The new forums will be named Coin Return (based on the most recent vote)! You can check on the status and timeline of the transition to the new forums here.
The Guiding Principles and New Rules document is now in effect.
The Deficit
Fartacus
__BANNED USERS regular
__BANNED USERS regular
Ah, yes, THE DEFICIT (cue Carmina Burana)
So folks, I know this place is pretty liberal, so most people aren't liable to be much concerned with the deficit right now, but even most Democrats and liberals I know are concerned about it long term, and think budget surpluses are a good thing when we have the capacity for them.
I am not one of these people.
I want to know: why do you (if you do) think deficits are undesirable and/or unsustainable? What makes you think surpluses are a good thing? What concerns you about the government borrowing and spending money it doesn't have?
I'll admit right off the bat that my stance is one that deficits aren't a problem at all, but I find the easiest way to get at this discussion is through a sort of Socratic method.
So, D&D, what bothers you about deficits?
So folks, I know this place is pretty liberal, so most people aren't liable to be much concerned with the deficit right now, but even most Democrats and liberals I know are concerned about it long term, and think budget surpluses are a good thing when we have the capacity for them.
I am not one of these people.
I want to know: why do you (if you do) think deficits are undesirable and/or unsustainable? What makes you think surpluses are a good thing? What concerns you about the government borrowing and spending money it doesn't have?
I'll admit right off the bat that my stance is one that deficits aren't a problem at all, but I find the easiest way to get at this discussion is through a sort of Socratic method.
So, D&D, what bothers you about deficits?
Fartacus on
0
Posts
And now that that is out of the way, begin.
In principle? Crowding out of private investment that would be more efficient and effective at growing the economy. At the moment that isn't happening, which is why we should be borrowing more and investing in infrastructure, education, and other long term beneficial programs in order to act in a counter-cyclical way now that also pays dividends long term. When we aren't in the middle of a deflationary contraction, however, that might be the case and so you want to pair back on how much aggregate investments are made by the government rather than private enterprise.
Yeah, but I sort of wanted it to be a specific topic. I'm a long(ish) time lurker, but I thought it made more sense to have a separate thread. I guess feel free to merge it if this is wrong.
But besides that. In the long run there is nothing wrong with a stable government deficit, nor surplus; this is because of its diminishing impact on the allocation of real resources (by analogy, take a long list of annual budget sheets and move the revenue column one year up or down). The trouble comes principally from structural annual deficits, since those work towards undermining confidence that the debt won't be monetized or defaulted upon.
What's that old joke? If you owe the bank a thousand dollars, you've got a problem. If you owe the bank a million dollars, the bank's got a problem.
Beijing has staked a lot on the Treasury simply not upping and walking away at some future date, and there is enough unique about sovereign lenders that a future Treasury might feel that there is no systematic risk in a selective default.
Well, that assumes that government is either taxing to bring in money equivalent to what it is spending, or borrowing enough to drive up interest rates (and given how much we've borrowed currently, and how low interest rates are...).
Of course, you can simply solve both of these concerns just by creating money without borrowing to finance it or taxing. Just adjust up numbers on spreadsheets and the crowding out problem is neatly side-stepped.
Nope. Seignorage is simply taxing creditors and other holders of nominal assets. So the government is still taxing claims on real resources, with all the attendant impacts of a tax (plus other negative effects when we start destabilizing inflationary expectations).
Of course the day the Treasury selectively defaults on Chinese investments is the day Taiwan gets a lot more metal rain. I don't think it's unreasonable to assume that conventional conflict between China and the US over Taiwan, Burma, or Korea is held in tight reign because of those Chinese investments.
I know we owe them money, but it is less a leverage of them over us as it is us over them.
But a sovereign nation has no real risk of default, so why would lenders panic? And in fact lenders have proved pretty smart about this, given that (pre-Euro) Italy has debt somewhere on the order of 120% of GDP, IIRC, and there was no collapse in confidence or in the currency.
I mean, the government can always pay off its debts by issuing new currency. Sure, you've got other risks at that point, but it is impossible for a monopoly-issuer government to involuntarily default, no?
Oh I know. We're fine as far as Chinese relations go simply because they're as tied to as as we to them. Us defaulting would be horrible for both parties.
Asian financial crisis, Russian financial crisis, the present day Greek financial crisis...
Anyway, The primary reason I feel they current deficits are bad is because they are being used not for long term structural or infrastructure projects with one time costs(like building or replacing dams bridges buildings), but for year to year financing of ongoing costs(like maintenance, general salaries and pensions, health-care(possibly?) and private sector subsidies).
Basically instead of taking something that will benefit us for 10 years and paying for it over 10 years we are getting something that will only add value for 1 year and paying for it over 10 years. But then next year we are doing the same thing. Instead of taxing at an appropriate level to pay for 10 years worth all at once the cost is spread out.
In the short term or done on an intermittent basis (like once every 10 years or so) this can help smooth over rough times, but if done constantly it actually makes the real cost of the budget higher then it would be previously, because we pay interest. After 10 years of constantly borrowing like that year to year, as an example, you would be paying for an extra full year of costs every year going forward + interest so the cost goes up.
The deficit represents money that must be payed back in the future at a higher cost. The debt represents obligations we already made and MUST pay back, either in the form of higher taxes, selling off land and natural resources or printing money(devaluing the currency).
Not all debt and deficits are bad, but the problem is that debt spending has become the default norm by which governments give excessive services they cannot afford. The basic idea is to have a balanced budget or one where we are paying back obligations be the norm, with deficits run for specific projects or in dire economic times(like major disasters).
Interest rates are low because of horrible state of the economy and fear about low future aggregate demand leading to slower recoveries. Bond markets can and have priced our debt and interest rate far higher which leads to crowding out or unchecked inflation, both of which are bad things.
Well, we're in Taiwan in part to eyeball Beijing from real close, so the day the Treasury decides to really aggravate Beijing is also the day we either decide to leave Taiwan to defend itself, or get the seventh fleet to sail up and down the strait a bit and see who blinks first.
This said, I would not be entirely surprised if a PRC administration in 2050 agreed to simply write off some of the loans, even without any threat of default imminent. I wouldn't bet on it, but it wouldn't be surprising, either. How much are good relations worth to Beijing?
As moniker pointed out, governments do default. Defaulting just ensures that nobody lends you money in the future. If you have debts of such a magnitude that you cannot convince lenders that you can repay it eventually, attempting to monetize the debt would almost certainly create hyperinflation, thus both destroying your economy and ensuring that nobody lends you money in the future. Thus only very delusional finance ministries engage in it (e.g., Zimbabwe).
Lenders panic in the face of inflation-funded borrowing because people don't just want money, they want what money can buy. If a government inflates its way out of debt, the money can buy less. Unless the inflation was priced into the loan interest rate to begin with, the lender is getting stiffed.
The reason US deficit is mentioned as a problem lies with the way it's being managed year after year. Kotlikoff may sound a bit crazy when he goes on a rant(especially as his projections usually go too far in the future), but the country is certainly not doing a great job of acting on the promise of fiscal responsibility and the political situation doesn't exactly predispose such actions.
To nitpick, the Asian financial crisis wasn't triggered by fears of default; some of the countries involved even ran surpluses and still do. All of them had relatively sound fiscal discipline. The Argentinian crisis might be more appropriate.
He meant the one that's coming ....;o)
Fair enough. I was mostly just pointing out that governments can be involuntarily fucked over just fine.
Come to think of it, past fiscal crises have usually been one debtor nation owing a large variety of private or public creditors. Has there ever been a case in modern history where one creditor region has lent out so much? And one creditor government, no less? A loan default crisis instead of a debt default crisis?
Ehhh, only if you're producing significant inflation. I mean, you're not really diminishing purchasing power, but also theoretically it should be possible to deficit spend without borrowing to finance and still have relatively low or even no inflation.
The issue is if the increase in money supply pushes AD higher than your potential real output, but when you've got 16% un/der-employment (or, really, anything higher than 2% unemployment) that's not really much of a concern.
And, frankly, since real potential output is always rising, you would still need to maintain a deficit in order to have the money supply keep pace with the rise in output.
For entire time I've been alive (and I'm older than a lot around here, in that I remember the Reagan admin) the Democrats have been far more fiscally responsible than their republican counterparts (in relative terms). Not that they've been "good" if you are a deficit hawk but their "tax and spend" beats the Republican (going back to at least Reagan if not before) "don't tax and spend even more".
The one exception being the brief term of Bush the elder, in that he at least tried to raise some taxes to put a dent in the bill for the two wars he pulled off in one term and all the damage he had contributed to during the years he was VP for Reagan.
For Bush the Younger, not only was there his infamous tax cuts, two enourmously large and expensive wars etc... but also during the years we had a republican president and congress non-military discretionary spending increased at a greater rate than for any Democratic admin (or majority congress) in a generation.
Basicially, if your hot button issue is the deficit the Republicans are the greater of two evils. They spend more on the military, they spend more on "pork" and they raise less in tax revenue.
Granted, the deficit is not the main priority of the democrats either. But they at least do less damage.
The Greek crisis isn't at all applicable because they don't have monopoly issuance. These rules I'm stating absolutely do not apply to the Eurozone. The Thai baht also wasn't a floating currency when shit got nasty -- in fact, that transition was part of the problem. The private sector was hugely over-leveraged and they hadn't had a floating currency. Same goes for Russia.
I'm specifically talking about a country that has monopoly issuance of a floating exchange fiat currency.
But, as I said, you can avoid interest rate rises simply by adding to net money supply through unfinanced deficit spending. This would also drive down the demand for money, resulting in lower interest rates, if you did feel like borrowing.
Eh, Zimbabwe is a pretty crappy example, and so is Weimar Germany. I personally can't think of any examples of hyperinflation that weren't driven mostly by a loss in real output (and, consequently, too much money chasing too few goods). Zimbabwe's white-owned farms employed I think close to 80% of the population and were responsible for a comparable bit of GDP, and were pretty catastrophically fucked by the civil war. So, I mean, yes, if you go through war and come out the other side with drastically more limited potential output, you should definitely raise taxes and lower spending in order to shrink the money supply.
Like I said, you face other risks, but not the risk of default. I just think it's important to be specific, because inflation is different from default. They happen for different reasons and have different effects. And, frankly, you can print a damn lot of money without substantial inflation if you've got 16% of your workforce underutilized, not to mention languishing capital goods.
The only fear then is, what, inflation?
Why should fear of inflation prevent us from creating money?
My knowledge with regards to economics is rusty, but isn't the only way to get significant damaging inflation to have either a government policy that does so (post WW1 Germany) or a sudden and massive decrease in production?
Neither seem like serious concerns in America.
Russia's currency floated. In fact that helped contribute to the uncertainty because they kept changing things.
Basically, using an operational approach, Modern Monetary Theory (MMT) posits that private net savings are directly and inversely proportional to government deficits, and therefore that government surpluses produce credit bubbles and (eventually) deflationary recessions, whereas deficits facilitate monetary expansion, growth, and employment. Surpluses are in fact, horrible. Deficits are the lifeblood of the economy. This is at most a very slight exaggeration of the theory. Anyway, let's do some operational analysis:
So, say in a household, a mother wants to teach her son the value of work, and so on. She tells him that he will get 100 business cards a week in exchange for doing yard work. He asks, naturally, why he would want these business cards. She replies that if he does not pay her 100 business cards every week in "taxes," that he will need to find somewhere else to sleep! He charges out the door and starts mowing.
In this analogy, the mother is of course government, with monopoly of currency issuance, and the child is the citizenry.
Now, it's important to see that he has no money to pay these taxes until the mother issues currency. She is operating budget-neutral structurally, but the son has no way to save business cards because all the money he earns is taken back up in taxes. Operationally speaking, the mother issues each 100 business cards each week out of deficit, essentially, and takes them back in taxes later. How much the son has at any point is equal to the mother's deficit in that instant.
Let's say mom wants to teach little Jimmy about the value of saving. So she says he can exchange his business cards for things he wants -- like a gameboy, if he has 200 business cards. Of course, he can't save any cards since tax rates are equal to the government issuance of currency. So, she increases the spending to 120 cards a week.
Mom is now running a 20 card structural weekly deficit, which is exactly equal to Jimmy's private savings rate. The net money supply in the house is equal to the government's overall debt (although in this case of course it is not financed).
Now, let's say Jimmy has his gameboy, and some savings, but mom decides she should be "fiscally responsible" and stop running a deficit. She cuts spending to 90 cards a week so she can reign in her spending. Jimmy's net assets are now being actively drained by this "government surplus" that mom is running. Eventually, his savings run out and he has to either sell his gameboy or borrow against it to keep paying.
And the metaphor sort of breaks down from there, as Jimmy's loans eventually exceed any reasonable value of his assets, he defaults, the money supply collapses entirely, and he can no longer purchase gameboys or anything else, AD crumples, and unemployment skyrockets. But I think by now you get the basic idea.
Deficits are the public's savings.
Here's an article that adds a little more math to the basic idea: http://bilbo.economicoutlook.net/blog/?p=10384
If this is a subtle attempt to translate the wonders of paleo-Keynesian endogenous money theory to English, I salute you, but you're going to need to come out and say it, because where I come from we try to keep our nominal and real variables separate.
Anyway. It is indeed the case that (simplistically speaking) when AD is lower than potential real output, expanding the money supply (be it to fund spending - whereupon it would not be deficit spending, technically - or to helicopter-drop money upon the unsuspecting) will not generate inflation. But I think you will agree that this would be the minority scenario. Unemployment tends to be near the the NAIRU (which can be well over 2%). The Great Contraction sucks and all, but we do have three decades of the Great Moderation to consider.
We do not, in fact, have to make the money supply 'keep pace' with real output because real wages also increase (remember what I said about keeping real and nominal variables separate?). For all that, most OECD nations target a 2% inflation rate for other reasons. This doesn't entail maintaining a deficit; it entails tweaking the overnight interest rate.
Well, frankly, I'm not a big fan of NAIRU. I'm much more a fan of the now-mostly-abandoned notion of full employment. We have done it before, in the '50s, back when real wages rose precipitously and fear of inflation wasn't used as a bludgeon by the wealthy and business interests in order to avoid public policy that might actually result in higher employment and escalating wage rates.
Well, if you want to rely on private credit to expand the money supply, which certainly works for a while but if there is a default problem, well, then I think we can see right now just how shit-house that can turn out.
Also, why exactly do real wages increase with real output? Certainly real output has risen dramatically in the last 30 years but real wages have stagnated, at least in America.
In fact, isn't this exactly the problem? Real wages have remained mostly constant from 1968. We have a mostly consumer economy. Real output has grown tremendously. So, essentially, there is the same real amount of money out there (the same potential AD) trying to buy more goods. The only way this can happen is through private leveraging, and when that collapses you're fucked. And we're surprised that recoveries have been becoming more and more jobless over the last 30 years?
I'm not familiar with the innards of MMT so you'll have to wait awhile before I can write a presentable response. In the meanwhile, for the sake of the audience I should point out that the 'Modern Monetary Theory' - prominently associated with James K. Galbraith - is a strictly heterodox school of thought. I think it's even smaller than the post-Keynesians.
Yeah, it's pretty fringe in a literal sense.
I used to be a good old fashioned Krugman-reading Keynesian, but damnit if MMT doesn't make more sense than any neo-liberal or Keynesian macro-econ that I've ever read.
edit: especially in light of the current crisis, which nearly every other school really struggles to explain, including the Keynesians.