Federal Reserve Bank, one that's more cooperative and more willing to monetize. And so we'll assume that that borrowing is forthcoming by the Treasury selling bonds to the Federal Reserve, which of course causes inflation. And let's say the inflation is as much as 10%, which might be not all that far-fetched for 97. In fact, it was what we experienced in the late 70s, that and a little more.

11:40But if you get an inflation rate of 10% because of the Federal Reserve extending credit to the Treasury, Then that erodes the real value of the outstanding debt, alright? So what counted as outstanding debt of 5 trillion at the beginning of the physical year is actually less by 10% at the end because of the inflation. The debt has been eroded away to the tune of 10%, okay? So the first adjustment we'll make is to subtract the 500 billion associated with the inflation And that gives you $4,500 billion, to which, of course, we do have to add the current borrowing, which is $300. And that gives us a net of, in real terms, $4,800 billion, $4,800 billion.

12:33Which is less, it turns out, than what you started with. You started with $5 trillion and you ended up with $4.8 billion. So this, when Eisner rewrites the book, is declared a surplus, okay? It's a surplus in the amount of 200 billion. And this is the most common usage of even the definition of deficits in the journals. Eisner first introduced this several years ago, and much of the empirical work in the journals would use the Eisnerian-measured deficit. And sometimes I'd have a little asterisk indicating that this measure factored in the erosion of the debt as a result of inflation. But in more modern times, in the profession, it hasn't even been thought necessary to put in the footnote.

13:23You just talk about the deficit or the surplus, whichever it is, and it's understood that you're measuring it in Isnerian terms. Now, to me, this is a little bit troubling, it defines the deficit away, in fact, one One of the bad consequences of the deficit is precisely the fact that the government tends to monetize it, and yet by their monetizing it, they reduce the deficit and possibly turn it into a surplus. Eisner uses this particular reformulation of the deficit in order to rewrite the whole Keynesian episode during the Carter administration, where Carter was running high deficits for of the Time, 50 and 60 billion dollars in his last two years of office and yet the economy was somewhat sluggish. Now Eisner and others are going back and reworking the history of that period and saying no wonder, no wonder the economy was sluggish, the government was running a surplus and that dampened the economy and they needed to have run a deficit in order to Stimulate.

14:32And of course, if you see the dynamics of this, you wonder if it actually would have been possible to run a deficit. Once you've got the debt so high and maybe $5 trillion will do, then it becomes difficult to run a deficit because the inflation erodes away the real value of the debt and keeps a step ahead of you. Now, this idea of measuring deficits that way is not all that new. It's fairly new in academic circles for the president of the American Economic Association to argue this is what's new. But I can remember during the Carter administration itself, representatives of the Treasury making exactly this same argument.

15:19While I was a graduate student at the University of Virginia, we had one of our seminar sessions One of his sessions on a Friday afternoon was done by an economist from the Treasury. He had come down from Washington. This was during the Carter administration. And he came down to give us his view, or the Treasury view, of the deficit. I wasn't too surprised, I guess, by a Treasury bureaucrat giving us his view. I am surprised at Eisner. But I remember that particular episode well because I was a graduate student at the time I actually read the paper before the seminar, something that's a rare faculty didn't read papers before seminars and I don't think too many graduate students did either but I'd read it I knew what his argument was going to be and it struck me that it was Orwellian doublespeak or very close to it and so I managed to slip into the seminar room before the seminar started we had a one

16:17single blackboard in front of the room with a traditional map that you could I wrote a message on the board from Orwell. I wrote war is peace, slavery is freedom, and deficit is surplus. And then I pulled the map down. Knowing full well, of course, that no economist could talk very long on the deficit without going to the board to show us an example. So, he talked for five minutes, went to the board, and when he raised the map, there it was, he was never quite able to recover in that session. He was sent packing back to Washington.

17:07I'll come back shortly to the idea of some of Eisner's ideas, but I want to go on now to consider the monetarists, who typically say things that you can warm up to. Monitors have some good things to say. Friedman has done a lot in clearing up the relationship between the Fed and the economy over the years. He's done battle with the Keynesians and effectively so in many areas. And I can go a long ways with Friedman and yet I'll stop just short of endorsing his conclusions. A freedman can be credited with pointing to government spending rather than the amount of taxation as a better measure of the size of government.

17:52If you want to know how big government is, how much influence government has, don't just look at the taxes that they take from you, that's big enough in and of itself, but look at how much they spend, look at how much they spend. And what they spend is actually a better measure of their influence because they're getting They're either getting the money from somewhere, they're either getting it from you, or they're borrowing it, or they're getting it, or they're printing it out, but however they're getting it, they're spending it and allocating resources, real resources, that otherwise would have been available for the private sector, and if the government's in command of those resources, then those resources are not available to you and me, and the dollar magnitude, dollar value of those resources is a much better measure of how big an impact the government's having on the economy, Friedman is to be credited with this insight. Look beyond taxes, per se, and look to government spending.

18:50I'm inclined to say he's right up to a level. So long as the deficit is relatively small, and we can talk later about what constitutes relatively small. But as long as the government, or as long as the deficit is relatively small, then that's probably the beginning and the end of it. Just look at government spending and don't worry about just exactly how the government got the money. But I'll go on to argue that we have to part company with Friedman during periods where the deficit is large and chronically so, where year after year We have huge deficits measured in the hundreds of billions of dollars. But before I turn to that part of the lecture, I'll say a few things about the supply-siders who also are allies in so many different areas.

19:45And yet, I think supply-siders have gotten it wrong when it comes to issues of deficits. Supply-siders have simply argued that deficits don't matter. They just don't matter. and they're picking up to some extent on Friedman saying only government spending matters and yet if you look at their policy recommendations it's recommendations that allow the government to collect more taxes by lowering rates and increasing the tax take as the lower rates spur on production and make for efficiencies of one sort or another. Here I think they've allowed their policy conclusions to drive their analytics. In other words, they're basically against raising tax rates. They don't want to do that.

20:30They're not quite sure that government spending can be cut. It's been tried with little success at this point. And if they admit that deficits are harmful, well, they might be led willy-nilly to recommend a tax increase, which is not what they want to do. And so they simply argue that deficits don't matter. I think this is a shaky way of going about things. They also argue that cutting tax rates will increase the tax take, and there's an element of truth to that, although it has a time dimension to it that the supply-siders aren't too quick to incorporate into their analysis. It's true that at lower tax rates, production will grow, and eventually, eventually, sometime in the future, both output and the total tax take will be larger than it otherwise would have been.

21:21But it's not true that in the immediate period you can lower the rates and increase the tack takes. The statistics are certainly against that as well as the logic of it itself. In fact, this idea that lowering the rates would immediately increase the take was the Trojan horse that got David Stockman in such trouble during the early Reagan administration, where It was admitted fairly candidly that nobody in the Reagan administration with the possible exception of Reagan himself believed that this would be the case. So what I'm suggesting is that both the monetarists and the supply fighters seem to be saying that deficits don't matter, while the Keynesians actually think that they ought to be higher.

22:10This leaves room for an alternative view, one that I think that Austrians can warm up to. If you look at all of these different views of the deficit, you see articles that come out of both monetarism and the supply side school that tend to downplay the deficit. One line that I can put you on notice to watch out for is maybe the second paragraph or so in an article. So it starts out, let's put the deficit in perspective, okay? When you read that, watch out, okay? Watch out. I've learned to view that line as the same as one size fits all, and of course I'll respect you in the morning, okay?

23:00And let's put the government deficit in perspective. Now, the way it typically gets put in perspective is by expressing the deficit, not as an absolute number of 1,500 billion with all the zeros that I finally got up there, but rather as a ratio, the deficit to something ratio. And of course, if you divide that huge number by another number that's even huger, it can look relatively small. And let's look at the few things that get put in the denominator and that will steer us towards some notion of what ought to be in the denominator If you want to express deficits as a ratio of something, the most common thing that typically is used almost without any justification is the deficit to G and P ratio.

23:50Deficit isn't too large when you compare it to total G and P. Well, of course it's not. Why should it be? Gross national product, as you learn in economics 101, measures effectively everything. Almost anything, including the deficit, is small compared to everything. Almost goes without saying. Everett Dirksen, one of the most colorful politicians from Illinois, used to remark that the main purpose of the figure we call gross national product is to give politicians a way of making any other number look small by comparison, including, it turns out, the deficit. Another ratio that's used fairly commonly, watch out for this one, is the deficit as a percentage of total indebtedness, okay?

24:41We're not really borrowing that much compared to the total accumulation of all that we've borrowed before, okay? And I grant you, that number is small and getting smaller, right? But that's not a cause for lack of concern, quite to the contrary, the smaller that number gets as that total indebtedness grows, the worse off we are. Still another ratio, government borrowing as compared to private borrowing, all right? And now why this number should have a special claim on our attention, I'm not quite sure. But again, it causes us to worry more rather than worry less because when you talk about government borrowing, you're talking about all the demands that the government is putting on the credit markets, okay?

25:28And how can you claim that there's no worry about that because lots of other people are putting lots of other demands on those same credit markets at the same time, right? Makes the worry all the more. U.S. borrowing compared to the borrowing of other Western countries, okay, were better than some and worse than others. But still the message is that not only is the U.S. government borrowing tremendous amounts of money, So is the private sector, so are the governments of other Western countries. There's tremendous demands put on credit markets all around. These are reasons to worry more, not worry less. But it actually leads us to a reasonable measure of the deficit, if you want to measure it as a ratio.

26:15Let's take the deficit as it relates to total saving. In other words, look at the total demands, In fact, quite to the contrary, it's large and rising, and for both reasons, the deficit's going up and savings is going down, okay? The U.S. has a particularly low savings rate. If you look at one of the more recent periods and consider total private savings, you'll see that the U.S. has a particularly low savings rate. The U.S. has a particularly low savings rate. If you look at one of the more recent periods and consider total private savings, savings by individuals in this country, the government borrows well over half. The total amount of government borrowing is greater than half of total personal savings in this country.

27:04And no one claims that that ratio is small and it's getting worse. Now of course the government doesn't literally borrow half of U.S. savings and the reason it doesn't is because it also has access to world capital markets. It also is borrowing savings from the Japanese, it's borrowing savings from the Europeans. And it's only because it has access to world capital markets that domestic interest rates aren't sky high as it accommodates its own demand for credit in the U.S. Now, recognizing that the government has a few different alternatives for borrowing also puts us onto a problem associated with the deficit that goes above and beyond the insights of the monetarist, Milton Friedman.

27:58It shows us why we should worry about the deficit has something more than more spending for the government, right? It's true that when the government borrows, it spends, and we don't particularly want the government spending, but given a certain level of spending, I'll argue that the part that's been asked by the deficit is actually more harmful by good measure than the part that is collected by taxes. Let me put it this way, and I'll go back to my original example here of Government Spending, Taxes and the Difference of 300 Billion. When the government is spending at this level and it's collecting 1200 billion in taxes, borrowing the rest, we can make a sharp distinction between these two figures, the 1200 and the 300.

28:49In the case of the 1200, that's funds that are collected in accordance with a tax code. Now, the tax code itself is changing, we can talk about that, actually I think that is deficit related as well. Tax code is changing some, people complain about changes from year to year, but for the most part, you know what the tax code is, or you hire an accountant who knows what the tax code is. You can prepare your plans with an eye towards minimizing your taxes, what your tax strategy There is a tax code, but the government is saying that we're going to get $1200 by means of this tax code and we're going to get another $300 but we're not saying just how or just when or just whose.

29:43Have you ever heard of a deficit code? This is the thing to think about. You know what the tax code is. You regret it changes from time to time. But you've never even heard of a deficit code. There is no such code. There is no such pre-announcement on the part of government that it intends to appropriate these funds in a particular way that you can know about in advance and plan your own activities around. And therein lies the problem of the deficit. Okay, that's why it's more than just part of the total that gets And let's look at the different things that the government can do in order to finance this deficit. One is, of course, that it can borrow domestically. It can borrow from you and me or borrow from U.S. financial institutions.

30:33In which case, interest rates will be high. Now, if you knew that in advance, if that's how it's going to get its funds, well, you plan your affairs on the basis of facing high interest rates. and high interest rates. Corporate planners, entrepreneurs, business planners would factor this into their own plans. And that's what the government might do and that's what you might be faced with. But it might be something else instead. The government might be able to borrow abroad from Germany and Japan. If so, that will take the pressure off of domestic interest rates. But it has other effects. It will affect export markets. If the foreign When trading partners are selling their goods here and buying treasury bills instead of lumber and machinery and agricultural products and so on, then all of a sudden our export markets are weak, weaker than we would have guessed had the government borrowed domestically.

31:26Again, that needs to be factored into your plans, but you can't do that unless you know just what the source of funds of the government might be. The government also could resort to monetization, could get its funds directly from the Federal Reserve. And right now that's a bigger aspect of the uncertainty than it has been in recent years. Again, because you know that you'll have a different, or might have a different Federal Reserve Chairman next year and you're not quite sure what he will do. If that's the source of funds, then it's going to be inflation rates that you have to cope with. Somehow you've got to factor that into your plans, but you're not sure just how because And there are a few other alternatives as well. There are possible new taxes or changes in the tax code.

32:14In fact, one of the reasons the tax code has changed so much in recent years is precisely to try to collect more funds and reduce the deficit. Value added taxes that get talked about or all sorts of adjustments going to a sales tax or going to flat income tax Tax, and all this discussion about changing the tax code as another element of uncertainty that you have to plan against. I remember hearing on the news, again, this is clear back during the Reagan administration, when a second or third round of tax changes were in the works. They called them Treasury 1, Treasury 2, and Treasury 3, the different proposals and so on. And there were all sorts of jitters on Wall Street and falling prices and uncertainties.

33:02One of the administration spokesmen got on one of the Sunday morning talk shows and he says, I don't know why everybody's upset, we haven't actually done this, this is just a proposal and doesn't Wall Street understand that it's written on a word processor. We've got this now just written on a word processor, the implications being it could be something different tomorrow, okay, we can change it tomorrow, it doesn't have to stay this way. And of course the message is, that's the worry, that's the worry, it's on a word processor, An era of high budgetary deficits gives you continuing uncertainty over and above what's normally found in the marketplace. And that's very apparent, I think, in the recent period.

33:48Let me just mention what's going on in the profession trying to record this or dispute this. The fact that financial markets are relatively unstable these days seems not to be in dispute. But any connection with the deficit does seem to be in dispute. And I think I have an answer for this. I think I see what's going on. You'd think that government would sort of collect its funds in ways that were halfway predictable. In other words, it gets some from taxes, it prints some, and it borrows some. You'd be real surprised if it would swear off of any one of those ways of raising money. And you would think that it would sort of equalize at the margin, where it would collect dollars in each of the three ways until they were sort of equally costly at the margin.

34:42And that would be the solution, all right? But that's not quite the solution because when it looks how costly it is to collect In fact, at this margin, or that margin, or the other margin, most of the costs from the government's standpoint are political costs. How much is it going to cost me in election time to increase taxes, or to increase borrowing, or to increase inflating? And the political costs change as people become more sensitized to inflation, or to deficits, or to taxes. Which means the government tends to binge, first one way, then the other way. will borrow domestically until people complain about high interest rates and then they'll inflate until people complain about inflation. Then they'll sell debt abroad until people complain about weak export markets. These are the things that you have to try to predict.

35:33Well, many of the studies, the empirical studies, capture the history of this, but they miss the conclusion. In other words, we could line up these different ways that the government gets money with with recent history we could say in the 1960s there was a lot of domestic borrowing and we had credit crunches I remember 69 I could have included in my timeline a credit crunch high interest rates and businesses had trouble competing for funds in the 1970s the recourse was to the printing press monetized we had double-digit inflation that was under Carter especially in the 80s we had borrowing abroad and that gave us the so-called twin deficits in in the budget and international trade and weak export markets.

36:18So we had first one, then the other. But as I look at the empirical studies in the literature that try to capture this, they miss it every time. Because the empirical studies tend to use the entire time series of data from about World War II, about end of World War II, 1946 is usually the start of the data points, until present. And if you get onto these studies, you can see how they work. They say, well, we tested in this study, this particular study, to see if government borrowing has a systematic effect on domestic interest rates. But they use all the data from 46 to the present. And of course, the one period where it did have a dramatic effect was in the 60s when that's where the government was borrowing us money from domestic credit markets.

37:06But if you look at it over the whole period, you miss that effect. and the conclusion is that well the results are weak and mixed and if there's a worry about deficits it shouldn't be related to domestic interest rates. Well someone else will do a study and they'll say well we'll test to see whether inflation tends to get monetized or where deficits tend to get monetized and cause inflation. Well that's what happened during the 70s but they use the whole data set from 46 to present. What do you suppose the results Deficits are weak and mixed. It's a technical term. If the deficits are a worry, there shouldn't be no worry about inflation. We can't find it in the data. You can guess what the studies look like to test for the twin deficits. Is there really a relationship between the budget deficit and the trade deficit? Some people think there are. Of course, there was during the 1980s when Reagan was borrowing abroad. But they used the whole data set from 46 on.

38:05Sometimes the budget deficit is going up and the trade deficit is going down. And so the results are weak and mixed. And if there's any worry about the deficit, it's certainly not connected with international trade. So, if you look at it on a piecemeal basis, and you see that there's no connection in each of these different areas, then you conclude that the worries that come from each of these areas are misplaced. And then the summary conclusion is that there's no basis for worry at all. This doesn't seem to cause anything. There's an article by Paul Craig Roberts where he talks about unwarranted hysteria about the deficit. And this is his point. It doesn't seem to systematically cause anything in particular. And yet, that's the problem. That's the problem.

38:50The problem that it causes, you know, one damn thing after another. And if you're a businessman, you've got to guess what and plan your affairs accordingly. And if you guess wrong, you can lose big. Alright, that's the bottom line. and therein lies the problem of the deficit. At the end of my time slot I have one thing to conclude with. I have done my own study which tries to sort of leap over all these others and my own study which is empirical. I don't do much in the way of... There are two things I don't like to do in academics. I don't like to do empirical studies. This data is pretty messy data to begin with. I also don't like to co-author. by myself. I don't use co-authors. But if I violate one of those dislikes, I violate both.

39:38I co-author with somebody who likes to work with data, you see, which I've done in this case. So what I try to measure is the uncertainty that's caused in the marketplace. And I do that by looking at the interest rate on BAA bonds. That's the most risky but nonetheless rated bond. okay so you got good statistics on that and then I look at the interest rate on T-bills which as I explained last night has no premium on it there's no default risk premium on T-bills okay so this is going to be a lower rate than this the difference between the rates is going to express how risky business is in general okay the general riskiness in the in the economy and the difference, I simply call it the spread.

40:30In other words, the spread between those two rates, the difference between those interest rates. And then I show a statistical correlation between that and deficits over that whole period. So if you look from 46 to present, what you see is that periods of high deficits are periods in which this spread is great, which captures the uncertainty in the private sector are associated with uncertainty about how those deficits will be accommodated. That's the problem of the deficit that I want to tell you about today. And I'll just conclude by saying that seeing that as a problem doesn't imply that you raise taxes in order to reduce the deficit. Far from it. Taxes are too high as they are. It suggests that you lower government spending.

41:15In fact, you need to lower spending and taxes, spending more so than taxes.