Category: Analysis

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.

That’s generally attributed to Will Rogers, but it’s probably apocryphal.

I was going to write one post on the topic of the debt ceiling.  But every time I peeled back the onion on this topic, it stank even worse.  And made me cry even harder.  So it’s going to take a few posts to get through this.

Like most Americans, have been kind-of laughing off the threat of a default on U.S. government debt.  Default, as a consequence of failing to raise the U.S. debt ceiling.

For most of us, “It’s like déjà vu all over again.”  I’m 64.  Per the Wikipedia article, the U.S. debt ceiling has been increased or suspended no fewer than 86 times, in my lifetime.

So, on the one hand, how many times can the U.S. Congress cry “wolf” before nobody pays attention any more?  On the other hand, recall that in Aesop’s fable, the sheep do, in fact, get eaten.

So, as is my habit, I decided to get my thinking straight about this.  Like most Americans, I’m a little fuzzy on the details of just how, exactly, this whole  legislated-increase-in-the-debt-ceiling works.

Personally, I’m not so much a fiscal conservative as a fiscal realist.  Or, pessimist, depending on your orientation.  On a personal note, I took Social Security at age 62, figuring that the current benefit levels could not possibly be sustained for much longer.  And I’m taking a lot of taxable income from investments, under the assumption that tax rates cannot possibly remain where they are now.

In a nutshell, I think you’d have to be crazy not to see that we’re well into the process of the poop hitting the fan, fiscally speaking.  It’s just a question of whether or not we’re going to so something rational about that.  Or whether we’re just going to govern through chaos.

To cut to the chase, the more I looked, the more I realized that I completely misunderstood the basic facts of the current debt limit situation.  And the less sure I was that the U.S. would avoid default this time.  I’ve been sure that the problem is squarely attributable to the Republicans.  And, on balance, I’m still in that camp.  But now, eh, there’s an element of doubt.   And that’s what I find most unsettling.  Given restraints on how legislation has to get passed, it’s no longer clear to me that either party has what it will take to raise the debt ceiling.

In short, this time, I think we actually are going to default.  Or, at least, run out of money.  Fail to issue enough new debt to cover all currently promised payments.  That doesn’t necessarily mean literal default on the federal debt.  The Federal government would have no trouble continuing to make interest payments on its debt.  As long as its willing to make large cuts in something else.  I just have a very hard time seeing that happening.

Take that FWIW.  Guard your sheep or not, as you see fit.

Instant recession:  The Federal government is really, really big.

For this first post, I just want to get a few magnitudes down.

• The U.S. GDP is about US $ 23 trillion (reference).
• Total Federal spending is around $ 6 trillion (reference).
• The FY 2022 Federal budget deficit was $ 1.4 trillion (reference).
• Best guess, the FY 2023 deficit will be about the same.

So, from the get-go, realize that the Federal government is large, compared to the entire U.S. economy.  From the above, Federal spending amounts to about (6/23 =~)  one-quarter of the U.S. GDP. 

Let me be clear, most of that spending is not, directly, itself, counted as part of the GDP.  

For example, the single largest item in the budget is Social Security, accounting for 19% of the federal budget, per the U.S. Treasury.  That’s a “transfer payment”.  It takes money out of one pocket and puts it in another.  Transfer payments are not counted as part of GDP.  So those Social Security payments are not directly counted as part of the U.S. GDP.

But continuing that example, those Social Security payments are what allow a lot of seniors to (e.g.) buy food and such.  And those purchase of food ARE counted in the GDP.  So while Social Security itself is not directly counted as part of the GDP, you had better believe that Social Security payments fund a big chunk of what gets counted as GDP.

If we finally, truly, really hit the debt ceiling, that means that Federal spending will have to fall by roughly the amount of the annual Federal deficit.  That is not, actually, 100% correct, because the increase in the public debt is not the same as the annual budget deficit.  (That is due, among other things, to various Federal trust funds.)  But it’s close enough.

So, how big is the annual Federal deficit, these days, relative to GDP?  All things equal, if at some point the Federal government can no longer borrow money to finance that deficit, that means that payments equal to roughly (1.4/23 =~) 6% of GDP will instantly stop flowing.

Now, some of those are payments to foreigners.  For example, foreigners now hold about one-third of the public debt, per the Congressional Research Service.  So, about a third of interest payments on the debt go to foreigners.  But that’s really a drop in the bucket.  Most of that money is paid out in the U.S.

Again, some of that — like interest payments to U.S. citizens and other entities — may have a relatively minor impact on final demand for U.S. GDP.  The wealthy have a notoriously low marginal propensity to consume out of current income.  Just because you cut off $1000 in bond payments doesn’t mean that you’re going to see a $1000 drop in final demand for GDP.

Finally, I must note that thanks to COVID relief spending, virtually all U.S. states had record-breaking budget surpluses these past couple of years.  (See Post #1316).  And so, it’s not clear that cuts to payments made to states would translate dollar-for-dollar into cuts in payments that the states themselves make to others.  But that would require states to pass new budgets to account for those changes.

So, let’s conservatively guess that the FY 2023 budget deficit accounts for … one way or the other … payments to U.S. entities equaling … ah, call it roughly 5% of GDP. And that if Uncle Sugar stops paying that money, then final demand for goods and services in the U.S. will drop by … ah, somewhere around 5% of GDP.

Just spitballing.  It only has to be ballpark.  Because we can find a credible source that says the following, emphasis mine.

Routine recessions can cause the GDP to decline 2%, while severe ones might set an economy back 5%, according to the IMF.

Source: Investopedia.

And so, if we actually go through with not raising the debt ceiling, and none of the various gimmicks for getting around that are deemed legal, and the “extraordinary measures” get used up, and payments stop flowing, we are instantly in “severe recession” territory. 

That’s before any “multiplier” effects.  Before the folks who didn’t get paid by Uncle Sugar stop paying their suppliers.   And so on.  And if those effects snowball — as classical economic theory tells us they will — it’s hard to say where that will end up.

Bear in mind, this is all before we even talk about defaulting on Federal debt or not.  This is before we even recognize that the “automatic stabilizers” in the Federal budget will automatically translate that decline in GDP into an even bigger increase in the Federal deficit, vicious-circle style.

This ain’t rocket science. All I did was get a round-number estimate of first-order spending impact of hitting the debt ceiling for real.  It just requires acknowledging how large Federal payments are, compared to U.S. GDP.  Stopping that amount of payment, in the U.S. economy, is not something you should do on a whim.  Or in a snit.

Conclusion:  End of Part 1

This ended up being an odd post, because I started by researching the actual Congressional budget process.  And every time I turned around, I had to go further back the chain/peel another layer from the onion.  From the debt ceiling legislation, to filibuster, to budget reconciliation not subject to filibuster, to the annual budget resolution that drives budget reconciliation, to the President’s budget, to “the budget deficit”.  And on and on.

And ended up with what you see above.

Just to focus on one point,the most recent increase in the debt ceiling occurred in December 2021.  That was only possible because Senate Republicans agree to make a one-time exception to filibuster rules, in exchange for increasing the debt limit enough to get us past mid-term elections.  This one-time exception allowed the debt ceiling legislation to pass, while  simultaneously allowing all Senate Republicans to vote against it.   (On paper, at least.  The reality is that agreeing to the filibuster exception is what allowed it to pass.)  It then passed in the Democrat-majority House.  And that got us from December 2021 to where we are now.

Now, here’s where it gets frightening.  I thought that the reason the Democrats didn’t take care of this again, in December 2022, when they had majorities in both Houses was, in fact, those Senate filibuster rules.

Turns out, that’s not exactly true.  In theory, they could (and in the past, the Congress has) put an increase in the debt limit into annual budget reconciliation, not subject to filibuster.   It’s not crystal clear that it would work but it has been done in the past.  There is no precedent on whether or not members could raise “a point of order” to object to inclusion of this in the budget reconciliation bill.

But the Democrats didn’t put it into budget reconciliation.  More importantly, they didn’t even try to put it there.  And here’s where it gets a bit weird.  The best analysis I read says that they didn’t, because if they had, the Democrats would not have had the votes to pass budget reconciliation.

Don’t know if that’s true or not.  But now, with a Republican majority in the House, and a stated unwillingness to provide a “clean” increase in the debt ceiling … it sure looks to me like there’s no way to get it done.  If the above is true then neither party has the majority required for a clean increase in the debt limit in the Senate.  And the House is basically running amok, and on the face of it, just isn’t gonna play ball, no matter what.

Which means that neither house of Congress can (or will) get this done?  That’s kind of where I ended up.

The rest of the posts in this series will now unspool in the other direction.  Ending up with, how in the world is the U.S. Congress going to raise the debt ceiling, under the current circumstances?  I’ve been looking at that pretty intensely for a couple of days now, and I’m still not seeing it.

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Part of the problem with getting old is that sometimes you can’t tell if the world has changed (and nobody sent you the memo), or if you merely mis-remember history.

A case in point is our current extended bout of economic protectionism (or industrial policy, or trade wars, or whatever you want to call it.)

Most recently, we had the CHIPs act to subsidize domestic production of computer chips.  The Inflation Reduction Act provided significant subsidies for electric vehicles via the tax code, but unlike the legislation that replaces, those subsidies are now for domestically-assembled cars only.  The Biden infrastructure bill has a pretty strong “buy American” clause.

(I know that last one because I recall all the right-wingers from Fox on down pissing all over those buy-America clauses.  Which just … seemed odd, to say the least.  Because we need to hate China, but we have to buy Chinese steel?  Beats me.  I don’t think internal consistency is necessarily their strong point in the best of times.)

And then, of course, the prior President appeared to impose new tariffs almost at random, or based on whoever spoke to him last.  With some obviously made-up national security pretext.  So we had ourselves a mini trade war with Canada?  Yeah, Canada.  Because they were a threat to U.S. national security?

Let me put aside whether I’m for or against such things.  Put aside the knee-jerk reaction of a classically trained economist.  Or even whether you think the best of these constitute good economic policy.

My only question is:  Didn’t that used to be illegal? 

For example, didn’t the General Agreement on Tariffs and Trade (GATT) forbid that sort of non-level-playing-field behavior?  Is GATT still in force?  If not, what replaced it?

I’m sure I can recall the U.S. claiming that (e.g.) Canadian subsidies for softwood lumber were illegal.   And having anti-dumping penalties imposed on Japanese chips.  And so on and so forth.  I’m pretty sure I didn’t make those up.  Pretty sure they actually occurred.

What changed?

GATT and the WTO.  There is no legal or illegal. There is only power, and those too weak to use it.

The answer to my question is that international trade law is just one great big game of “So, sue me”.

First, I appear to be a touch out of date.  GATT was a set of treaties in force between 1947 and 1995.  GATT was effectively replaced by the World Trade Organization (WTO) at that point.

But, in theory, the guiding principles of the WTO are the same as GATT.  In a nutshell, they are for removing tariffs and other barriers to trade.

So, what’s legal and what’s not legal, under the WTO?

Despite several attempts to figure out just what, exactly, the WTO is and does, I have decided that all documents pertaining to the WTO are required to be written in impenetrable bafflegab.  Half an hour of reading, from multiple sources, and I still have no idea what’s legal and what’s not.  I have no idea whether the concept of “legal” even applies to policies affecting international trade.

I’m clearly going to have to have an expert dumb it down for me.

OK, to be concrete.  The Biden infrastructure bill has some fairly strong “Buy American” clauses in it.   And yet, the U.S. is party to a WTO agreement requiring that government purchases operate on a level playing field, that is, without preference for domestic over foreign manufacturers.  How can those two things both be true?

The law firm of Aiken, Gump offers this explanation.

Below, the GPA is the WTO agreement, of which we are part, which “… prohibits the U.S. from discriminating against the goods, services and suppliers of parties to those agreements for procurement.”

The article closes with a review of the implications of the GPA on the IIJA’s Buy America requirement. The authors note that many state agencies implementing IIJA-funded projects may be unaware of the implications of the U.S.’s GPA commitments on their procurement because previous federal funding similarly subject to Buy America requirements was “generally covered by exceptions to these commitments,” as they discuss in the article.

They conclude by noting, among other benefits and risks, that “[T]he Buy America expansion in the IIJA could significantly complicate the administration of procurements for infrastructure projects for covered states. Unlike with previous federal funding, states agencies will now have to consider whether the procurement for each infrastructure project is subject to U.S. GPA commitments via consideration of the factors listed above.”

Source:  The law firm of Aiken, Gump 

Clear as mud.  As I read it:

• The U.S. government cannot discriminate against foreign suppliers.
• But the U.S. government is handing the money to the states.
• The states can discriminate against foreign suppliers, even if that’s at the explicit direction of the Federal government.
• Except maybe they can’t.

Well, OK, then how about the CHIPS act?  Here’s a reasonably intelligible writeup of that, from somebody I don’t recognize.  A key paragraph, emphasis mine:

"Under WTO law, the Chips Act is a “domestic subsidy” because it is targeted at a particular industry and makes financial contributions to that industry through direct payments and tax subsidies. Such subsidies are not prohibited but are potentially “actionable” at the WTO if they cause injury to foreign producers of semiconductors seeking to sell into the U.S. market or some third country market in competition with subsidized products. In addition, if chips produced by subsidized facilities or firms are exported, they are potentially subject to “countervailing duties” imposed by the importing country if their presence in the export market causes “material injury” to producers in that market.

Source:  Stanford University Law School

Aha.  The penny drops.

There is no clear-cut legal and illegal under WTO agreements.  There are some vague general principles that we’ve agreed to.  And then, they way these things are settled is that if some country or industry doesn’t like what you’ve done, they sue you over it.   And … I guess the WTO kind of functions like an international court of law.

So, for example, the domestic subsidy is only one of several controversial parts of the CHIPs act.  The most controversial is that it bars U.S. producers from expanding production of certain types of chips in China.  And it appears that China is getting ready to sue us, via the WTO, over that (per this reference).

When I was a child, I talked like a child, I thought like a child, I reasoned like a child.

I think I finally get it.

As a young man, I naively thought that there were, you know, laws and stuff, governing international trade.

Now, as an old man, I’m pretty sure that’s wrong.  There are agreements, but these aren’t laws they way (e.g.) criminal laws are laws.  They kind of outline the things that you can sue somebody else for, if they do them.  I think.

So, international trade is governed by some general principles — with numerous exceptions.  Each country and industry is free to do whatever it wants to.  And if somebody else doesn’t like it, they can take them to court.  With, I guess, the WTO being the court, that is, supervising the dispute.

And that’s why the U.S. can sign a treaty that bars discrimination against foreign-made goods in government procurement.  And then sign laws requiring discrimination against foreign-made goods in government procurement.

It’s up to foreign governments and industries to sue us if they don’t like it.  Given how swiftly the law moves in general, I cannot even imagine how long that takes under international law.

Maybe a decade from now, we’ll be found to be in violation of our WTO treaty.  But by then, that big chunk of infrastructure money will have been spent.

In any case, I think I get it now.  When it comes to tariffs, domestic subsidies, and Buy American legislation, there are no laws.  It’s all just a game of whatever you can get away with.

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Source:  American Society of Heating, Refrigerating and Air-Conditioning Engineers.  This is from the 2016 ASHRAE Handbook—HVAC Systems and Equipment (SI), Chapter 22:  Humidifiers.

I’m a big believer in running a humidifier or two during the coldest part of the winter.  I harped on that point just recently, in Post #1640.  I do it as much for the health benefits (illustrated above) as for the comfort.

That said, I realize that I pay a considerable energy penalty for doing that.

Interestingly, a lot of people do not seem to understand just how large that energy cost is.  Here’s the trick:  You can’t measure it by the amount of electricity the humidifier itself uses.  If you have anything other than a boiling-water humidifier, by far, the majority of energy used to run your humidifier comes from your home furnace.

Which I shall now demonstrate, and briefly calculate.

Humidifier as a house-cooling device.

First, this ain’t rocket science.  Everybody knows that evaporating water cools things off.   For this next part, you just have to get your mind around what, exactly, is being cooled off by the evaporation from your humidifier.  And then, what you have to do about that, in the wintertime.

In the case of an evaporative humidifier, what is being cooled is the air inside your house.  The humidifier literally absorbs heat from room air.  You can easily prove that to yourself, as I did above.  My Vornado humidifier cools down the room air by about 5 degrees when used on its medium setting.

That’s just physics, and there’s no getting around it. No matter how you do it, converting liquid water into water vapor takes a lot of energy input.   Boil it, evaporate it from a humidifier pad, mist it into the air and let those tiny drops evaporate.  Or just hang your damp laundry inside.  If you start with liquid water, and end with water vapor, somewhere along the way, that water absorbed a lot of heat energy.  From somewhere.

At room temperature, it takes just about 700 watt-hours of energy to evaporate a kilogram of water (reference).  Which means that evaporating a U.S. gallon of water, at room temperature, requires somewhere around 2.5 kilowatt-hours of energy (or about 8500 BTUs).

And so, per the illustration above, if I want keep the room at 68F, I’m going to have to run my furnace to make up for the 5-degree difference between room temperature and the cool air coming out of the humidifier.  How much energy will my furnace have to supply?  Just about exactly 8500 BTUs for every gallon of water I evaporate.  Or, if I do a typical 2-gallon day, roughly 17000 BTUs or 5 KWH of energy, per day, will have to be added into the room air, that would otherwise not have to be supplied.

That works out to a rate of power consumption of (5000 W-H/24 H =) about 200 watts, averaged over the course of a 24-hour, 2-gallon day.  By contrast, the humidifier itself uses just 32 watts, run on medium speed.  The upshot is that the furnace supplies roughly 85% of the energy required to run that humidifier, in a room with constant temperature.

The actual electricity use isn’t quite that bad, because my “furnace” is a heat pump with a coefficient-of-performance (COP) of roughly 3.  That is, it releases about 3 watts of heat energy inside my home, for every watt of electricity consumed.  So it only uses electricity at a rate of about 70 watts, on average, to offset the cooling produced by the evaporative humidifier.

What’s the difference between a humidifier and a clothes dryer?

Answer:  Not much.

To drive this home, let me now compare the humidifier to a known household energy hog, the clothes dryer.  A typical home dryer uses about 3.5 KWH per load.  Here, if I ignore the COP advantage of the heat pump, my humidifier requires about 5.7 KWH of energy input per two gallons, including both the device itself (32 watts on medium), and the heat required to re-heat the air after it’s been cooled by evaporating water.

At which point, I’m hoping that a little light bulb goes off.  Because those energy use figures are pretty close.  Let me adjust them for the amount of water being evaporated.

Some time back, I figured that a typical load of laundry retained about 10 pounds of water (Post #910).  So that’s about 3.5 KWH of electricity, to evaporate 10 pounds of water, in a dryer.  But two gallons of water per day, out of an humidifier, is about 16.5 pounds of water.  So, at the rate my dryer uses energy, that ought to take about (16.5/10 x 3.5 KWH =) 5.8 KWH of energy.

In other words, per pound of water, your home humidifier uses just about exactly as much energy as your home clothes dryer.

Because, of course it does.  It has to.  Plus or minus a bit of wasted heat, your home clothes dryer does exactly the same thing as your humidifier.  It’s taking water and converting it to water vapor.  It just does it at a different temperature.

The only energy advantage my humidifier has over my clothes dryer is that the humidifier uses a more efficient heat source.  The COP 3 heat pump uses less electricity, per unit of heat, than the resistance heating elements in the dryer.  So the actual electricity use is lower, due to the magic of heat pumps.  (Plausibly, if you had one of the new heat-pump clothes dryers, there wouldn’t be much difference at all.)

Finally, if you have achieved enlightenment in this area, you now realize that hanging your laundry to dry, inside, in the winter, does not save anywhere nearly as much energy as you probably thought it did. Sure, you don’t run the dryer.  But you run your furnace instead.  That’s to make up for the cooling effect all that wet laundry has on your room temperature.  Which is exactly the same cooling effect that the humidifier has.

There ain’t no such thing as a free lunch.

Sensible heat, latent heat, and conservation of energy.

Hang on, Mr. Conservation-of-Energy.  You’re saying that the humidifier is, in effect, withdrawing heat out of the room air?  Where does that heat go?

These devices:

• Humidifiers (both evaporative and ultrasonic),
• Personal air conditioners
• Swamp coolers
• Mist fans
• Patio misting systems
• Street-fair mist-cooling stations

all work by converting “sensible” heat — that is, air temperature –– into “latent” heat — that is, the energy embodied in water vapor as opposed to liquid water.

The energy is still there.  It was neither created nor destroyed.  It’s simply in a different form.  In this case, it’s in the form of the energy that’s in the water vapor, as opposed to liquid water.  If you could condense that water vapor back into water, it would release exactly the amount of energy it absorbed in making the transition from liquid water to water vapor.

And, as night follows day, any time you convert liquid water into water vapor, that’s going to absorb heat energy.  In all of the above, the heat comes out of the air, and the air cools down. For most of these devices, that’s the entire point.  For humidifiers, by contrast, that’s a regrettable downside.

My point being, physics doesn’t care about your opinion.  If you like street-fair cooling stations, or patio misters, because they cool you off — up to a claimed 30 F in ideal conditions (reference) — then, logically, you have to realize that your home humidifier is also cooling you off.  In the dead of winter, when that’s the last thing you need.

And that’s why running your humidifier, in the winter, takes just about as much energy as running your clothes dryer.  Per pound of water, that is.  From a physics standpoint, there’s not much difference between the two appliances.  One of them heats up air, and converts water to water vapor.  The other one converts water to water vapor, which then requires you to heat up the air.   The only difference is the timing, and the efficiency of your home heating system compared to the simple resistance heaters (hot wires) used in a typical clothes dryer.

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