In Defense of Deficits
Jamie Galbraith writes in The Nation:
In Defense of Deficits
The Simpson-Bowles Commission, just established by the president, will no doubt deliver an attack on Social Security and Medicare dressed up in the sanctimonious rhetoric of deficit reduction. (Back in his salad days, former Senator Alan Simpson was a regular schemer to cut Social Security.) The Obama spending freeze is another symbolic sacrifice to the deficit gods. Most observers believe neither will amount to much, and one can hope that they are right. But what would be the economic consequences if they did? The answer is that a big deficit-reduction program would destroy the economy, or what remains of it, two years into the Great Crisis.
A big deficit-reduction program would destroy the economy two years into the Great Crisis. For this reason, the deficit phobia of Wall Street, the press, some economists and practically all politicians is one of the deepest dangers that we face. It’s not just the old and the sick who are threatened; we all are. To cut current deficits without first rebuilding the economic engine of the private credit system is a sure path to stagnation, to a double-dip recession–even to a second Great Depression. To focus obsessively on cutting future deficits is also a path that will obstruct, not assist, what we need to do to re-establish strong growth and high employment.
To put things crudely, there are two ways to get the increase in total spending that we call “economic growth.” One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that’s basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors–public deficits or private loans–has to be in action.
For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in “net financial wealth.” Ordinary people benefit, but there is nothing in it for banks.
And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits.
All of this should be painfully obvious, but it is deeply obscure. It is obscure because legions of Wall Streeters–led notably in our time by Peter Peterson and his front man, former comptroller general David Walker, and including the Robert Rubin wing of the Democratic Party and numerous “bipartisan” enterprises like the Concord Coalition and the Committee for a Responsible Federal Budget–have labored mightily to confuse the issues. These spirits never uttered a single word of warning about the financial crisis, which originated on Wall Street under the noses of their bag men. But they constantly warn, quite falsely, that the government is a “super subprime” “Ponzi scheme,” which it is not.
We also hear, from the same people, about the impending “bankruptcy” of Social Security, Medicare–even the United States itself. Or of the burden that public debts will “impose on our grandchildren.” Or about “unfunded liabilities” supposedly facing us all. All of this forms part of one of the great misinformation campaigns of all time.
The misinformation is rooted in what many consider to be plain common sense. It may seem like homely wisdom, especially, to say that “just like the family, the government can’t live beyond its means.” But it’s not. In these matters the public and private sectors differ on a very basic point. Your family needs income in order to pay its debts. Your government does not.
Private borrowers can and do default. They go bankrupt (a protection civilized societies afford them instead of debtors’ prisons). Or if they have a mortgage, in most states they can simply walk away from their house if they can no longer continue to make payments on it.
With government, the risk of nonpayment does not exist. Government spends money (and pays interest) simply by typing numbers into a computer. Unlike private debtors, government does not need to have cash on hand. As the inspired amateur economist Warren Mosler likes to say, the person who writes Social Security checks at the Treasury does not have the phone number of the tax collector at the IRS. If you choose to pay taxes in cash, the government will give you a receipt–and shred the bills. Since it is the source of money, government can’t run out.
It’s true that government can spend imprudently. Too much spending, net of taxes, may lead to inflation, often via currency depreciation–though with the world in recession, that’s not an immediate risk. Wasteful spending–on unnecessary military adventures, say–burns real resources. But no government can ever be forced to default on debts in a currency it controls. Public defaults happen only when governments don’t control the currency in which they owe debts–as Argentina owed dollars or as Greece now (it hasn’t defaulted yet) owes euros. But for true sovereigns, bankruptcy is an irrelevant concept. When Obama says, even offhand, that the United States is “out of money,” he’s talking nonsense–dangerous nonsense. One wonders if he believes it.
Nor is public debt a burden on future generations. It does not have to be repaid, and in practice it will never be repaid. Personal debts are generally settled during the lifetime of the debtor or at death, because one person cannot easily encumber another. But public debt does not ever have to be repaid. Governments do not die–except in war or revolution, and when that happens, their debts are generally moot anyway.
So the public debt simply increases from one year to the next. In the entire history of the United States it has done so, with budget deficits and increased public debt on all but about six very short occasions–with each surplus followed by a recession. Far from being a burden, these debts are the foundation of economic growth. Bonds owed by the government yield net income to the private sector, unlike all purely private debts, which merely transfer income from one part of the private sector to another.
Nor is that interest a solvency threat. A recent projection from the Center on Budget and Policy Priorities, based on Congressional Budget Office assumptions, has public-debt interest payments rising to 15 percent of GDP by 2050, with total debt to GDP at 300 percent. But that can’t happen. If the interest were paid to people who then spent it on goods and services and job creation, it would be just like other public spending. Interest payments so enormous would affect the economy much like the mobilization for World War II. Long before you even got close to those scary ratios, you’d get full employment and rising inflation–pushing up GDP and, in turn, stabilizing the debt-to-GDP ratio. Or the Federal Reserve would stabilize the interest payouts, simply by keeping short-term interest rates (which it controls) very low.
Page 2 can be read following the link
Gailbraith writes:
But for true sovereigns, bankruptcy is an irrelevant concept.
I have to disagree. Yes, the government can just print money to pay its debts (though not Greece cause it cannot print Euros), but a tremendously devalued currency and hyperinflation is indeed disasterous to its inhabitants. The latter is very relevant.
And what hyperinflation scenario do you foresee? Seriously.
Thanks. 🙂
Not sure if that was directed toward my comment or not.
See this to start:
Figure 4 on inflation and external default (1900 to 2006) illustrates the striking correlation between the share of countries in default on debt at one point and the number of countries experiencing high inflation (which we define to be inflation over 20 percent per annum). Thus, there is a tight correlation between the expropriation of residents and foreigners.
http://www.voxeu.org/index.php?q=node/1067
Min,
Look at the FED during the Carter administration for examples of running up inflation from trying to keep full employment. This is not hyperinflation but here goes on a likely scenario: Obama appoints Janet Yellen to replace Bernake. Yellen focuses on employment and like in the 70s tries to bump up employment with inflation. Keynesians believe these sort of dynamics. In doing so she drives inflation over 10 percent a year. Again, not hyperinflation but certainly a step backwards for this country.
Jamie Galbraith will probably be defending the soaring deficits after 2020 if he is still writing during the next decade. That will make for interesting reading.
Cantab,
You don’t know a damn thing about Yellen. Her analysis is and always has been conditions based…something that conservative idiotlogues don’t seem to grasp. Yes, Yellen is currently a monetary “dove”…as she should be. The stupidest thing that the Fed could do right now or in the foreseeable future would be raise interest rates. The time will come when that will be the right policy. And how do we know that Yellen will become a monetary “hawk” when the time is right? Because her history tells us that’s true. Afterall, Yellen and Larry Meyers stood alone…literally alone…in warning Greenspan that he needed to increase rates. And this was back in the 90s. Yellen understands monetary policy; you don’t.
This is not one of Jamie Galbraith’s better efforts. I completely agree with him that deficits ought not to be a concern at the moment. We need deficit spending to soak up excess private savings. The goofy arguments and crappy econometrics against deficits (read Robert Barro) have been shot down more times than I can count. A quick review of each week’s NBER papers leads me to believe that macroeconomists are beginning to treat Barro and Mulligan as pinatas. I almost feel sorry for the hapless Barro. Mulligan is beyond pity. So we need deficits right now. And we’ll need deficits next year. With a lotta luck we might be able to start reducing the deficit in 2012, but it will take a lotta luck. But eventually we will get through this recession and then it will be time to tackle the deficit. I’m afraid that Galbraith’s article comes across as a cartoon version of 1960s style Keynesian economics. Deficits do matter when the economy is operating at normal levels.
And Galbraith commits the same sin that many conservatives do in lumping Social Security and Medicare into one big program. Galbraith is right in saying that Social Security is not in any long run problem worth worrying about. As problems go, fixing Social Security is a no brainer. If only all our problems were that simple. But Medicare & Medicaid are another story. Those programs really are in long run trouble…not because they are govt programs but because healthcare in general is eating our lunch. Instead of pretending that Medicare and Medicaid are not in trouble, Galbraith should be pointing out how the Obama healthcare bill is a first step in getting Medicare/Medicaid under control.
Mcwop,
Inflating the currency is what countries do to avoid default; it’s not the cause of defaults.
There is no plausible risk of inflation. If anything the risk is one of deflation…or at a minimum disinflation.
I disagree 2slugs. This is the kind of stuff we need to beat people over the head with. Hate to say it Cheney was right, deficits DONT matter. Now, he was right for the wrong reasons because he is now decrying the deficits of THIS administration but as a rule looking at only deficits is myopic. The real mistake that gets made is that people say high deficits slow growth over time when the truth is slow growth cause a rise in deficits. The causation is BACKWARDS. Focus on growth and the deficits will decrease all on their own. There is no growth without an increase in employment. Deficit spend on jobs, growth will follow, deficits will magically shrink.
Deficits matter, but only when there is a risk of inflation. When there is a risk of *deflation*, deficits are a quick and handy way to print money to re-inflate the economy. As for the notion that there is any monetary event right now that could result in hyperinflation… not likely. The only times we’ve ever had hyperinflation in U.S. history is when the central government had to print massive numbers of dollars in order to purchase military munitions from foreign powers in order to wage wars via the income derived from taking advantage of exchange delays — thus why the Continental dollar and Confederate dollar were worthless by the time of the respective collapse of those governments (though luckily the Continental government did not collapse until after their war was won, a luxury the Confederate government did not have). The Weimar Republic had hyperinflation for similar reasons, i.e., the need to buy massive amounts of gold from foreign sources in order to meet the war debts imposed by the Armistice, and they kept printing more money to do this, which caused gold prices in marks to rise, which caused them to print yet *more* money, wash, rinse, repeat. But can anybody say that the U.S. is in anywhere near the same situation as any of these governments? It just doesn’t pass the laugh and giggle test… we could literally monetize the entire U.S. deficit tomorrow (or, rather, every bit of it coming due) and raise overall inflation rates by only a minor amount, due to the size of the world economy today that is (outside the EU) largely denominated in dollars.
We all know this. So why do we still get these morons nattering about how the best thing to do in a recession is cut the deficit? It’s as if they haven’t figure out that we have this marvelous new invention called the PRINTING PRESS, and the economy is *not* a zero-sum game… accounting relationships are all nice and so forth, but when you have an actual money printing press in your back pocket, pretending that every dollar of government spending is a dollar taken away from private spending is just nonsense. Dude. It’s the 21st century. We have *electronic* printing presses now that don’t even need paper to add money to bank accounts. Whoa! And Austrian heads explode, I’m sure!
Slugs,
Actually I do know some things about Yellen. She’s like Martha Coakley in Massachusetts. A capable woman but one not suitable for the top job. She’s voted to hide here true intention as a strategy to get the top job. Once she does she’s going to go wild. Lets face it she’s student of Tobin and he was a Keynesian and so is she. But Keynesism failed in the 1970s and there is no reason to believe she understands this fact. If she does not aknowledge this she is not suitable for any higher position.
Wow. You sound like one of those folks before the election who was saying that Barack Obama was a secret Muslim and would turn the USA into an IslamoFascistWhatever sharia gulag if elected. You have no — zero — evidence that Yellen would behave in any manner if selected to the top Fed job other than her current behavior, rank paranoia is *not* the same thing as evidence. You might want to, like, try finding some *evidence* to support your notion, otherwise be thought a buffoon just like the buffoons who insisted, insisted I say, that Barack Obama was a secret Muslim intent upon setting up a sharia state in the USA.
The economists arguing for deficit spending in the current environment lose public support when it seems like they believe that it doesn’t matter what the deficit is used for. Is it really the same to run a deficit to improve communication or transport infrastructure as it is to run a deficit to finance military operations on the other side of the globe? Is paying for children’s healthcare going to yield similar future tax revenue to holding BearStearns’ failed investments?
Most non-economists think that what you spend your money on now is key to later financial situations. That belief will be hard to shake, so it would be a good idea to lay out how current government spending will improve future tax revenues –at least if you’re trying to build public support for deficit spending.
CBPP, cited by Galbraith, included the phrase “Long-Term Budget Outlook Is Bleak” in titles of three of its last fourth major presentations. Perhaps the message should sink in.
January 29, 2007
http://www.cbpp.org/cms/index.cfm?fa=view&id=1003
December 16, 2008
http://www.cbpp.org/cms/index.cfm?fa=view&id=2215
September 30, 2009
http://www.cbpp.org/cms/index.cfm?fa=view&id=2933
Jan 12, 2010
http://www.cbpp.org/cms/index.cfm?fa=view&id=3049
.
One of the oversights that appears in many analyses and general commentary of U.S. federal debt obligations is the failure to view such debt in comparison to that of other major economies. The Bank of International Settlements undertook that approach in the following report, complete with eye opening graphs. Not for the faint of heart, I should add.
U.S. public debt/GDP projections rank near the top, trailing Japan, United Kingdom, and Greece. Notably, projected U.S. interest payment obligations as a percentage of GDP rank second only to the United Kingdom by 2040. The percentage? Approimately 22-23% of GDP. See Graph 5.
The nations identified will be competing for sales of debt instruments. There is also the matter of impact on commercial equity and bond markets. Corporate funding initiatives may become very expensive. And, of course, some impact on state, county, and municipal funding initiatives. On the whole, this may represent a very difficult financing picture.
Hopefully, this report will help clarify a few matters.
Here it is:
Projected interest payments as a fraction of GDP
The future of public debt: prospects and implications
published by Bank for International Settlements
February 2010
http://www.bis.org/publ/othp09.pdf
.
CBPP, cited by Galbraith, included the phrase “Long-Term Budget Outlook Is Bleak” in titles of three of its last four major presentations. Perhaps the message should sink in.
January 29, 2007
http://www.cbpp.org/cms/index.cfm?fa=view&id=1003
December 16, 2008
http://www.cbpp.org/cms/index.cfm?fa=view&id=2215
September 30, 2009
http://www.cbpp.org/cms/index.cfm?fa=view&id=2933
Jan 12, 2010
http://www.cbpp.org/cms/index.cfm?fa=view&id=3049
.
The long term debt outlook: One big global mess
One of the oversights that appears in many analyses and general commentary of U.S. federal debt obligations is the failure to view such debt in comparison to that of other major economies. The Bank of International Settlements undertook that approach in the following report, complete with eye opening graphs. Not for the faint of heart, I should add.
U.S. public debt/GDP projections rank near the top, trailing Japan, United Kingdom, and Greece. Notably, projected U.S. interest payment obligations as a percentage of GDP rank second only to the United Kingdom by 2040. The percentage? Approimately 22-23% of GDP. See Graph 5.
The nations identified will be competing for sales of debt instruments. There is also the matter of impact on commercial equity and bond markets. Corporate funding initiatives may become very expensive. And, of course, some impact on state, county, and municipal funding initiatives. On the whole, this may represent a very difficult financing picture.
Hopefully, this report will help clarify a few matters.
Here it is:
The future of public debt: prospects and implications
published by Bank for International Settlements
February 2010
http://www.bis.org/publ/othp09.pdf
.
The long term debt outlook: One big global mess
One of the oversights that appears in many analyses and general commentary of U.S. federal debt obligations is the failure to view such debt in comparison to that of other major nations. The Bank of International Settlements undertook that approach in the following report, complete with eye opening graphs. Not for the faint of heart, I should add.
U.S. public debt/GDP projections rank near the top, trailing Japan, United Kingdom, and Greece. Notably, projected U.S. interest payment obligations as a percentage of GDP rank second only to the United Kingdom by 2040. The percentage? Approimately 22-23% of GDP. See Graph 5.
The nations identified will be competing for sales of debt instruments. There is also the matter of impact on commercial equity and bond markets. Corporate funding initiatives may become very expensive. And, of course, some impact on state, county, and municipal funding initiatives. On the whole, this may represent a very difficult financing picture.
Hopefully, this report will help clarify a few matters.
Here it is:
The future of public debt: prospects and implications
published by the Bank for International Settlements
February 2010
http://www.bis.org/publ/othp09.pdf
.
The long term debt outlook: One big global mess
One of the oversights that appears in many analyses and general commentary of U.S. federal debt obligations is the failure to view such debt in comparison to that of other major nations. The Bank of International Settlements undertook that approach in the following report, complete with eye opening graphs. Not for the faint of heart, I should add.
U.S. public debt/GDP projections rank near the top, trailing Japan, United Kingdom, and Greece. Notably, projected U.S. interest payment obligations as a percentage of GDP rank second only to the United Kingdom by 2040. The percentage? Approimately 22-23% as a percentage of GDP. See Graph 5.
The nations identified will be competing for sales of debt instruments. There is also the matter of impact on commercial equity and bond markets. Corporate funding initiatives may become very expensive. And, of course, some impact on state, county, and municipal funding initiatives. On the whole, this may represent a very difficult financing picture.
Hopefully, this report will help clarify a few matters.
Here it is:
The future of public debt: prospects and implications
published by the Bank for International Settlements
February 2010
http://www.bis.org/publ/othp09.pdf
.
These sorts of scare reports make various assumptions that are pure asshattery:
1) They assume that Medicare spending will continue going up and up and up until it consumes half the GDP of the country. That’s as ludicrous as the notion in 2005, expressed to me by a supposedly sane real estate loan officer, that real estate prices would just keep going up and up and up so he didn’t have to worry about morons who could not pay back liar loans, he’d just foreclose on their house and flip it for 20% more than he originally loaned out. Clearly that was not true, and the same is true for Medicare spending — at some point, the majority are going to say, “Enough, we simply will not allow Medicare to consume more GDP.” Medicare spending simply cannot continue going up forever any more than real estate prices could.
2) They assume that current tax policies in the United States will continue into perpetuity. In reality the United States has the lowest taxes of any major OECD economy and its current tax policies cannot and will not continue into perpetuity, at some point U.S. taxes will have to rise towards the OECD mean if the U.S. is to continue to be a major economy rather than a Mexico North with a broken infrastructure and a broken government.
3) They assume that there will be no (zero) GDP growth for the foreseeable future and that the current economic downturn will never end. Reality is that the current economic downturn is unlikely to last more than a few years and there WILL be GDP growth, if only because U.S. population is still growing and per-capita productivity is still improving.
4) They assume that inflation will remain at 0% and thus the current debt will not get deflated by inflation. Reality is that the U.S. has often in the past deliberately inflated its currency in order to deflate its debt load, though rarely openly doing so.
5) They assume that the U.S. government will not outright monetize some of this debt. Remember that GDP growth is going to require a growth in the monetary base in the first place in order to prevent deflation (see Milton Friedman, monetarism, school of). The general way this is done is for the Federal Reserve to, err, monetize federal debt by buying Treasuries.
In short, there’s a lot of ASSumptions that these kinds of scare reports make, and if all those assumptions come true, federal debt is the *last* thing we should worry about because if all those assumptions come true, millions of Americans will be starving in the streets, all government services will have collapsed, chaos will reign, and the U.S. will have effectively ceased to exist as a viable entity. At that point the interest on the federal debt becomes the *least* of our worries…
Bullshit.
The Bank for International Settlement is not a lightweight outfit that engages in that sort of behavior.
Try reading the report.
Bullshit.
The Bank for International Settlements is not a lightweight outfit that engages in that sort of behavior.
Try reading the report.
That’s what I love about this country – so much choice. And even more with every day!
I can chose any expert(s) or claimed expert(s), read all his/her/their reports and believe I have found a prophet and seer.
How many divisions has the Bank for International Settlements?
Your first paragraph is correct that is what I said, countries can print money (inflate currency) to avaoid deafult. However, if they print too much money, then that can cause high inflation via currency devaluation. Of course, this depends on teh leveal of debt involved.
See this paper on the subject:
http://www.economics.harvard.edu/files/faculty/51_This_Time_Is_Different.pdf
Dude, I don’t have to read the report, just the abstract, which verifies that the report is EXACTLY WHAT I SAID IT WAS — a scare tactic report that examines “what current fiscal policy and expected future age-related spending imply”. I.e., that current U.S. fiscal policy will continue forever and that Medicare spending will continue rising forever (assumptions 1 and 2 I mention above that are common to *all* these kinds of “scare” reports). Neither of which is going to be true, any more than housing prices could continue rising forever. While these reports are important for reminding us now that, err, no, Medicare spending can’t keep rising forever or it’ll bankrupt the nation (like, DUH?), in the end they are FICTION, no different from any “Future History” written by Ray Bradbury or Larry Niven, because in reality Medicare is going to have to be reigned in *long* before it takes up half of U.S. GDP or debt payment is going to be the least of our problems.
Add to this all the debt not on teh books – state and local pensions, Fannie and Freddie.
Mcwop, the BIS report above does take state and local pensions and Fannie/Freddie into account.
Digging through the report, I find that it has element #3 that I mention for these kinds of reports too — on page 4 it basically says that one of its assumptions is that the current economic crisis has resulted in a permanent loss of economic output, i.e., that it will continue forever. So now we’re 3 out of 5 on the cookie cutter template that I mentioned, shall we go for 4 out of 5? 😉
Inflation and a U.S. default right now is just a ghost story being used to, as Naomi Klein would say, as a shock to create more inequality in the U.S. system. The real risk, and with what his happen with Europe and China right now a risk it seems to be is growing, is a double dip recession, an renewed descent in a deflation/income decline/default spiral for both individuals and corporations. There is a definite risk of the deep, dark, destructive spiral ala 1931-32, especially when Merkel is channeling Bruenning and the U.S. political and financial elite are channeling Herbert Hoover, Andrew Mellon, and Norman Montagu (See Michael Freaking Herbert Hoover Kinsley and Meagan Andrew Mellon McCardle). And the thermometer that systemic risk is rising is the recent increase in the LIBOR.
Our budget problems, and medicare and medicaids problem, is a health care system that is filled with rent seeking, oligopoly, and monopolies. The recent bill is the first step in stopping the increase in heatlh care costs and bringing them in line with rest of the world. Right now we are at 17%, and the next highest OECD country is at 12%. Let loose the dogs of anti-trust.
Unfortunately, with Summers and Geithner, they have pretty much drunk the Kool-aid that we need “Creative Finance with Super Banks” and that Social Security is just something the elites can’t afford.
The systemic problems the U.S. has are failure of private sector job growth the last ten years, the lack of median income growth over the last thirty years, and gross inequality. All those trade agreements that sounded so good in theory, they don’t seem to have worked out in practice, especially when the U.S. continues to use the dollar as the international reserve currency. The result of that is the dollar goes from being over valued to being grossly over valued, and back. There is also chronic underfunding the last 40 years on infrastructure and basic and applied research and development. Deficit hawkism will make these problems worse.
I don’t see where in teh report State and Municipal pensions are included, nore fannie or freddie?
MG
Comparing Greeces debt and the US debt is nonsensical. Greece is a currency user just like a household, they do not issue Euros. The US is a currency issuer. Its debt situation is not even in the same stratosphere as Greeces. This is crucial to understanding this situation.
Any projection forty years into the future is ABSOLUTELY WORTHLESS. They have no idea what our GDP will be and even if their numbers are right 22% debt payments may be exactly what we want. Remember, our debt payments (most of them any way) are to OURSELVES. They are bonds held by us and are INCOME. We will likely all have houses which are using totally renewable energy, driving vehicles which use very little gas and have a vibrant mass transit system, so our personal expenditures on those things will be a lot less meaning we could “afford” those interest “payments” to ourselves.
tinbox
Great post. Its not the level of the deficit that is harmful, that is simply an “accounting identity” which shows that, at this moment there are less taxes coming in than expenditures going out. The deficit should probably NEVER be reported because its a useless economic indicator. Just tell us what employment levels are and how prices are moving, those are the ONLY things that matter to the average Joe.
What is also important,as you point out, is what are we spending on. We should stop worrying how much we are spending but WHAT are we buying? There are plenty of things we need to buy, energy efficient cars and homes, alternative sources of energy, teachers and health care workers. So lets go buy them because they are available or in some cases lets train them so we can use them in a couple years.
Cantab,
As I pointed out earlier, Yellin already has a track record. She was one of only two folks at the Fed who dared to challenge The Maestro back in the late 90s and argued for rate increases because she was concerned with asset bubbles. Instead you offer some half-baked conspiracy theory. What next? Are you going to want to review Yellin’s kindergarten papers to scope out earlier evidence of radical Keynesian sympathies?
You’re the only conservative on this site that actually has formal training in economics. You really owe it to your fellow conservatives to try and put up some serious arguments instead of just phoning it in. I don’t expect CoRev or sammy to understand the technical stuff so we don’t talk about DSGE models and Euler conditions and blah-blah-blah. But surely you can do better than throwing up some crap about Yellin being a Keynesian sleeper agent on the Fed.
tinbox,
The economists arguing for deficit spending in the current environment lose public support when it seems like they believe that it doesn’t matter what the deficit is used for.
I think you’re confusing two different things. In terms of providing a stimulus to aggregate demand, to a first approximation it doesn’t much matter what the government spends money on. Digging holes and then filling them up would provide about as much stimulus to aggregated demand as building a transportation network. But economists are also concerned about pushing out the long run aggregate supply curve, and that’s where they make the argument for wise deficit spending. We want to increase the stock of public capital because that will yield a stream of benefits far into the future.
Where people get confused is when economists point out that it is better to spend money on wasteful projects than it is to not spend money at all. Given a perfect world we would all like to spend money on socially useful projects. But sometimes that’s not possible, as we saw last year when the GOP opposed infrastructure spending. So if useful spending isn’t always possible, at least we should engage in useless spending. It’s still better to spend than not to spend when you’re in a deep recession and the NAIRU interest rate is negative.
I wonder if he would defend Reagan’s deficits?
Greg – “Comparing Greeces debt and the US debt is nonsensical. Greece is a currency user just like a household, they do not issue Euros. The US is a currency issuer. Its debt situation is not even in the same stratosphere as Greeces. This is crucial to understanding this situation.”
BIS compared each of the listed nations’ fiscal balance, structural balance, and general government debt as a percentage of national GDP. There was no direct debt to debt comparison provided. The effort was valid as were the primary sources of data and forecasting methodology employed.
Greg – “Any projection forty years into the future is ABSOLUTELY WORTHLESS. They have no idea what our GDP will be and even if their numbers are right 22% debt payments may be exactly what we want.”
The data was pulled from OECD, CBO, and IMF (for Japan). Graphs 4 and 5 project thirty year national public debt/GDP and interest payments/GDP estimates. I have no problem with the methodology. It provides a good snapshot comparison whereby errors would generally apply to all nations listed.
Should the U.S. Government be paying out 22%/GDP in interest payments, one can reasonably assume that programs will have been hammered if not eliminated from the government budgets operated at various levels. At the Federal level, the implication is clear – a number of discretionary programs will have been gutted, Federal publicly held debt will have grow significantly, or interest rates will have increased substantially. These are not desirable situations, though each is very likely to occur.
Greg – “Remember, our debt payments (most of them any way) are to OURSELVES. They are bonds held by us and are INCOME.”
How do you arrive at this conclusion? The bulk of the United States governmental debt will be at the Federal level. Presently, the Federal debt breakdown as of February is Debt held by the public $7.93 trillion, Intragovernmental debt $4.5 trillion, and Total debt $12.44 trillion. Most of the growth in Federal debt is projected to be Debt held by the public, for obvious reasons as positive cash flow balances vanish from some programs operated with trust funds and further funding absent revenue source improvements will require more publicly held debt financing. As well, the growing level of debt held by the public will require additional financing once interest rates run up.
Note also: “Indirect bidders, a class of investors that includes foreign central banks, purchased 45 percent of the $1.917 trillion in U.S. notes and bonds sold in 2009 through Nov. 25, up from 29 percent a year earlier, according to the Fed and data compiled by Bloomberg.” Current Federal debt holdings by foreign interests are reported as $3.7 trillion of which official holdings are $2.67 trillion. The U.S. Treasury source data is provided here:
Major Foreign Holders of U.S. Treasury Securities
as of January 2010
http://www.ustreas.gov/tic/mfh.txt
Table 2 (preliminary data, Feb. 26, 2010)
Foreign Holdings of U.S. Long-Term Debt Securities by country as of June 30, 2009
http://www.ustreas.gov/tic/shlprelim.html
and
http://www.ustreas.gov/tic/shlptab2.html
Monthly Statement of the Public Debt of the United States
February 28, 2010
http://www.treasurydirect.gov/govt/reports/pd/mspd/2010/opds022010.pdf
Bloomberg reference above
Greg – “Comparing Greeces debt and the US debt is nonsensical. Greece is a currency user just like a household, they do not issue Euros. The US is a currency issuer. Its debt situation is not even in the same stratosphere as Greeces. This is crucial to understanding this situation.”
BIS compared each of the listed nations’ fiscal balance, structural balance, and general government debt as a percentage of national GDP. There was no direct debt to debt comparison provided. The effort was valid as were the primary sources of data.
Greg – “Any projection forty years into the future is ABSOLUTELY WORTHLESS. They have no idea what our GDP will be and even if their numbers are right 22% debt payments may be exactly what we want.”
The data was pulled from OECD, CBO, and IMF (for Japan). Graphs 4 and 5 project thirty year national public debt/GDP and interest payments/GDP estimates. I have no problem with the methodology. It provides a good snapshot comparison whereby errors would generally apply to all nations listed.
Should the U.S. Government be paying out 22%/GDP in interest payments, one can reasonably assume that programs will have been hammered if not eliminated from the government budgets operated at various levels. At the Federal level, the implications are clear – a number of discretionary programs will have been gutted, Federal publicly held debt will have grown significantly, and/or interest rates will have increased substantially. These are not desirable outcomes, though each is very likely to occur.
Greg – “Remember, our debt payments (most of them any way) are to OURSELVES. They are bonds held by us and are INCOME.”
How do you arrive at this conclusion? The bulk of the United States governmental debt will be at the Federal level. Presently, the Federal debt breakdown as of February is Debt held by the public $7.93 trillion, Intragovernmental debt $4.5 trillion, and Total debt $12.44 trillion. Most of the growth in Federal debt is projected to be Debt held by the public, for obvious reasons as positive cash flow balances vanish from some programs operated with trust funds and further funding absent revenue source improvements will require more publicly held debt financing. As well, the growing level of debt held by the public will require additional financing once interest rates run up.
Note also: “Indirect bidders, a class of investors that includes foreign central banks, purchased 45 percent of the $1.917 trillion in U.S. notes and bonds sold in 2009 through Nov. 25, up from 29 percent a year earlier, according to the Fed and data compiled by Bloomberg.” Current Federal debt holdings by foreign interests are reported as $3.7 trillion of which official holdings are $2.67 trillion. The U.S. Treasury source data is provided here:
Major Foreign Holders of U.S. Treasury Securities
as of January 2010
http://www.ustreas.gov/tic/mfh.txt
Table 2 (preliminary data, Feb. 26, 2010)
Foreign Holdings of U.S. Long-Term Debt Securities by country as of June 30, 2009
http://www.ustreas.gov/tic/shlprelim.html
and
http://www.ustreas.gov/tic/shlptab2.html
Monthly Statement of the Public Debt of the United States
February 28, 2010
http://www.treasurydirect.gov/govt/reports/pd/mspd/2010/opds022010.pdf
Bloomberg reference above
Anna Lee,
The source data for the BIS analysis was from OECD, CBO, and IMF. If you know of better sources for such data and projections, do post the information.
BIS used data from the June 2009 CBO Long Term Budget Outlook report. If anything, the CBO projections are conservative based on the methodology employed.
Here is that report plus two later reports:
The Long-Term Budget Outlook
CBO, June 2009
http://www.cbo.gov/doc.cfm?index=10297
The Budget and Economic Outlook: Fiscal Years 2010 to 2020
CBO, January 2010
http://www.cbo.gov/ftpdocs/108xx/doc10871/BudgetOutlook2010_Jan.cfm
Analysis of the President’s 2011 Budget
CBO, March 2010
http://www.cbo.gov/ftpdocs/112xx/doc11231/index.cfm
.
Greg – “Comparing Greeces debt and the US debt is nonsensical. Greece is a currency user just like a household, they do not issue Euros. The US is a currency issuer. Its debt situation is not even in the same stratosphere as Greeces. This is crucial to understanding this situation.”
BIS compared each of the listed nations’ fiscal balance, structural balance, and general government debt as a percentage of national GDP. There was no direct debt to debt comparison provided. The effort was valid as were the primary sources of data.
Greg – “Any projection forty years into the future is ABSOLUTELY WORTHLESS. They have no idea what our GDP will be and even if their numbers are right 22% debt payments may be exactly what we want.”
The data was pulled from OECD, CBO, and IMF (for Japan). Graphs 4 and 5 project thirty year national public debt/GDP and interest payments/GDP estimates. I have no problem with the methodology. It provides a good snapshot comparison whereby errors would generally apply to all nations listed.
Should the U.S. Government be paying out 22%/GDP in interest payments, one can reasonably assume that programs will have been hammered if not eliminated from the government budgets operated at various levels. At the Federal level, the implications are clear – a number of discretionary programs will have been gutted, Federal publicly held debt will have grown significantly, and/or interest rates will have increased substantially. These are not desirable outcomes, though each is very likely to occur.
Greg – “Remember, our debt payments (most of them any way) are to OURSELVES. They are bonds held by us and are INCOME.”
How do you arrive at this conclusion? The bulk of the United States governmental debt will be at the Federal level. Presently, the Federal debt breakdown as of February is Debt held by the public $7.93 trillion, Intragovernmental debt $4.5 trillion, and Total debt $12.44 trillion. Most of the growth in Federal debt is projected to be Debt held by the public, for obvious reasons as positive cash flow balances vanish from some programs operated with trust funds and further funding absent revenue source improvements will require more publicly held debt financing. As well, the growing level of debt held by the public will require additional financing once interest rates run up.
Note also: “Indirect bidders, a class of investors that includes foreign central banks, purchased 45 percent of the $1.917 trillion in U.S. notes and bonds sold in 2009 through Nov. 25, up from 29 percent a year earlier, according to the Fed and data compiled by Bloomberg.” Current Federal debt holdings by foreign interests are reported as $3.7 trillion of which official holdings are $2.67 trillion. The U.S. Treasury source data is provided here:
Major Foreign Holders of U.S. Treasury Securities
as of January 2010
http://www.ustreas.gov/tic/mfh.txt
Table 2 (preliminary data, Feb. 26, 2010)
Foreign Holdings of U.S. Long-Term Debt Securities by country
as of June 30, 2009
http://www.ustreas.gov/tic/shlprelim.html
and
http://www.ustreas.gov/tic/shlptab2.html
Monthly Statement of the Public Debt of the United States
February 28, 2010
http://www.treasurydirect.gov/govt/reports/pd/mspd/2010/opds022010.pdf
Bloomberg reference above
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a4Q1NEbwhFLI
.
As I’ve pointed out before, all of these projections are based upon current trends continuing into perpetuity. They are thus “conservative” in that respect, but unrealistic, just as the banker who told me that he was down with issuing liar loans in 2005 was unrealistic when he told me that housing prices always went up, so when the liar loan foreclosed he’d just flip the house for a 20% profit so he couldn’t lose. He was correctly stating what current trends in 2005 said, but also clearly, housing prices could not continue rising at 20% per year into perpetuity or the price of a house would be higher than the entire lifetime productive output of a typical U.S. citizen within a decade or so, i.e., utterly fiscally unsustainable.
Clearly Medicare expenses cannot continue rising as they are today, just as in 2005 housing prices could not continue rising as they did then. Assuming that Medicare expenses will continue to rise is “conservative” in that it makes no assumptions about what steps will be made to bring Medicare expenses under control, but unrealistic in that, as with the banker, we know that taxpayers will rebel and cut back Medicare long before it reaches the 50% of GDP that the CBO’s “conservative” long-term projections are calling. In short, this is an “if this goes on” type of projection, but reality will be far different, and calling absurd “if this goes on” extrapolations of current trends “conservative” is just semantic sugar on a science fictional future history tale.
The truth is simple: You have no idea what the governments will do. None.
long-winded penguin,
You have no idea what the governments are going to do.
You’re too busy condemning reports that indicate that some changes in fiscal, structure, and debt ratios should be addressed.
long-winded penguin,
You have no idea what the governments are going to do.
You’re too busy condemning reports that indicate that some changes in fiscal, structure, and debt ratios should be addressed.
In your defense, though, I agree with your general points.
I also aplaud your comments regarding Marianne Faithful. She was a fine English singer who suffered dearly after hooking up with Jagger. A real shame, that.
long-winded penguin,
You have no idea what the governments are going to do. Neither do I.
You’re too busy condemning reports that indicate that some changes in fiscal, structure, and debt ratios should be addressed.
In your defense, though, I agree with some of your general points.
My point is, even as a ratio to GDP the numbers between US and Greek debt are meaningless. Greece must ACQUIRE euros in some manner and thus when their bond payments get to a certain level they may not be able to generate enough economic activity to acquire the euros and pay the interest on the bonds. The US NEVER has that problem. They can make any interest payment on any bond any time, as long as it is dollar denominated.
The interest on the 7.93 trillion of public “debt” (otherwise known as bonds) is an ASSET to the holder of the bond, not a liability. Your numbers show that 75% of our debt is privately held while the rest is intergovernmental. Intergovernmental can be basically ignored. Treasury writing checks to itself?? Most intergovernmental debt is simply for interest rate management and is NEVER paid back in any way shape or form. We really should stop calling it debt because from OUR perspective its an asset, an interest bearing bond. Our government, because we do not have a peg or a fixed exchange rate can never miss a bond payment. All this ratio talk implies that the US has a default risk, which is NONSENSE.