Rudy Penner at the Tax Policy Center's TaxVox blog:
Thanks to artificially low interest rates, the United States has been able to finance deficits exceeding $1 trillion every year from 2009 through 2012 at very low cost. Throughout the period, the ratio of interest to the GDP has remained almost stable and is not expected to start rising until 2015. Some argue that this has encouraged the Congress to be fiscally irresponsible, although others believe that deficits have not been large enough given the severity of the recession.
But low interest rates will not last. In June, Federal Reserve Chairman Ben Bernanke gave the impression — apparently unintentionally — that the Fed would soon reduce its purchases of Treasury debt and mortgage-related securities. That helped propel a major increase in bond yields ...
The Congressional Budget Office (CBO) baseline assumes rates will gradually rise over the next few years until the 10-year rate stabilizes at a more normal 5.2 percent in 2018 and thereafter. The implications for federal interest payments are alarming. The bill is assumed to rise almost four-fold between 2013 and 2023 or at a rate of 14 percent per year. Interest would become the fastest-growing expenditure item in the budget by far, leaving health costs in the dust.
Countries are often pushed into a sovereign debt crisis because of growing interest payments. It becomes politically impossible for them to increase taxes or reduce noninterest spending fast enough to keep up with rising interest costs. The debt-GDP ratio begins to explode. A debt crisis is sure to follow.
EUROPEAN ARMIES SHOULD BE SMALLER
Matt Bassford at the Rand Corp.: Necessity is regularly called the mother of invention. In hard times, minds become focused and innovation flourishes. Unfortunately, austerity is having the opposite effect on defense planners.
The decline in defense spending across Europe has been widely reported. Far from sparking new thinking, however, the fiscal gap has been paralleled by a deficit in fresh thinking. Defense ministries have turned inward and purse-holders have become more parochial. But when resources are limited, nations need to look outward and work toward the greater good in deciding how to configure and equip an appropriate set of military forces for Europe's future.
Despite some downsizing in personnel numbers, European armies are still collectively too big compared with any reasonable estimate of demand. At last count, Europe had around 900,000 regular soldiers, not including gendarmerie or paramilitary personnel (which add an additional 500,000 people).
It is politically challenging for a state to reduce the headcount of its armed forces, and seemingly counter-intuitive to suggest that smaller armies are needed. But many of the current soldiers are relatively poorly equipped and inadequately trained. Some are not even fit for active service. If greater coordination were possible across European nations -- allied to a more professional cadre of soldiers -- far fewer troops would be required.
VISIONARY BUREAUCRACY SPURS INNOVATION
Ross Eisenbrey at the Economic Policy Institute's working economics blog:
The New York Times obituary for Douglas C. Englebart, identified as the "Computer Visionary Who Invented the Mouse," is fascinating reading, in part because Englebart, an Oregon farm boy, was in many ways the father of modern networked computing. Beginning in the early 1960s, he put together a team of engineers and computer scientists, funded by the federal government, that developed a prototype for most of the computer tools we all take for granted today. He unveiled them at a conference in San Francisco in December 1968, which "set the computing world on fire ..."
Englebart was a visionary, but his ground-breaking work was not supported by venture capital, and his innovations were not the result of the private market or corporate enterprise. His innovations were not spurred by the prospects of incredible income and wealth, all lightly taxed. Rather, the work was funded and organized by a visionary bureaucracy in the U.S. government.
As the Times describes it, "during the Vietnam War, he established an experimental research group at Stanford Research Institute (later renamed SRI and then SRI International). The unit, the Augmentation Research Center, known as ARC, had the financial backing of the Air Force, NASA and the Advanced Research Projects Agency, an arm of the Defense Department."