Friday, December 9, 2011

The Meme that Refuses to Die: Government Debt Must Be Paid Back


No it doesn’t.  It almost never is.  To pay back government debt, you have to run a budget surplus, and while there may be modest surpluses from time to time, they don’t add up to more than a minuscule fraction of all the accumulated debt.  But don’t take it from me, look at the record.


The story is unmistakable: the US jacked up its public debt to finance WWII and increased it further in almost every year since then.  We are not paying off the debt left by our parents and grandparents, and our children and grandchildren will not pay off ours.

The debt burden depends on the ratio of debt to GDP as well as the interest cost in servicing it.  The way to reduce this burden is to have a combination of real economic growth, inflation and modest interest rates.  If you want to show your solicitude for the well-being of future generations, demand macroeconomic policies that will boost demand and raise inflation a bit, consistent with continued low interest rates.

What to avoid: nonsense like this excerpt from today’s column by Catherine Rampell of the New York Times:
Total debt for the United States — that is, also including corporate and government debt — hit another all-time high because government borrowing is still outpacing the rate at which households shed debt.
 Guess who will ultimately pay back that government debt: American households.

38 comments:

Don Levit said...

Go to www.theeconomiccollapseblog.com, and look at the top story regarding America is not a wealthy nation.
Look at the explosion of debt in the last 30 years.
My grandfather had a very wise saying:
What you owe, you owe.
What you own, you may not own.
By saying that government debt need not be paid back, you are indirectly giving the message that business and household debt need not be paid back.
Government sets the pace for individuals.
A debt that need not be paid back by the government provides people with the excuse to multiply their debts, just like the government has done, for the last 30 years.
Don Levit

Jack said...

Don
What you fail to understand is that creditors are paid what they are owed, but the government uses new debt to payoff the old. Remeber? Like Aladdin, "Old debt, for new!!!" If debt as a percentage of GDP is going up it may be that GDP is stalling, like in a recession. That's not due to increased debt. It's the result of lack of demand. And lack of demand is a result of both stagnant income and increasing unemployment. And those phenomenon are brought about by the continuing bifurcation of the income distribution in the economy.

So the best way to reduce debt ratio is to reverse the trend, as described above. That means, in case it isn't clear, raising the income levels of the middle/working class and increasing employment. The latter will normally follow from the former, but restoring industrial activity will add to that normal growth phenomenon.

Jazzbumpa said...

The debt burden depends on the ratio of debt to GDP as well as the interest cost in servicing it. The way to reduce this burden is to have a combination of real economic growth, inflation and modest interest rates.

Exactly so.

This is what it looks like.

http://jazzbumpa.blogspot.com/2011/01/debt-after-ww-ii.html

Cheers!
JzB

Don Levit said...

Jack:
I agree with the raising of income levels and increasing employment.
This is not an either-or scenario.
It is very peculiar the levels that debt has risen in the last 30 years, compared to the 30 years before that.
What we need to do is to get rising levels of employment and earnings without such a large increase in debt.
Yes, government rolls over debt, not paying off principal, and adding to the total debt.
As I said in the prior post, government is the trendsetter.
If it is not paying off its debt, why should consumers and businesses not emulate them, to some extent?
It is a very bad influence on Americans that the government's debt has risen so much, even in relation to GDP.
Don Levit

The Arthurian said...

Don Levit : "By saying that government debt need not be paid back, you are indirectly giving the message that business and household debt need not be paid back.
Government sets the pace for individuals."

I don't see that connection. But government does set the policy for individuals and businesses. And the policy says we should use more credit because it's good for growth.

That policy has not worked for a very long time.

It is the excessive accumulation of private sector debt that hinders and hampers growth.

Amileoj said...

It is very peculiar the levels that debt has risen in the last 30 years, compared to the 30 years before that.

The peculiarity vanishes once we recall that this has also been the era of an increase in desired savings (due to various causes - tax favored savings vehicles, aging population, increasing inequality, mercantilist trade partners).

It is this increase in savings desires that has driven the increase in debt, by reducing the spending and hence the income needed to finance that savings. The paradox of thrift has become a chronic feature of our economy.

Amileoj said...

If [government] is not paying off its debt, why should consumers and businesses not emulate them, to some extent?

Because debt has an entirely different meaning for the federal government, as the issuer of the currency, than it does for the uses of that currency - households, firms, state and local government, etc.

That difference is quite simple: the federal government does not issue debt to finance its spending net of taxes. That it creates the appearance of doing so is entirely a voluntary (a political) choice, and probably an unwise one, on balance, since it leads to the sort of confusion of public with private debt that you are both warning about and exhibiting.

The economic reality is that the federal government need not, and in fact cannot, get the dollars it spends from any source other than itself. All the dollars there are in the world, come ultimately from its own spending, net of taxes. As the sole creator (and usually the sole destroyer) of dollars, it can never have too few, or too many of them. The economy as a whole can, but the federal government cannot.

This is why the size of the federal debt has zero effect on the interest that the government pays on that debt. Unless the government wants the interst it pays on its bond issues to go up (say to cool off the economy), it does not go up.

It is also why the federal government is the only actor that can always respond to a situation such as we have now (a massive shortfall in demand relative to the capacity to produce) by increasing its own net spending.

All other actors are constrained by the need to finance their spending--someone would have to go further into debt (in the ordinary sense) to provide the income for someone else to use in increasing their savings. Only the federal government's spending is unconstrained, since its debt issuance is voluntary and not essential to finance its spending.

Don Levit said...

Amileoj:
How was the economy able to do so well for the years 1950-1980 with very little government debt, yet for the last 30 years, with huge government debts, median households have lower incomes?
It seems that the federal government debt is not the magic elixir you suggest it to be.
I hate to break the news to you, but our solution is more complex than simply more and more government debt.
Don Levit

dr2chase said...

Don, two things:

First, collective debt is different from individual debt. A recession can be cured without government spending, if enough individual suckers can be convinced to spend their own money to get things going, even borrowing to obtain enough money to do this. That doesn't happen; there's not enough suckers. Having the government borrow and spend is indeed very much like coerced borrowing-and-spending by all of us.

Second, what happened, was an absurd and unsustainable cut in upper income tax rates, and a decades-long attack on labor unions. You are right that it is not simple. In particular, the simple answer of "paying off the debt" is not the solution, either.

The Arthurian said...

Don's question is excellent: "How was the economy able to do so well for the years 1950-1980 with very little government debt, yet for the last 30 years, with huge government debts, median households have lower incomes?"

The answer is found by comparing the level of government debt to the level of non-government debt. It is non-government debt -- private sector debt -- that holds back private sector growth.

For the last 30 years, private debt has been so vast that all of the growth of government debt we've had was not enough to generate vigorous growth.

For the 30 years before that, private sector debt was relatively low and so it was able to rise rapidly, creating growth.

Art

Don Levit said...

Combining Art's and dr.2chase's replies:
Can we say that government debt (coerced collective bargaining)
has little positive effect with the amount of private debt being so high?
Is the reverse also accurate: with government debt being so high, does extra private debt have little positive affect?
It seems to me that debt is not the answer.
We have to reimpower individuals to more fully utilize their gifts, talents, and abilities.
Until the individual is lifted up, rather than huge entities, the pattern will continue.
We need to be indebted to bringing out the best in individuals, not the worst in huge corporations.
Don Levit

dr2chase said...

@Don - government debt is not some mythical beast that lives in isolation. Was the debt caused by reduced taxation, or by increased spending? Whose taxes were reduced? Whose spending was increased? The debt incurred in the Bush years was largely caused by reduced taxation on the most wealthy; this is apparently destabilizing to the economy, and not a good way to create jobs, good or otherwise.

Keynesian, liberal prescriptions would serve us well. Borrow and spend now in a recession, raise taxes, especially on the most-wealthy, to run a surplus during good times which are expected to follow. Spend, now, on education, on infrastructure, and on things that might protect us from future economic shocks (home insulation, non-fossil energy, bike paths in dense areas, rail improvements where the ridership justifies it, battery research, power grid upgrades). The only hard part is getting the insane party far enough out of power that we can accomplish these things (where some of the more "conservative" Democrats are de facto members of the insane party).

Amileoj said...

How was the economy able to do so well for the years 1950-1980 with very little government debt...?

There was actually substantial government debt during much of this time, especially early on. The graph in this post shows percent change year by year, but a cumulative view would of course show that there was a very large overhang of public debt coming out of WWII (more than 100% of GDP).

[O]ur solution is more complex than simply more and more government debt.

Our solution is not more government debt. As I said, issuing additional federal debt is a voluntary/political choice and it is not the stock of debt, but the flow of net spending that matters for the health of the economy.

The central issue is the level of government spending, net of taxes (i.e., the deficit), relative to the savings desires of the other economic actors. The right level of net spending varies from year to year, as those savings desires change. The size of the deficit that is consistent with full employment thus changes over time.

The Arthurian said...

"There was actually substantial government debt during much of this time, especially early on."

Amileoj, you are right of course, But your words "especially early on" imply that the additions to government debt were very little, which is the meaning I take from Don's statement.

Oh, and the "savings desires of the other economic actors" are influenced by policies that encourage saving and discourage early withdrawal and like that.

Art

Joe Shelby said...

I'm actually of the opinion that while "modest" interest rates (as you said in the first sentence of pp 3) is what we need, but right now the interest rates are simply TOO low. They aren't profitable enough for banks to actually do what banks are supposed to do: loan money to small businesses to encourage growth (or survival through hard times). In particular, they aren't high enough to be profitable enough to cover the losses incurred from defaults. So they aren't loaning, and thus layoffs continue as does the recession.

The original impetus to over-loan and start the housing boom that led to the collapse (the securities frauds exaggerated and compounded the problem, but the housing sales started first) was simply that the rates were so low the banks weren't able to make the profits they were supposed to make, so they covered that gap by over-loaning, then by the securities gambit, then loaning out even MORE once they saw the profits to be made playing the securities gambit.

Had loan interest profits actually remained at a reasonable level (say, 7-9 % for good credit, 10-15% for risky), the impetus to make bad loans for the sake of keeping short term profits up wouldn't have been so strong and they might have made more rational decisions.

I do stress "might". Someone still would have come up with the securities scheme, it just would have taken longer to get going.

Amileoj said...

[T]he "savings desires of the other economic actors" are influenced by policies that encourage saving...

That is of course true. I believe I mentioned tax-deferred savings accounts as an example of this. This is one likely cause of the secular trend towards greater desired savings. There are no doubt others as well--notably the desire of certain trading partners to accumulate large reserves of dollar-denominated financial assets, in part to influence the price of their own currencies.

My point is that, whatever the reasons for this trend towards increased desired savings, it has the paradoxical effect of taking demand and thus income out of the economy, and therefore frustrating the very same desire for increased savings.

I do not think that most commentators, including Don, have come to terms with this paradox. To put it as starkly as possible: the trend towards increasing private debt is the result of increasing efforts to save.

This means that, to avoid another build up of private debt, we must either discourage those savings desires (probably on various fronts), or else accommodate them through larger federal deficits than we have hitherto been comfortable running, in both good times and bad.

The Arthurian said...

Amileoj: "I believe I mentioned tax-deferred savings accounts as an example of this."

Yes. I re-read that after it was too late to modify my remark. Oops.

"This means that, to avoid another build up of private debt, we must either discourage those savings desires (probably on various fronts), or else accommodate them through larger federal deficits than we have hitherto been comfortable running, in both good times and bad."

Oh, you said "hitherto"!! I bet you read Keynes...

I agree with your statement, except I think that accommodation leads to inflation. Which narrows down the options.

The Arthurian said...

...Also, I don't see increasing private debt as the result of increasing efforts to save.

I see both as the result of a misguided policy that says credit use is always good for growth, no matter how much credit is already in use, no matter how much debt we have.

Bruce Webb said...

Interestingly an examination of that portion of Public Debt represented by th Social Security Trust Funds, some $2.6 tn of the $14tn+ of Debt Subject to the Limit, shows that under conditions of Sustainable Solvency (as defined by the Office of the Actuary) NEVER have to be paid back, and in fact even the debt service on it is effectively discounted by around 60% going forward. Something that will no doubt blow Levit's one track mind.

Also an examination of Greenspan's testimony to Congress in 2000 shows that it wasn't all self-serving attempts to shore up Bush's proposed tax cuts, instead the world economic system requires a certain level of existing long and short term Treasury Debt to provide reserve and flight to safety functions. Now why it is intuitively clear that those functions could be preserved at less than current $14 tn levels, it is equally clear that it couldn't be reduced to zero without removing the Dollar as the worlds premier reserve currency.

That is US Debt is equally much of the worlds reserve liquidity and as the world economy increases in real and nominal terms we can and should accept and welcome the fact that nominal US debt will also.

Because reserves that can be expected to be held effectively forever, as they would be in a Sustainably Solvent Social Security system, are in a real sense not really debt at all. Instead being just subject to debt service, which in turn might or might not be onerous.

And at current 10 yer rates isn't

Don Levit said...

I agree with Arthurian that increasing private debt has a direct, or even indirect, relation to saving.
Sure, there are those instances in which people borrow to increase long-term savings.
But the savings rate has been relatively small for the last 10-15 years.
And, those that are able to save huge amounts are concentrated in the top 10% of households.
Don Levit

Jack said...

Here is an interesting clue to Don Levit's persistent commentary which seems to run around in a circle and carries an implied message that government spending is bad and maybe government is at the core of all problems From one of his comments, above, "Can we say that government debt (coerced collective bargaining)..."
Note the parenthetic. Don, what is the meaning in your equation, government debt=coerced collective bargaining? Is government debt solely due to the public employment sector of the economy? What is "coerced collective bargaining"?

Don Levit said...

Jack:
i understand where you are coming from when you say that Treasury debt is funded as long as there are willing buyers.
But, the point is that when the Treasury increases debt held by the public, even with a willing buyer, that debt has to be serviced with new monies.
Do you think Medicare Part D is fully funded?
Don Levit

Jack said...

Medicare Part D is not the issue. We are tal;king about government debt in general. Try another tact to divert the focus on an issue you seem to have little knowledge about.

rjs said...

comparing govt debt to personal or corporal debt is a fallacy of composition...

& US debt has a special function in the financial markets; without it, the financial markets freeze...

short term US government debt has become, at least in part, the worlds money supply; a million dollar Treasury bill is used as money by the international banking system or by a sovereign wealth fund in the same sense that you use a ten dollar bill in your wallet...thus, a contraction of the supply of the reserve currency (our treasury debt) would have a negative impact on the world economy in the same manner that a contraction in the domestic money supply would impact our nation's economy...

the problem is illustrated in a recent post by david beckworth: "Why the Global Shortage of Safe Assets Matters"...

http://macromarketmusings.blogspot.com/2011/12/why-global-shortage-of-safe-assets.html?ext-ref=comm-sub-email

furthermore, randy wray discovered that reducing federal borrowing tends to lead to financial collapse:

http://www.asymptosis.com/does-reducing-the-federal-debt-cause-financial-collapse.html

Don Levit said...

rjs:
Are you saying that Treasury debt is just as good as cash?
Or, would it be even better than cash, since the Treasury pays interest, although the interest is additional debt?
Don Levit

rjs said...

@Don Levit: in a ZIRP environment, short term treasury debt is virtually identical to cash...andy harless explained that here:

http://blog.andyharless.com/2009/12/treasurys-monetary-policy.html

"Treasury bills are not just more like money than like other assets; from a portfolio point of view, on the margin of new issuance, Treasury bills are exactly like money. Holders of short-term Treasury bills are willing to hold them without receiving interest. Anyone who is willing to hold them is placing no value whatsoever on any liquidity or safety advantage that might be had from holding those assets in the form of money."

Don Levit said...

rjs:
Treasury bills are exactly like money?
Rememnber, it is a two-party exchange, and their must be willing buyers to make this thing go.
With cash, I am already a willing buyer.
I need to find a willing seller!

Since you believe Treasuries are exactly like cash, which perspective would you ascribe to, from the following excerpt?
From a paper entitled "Social Security and Medicare Trust Funds and the Federal Budget," published by the Treasury Department:
Page 13 "From the Trust Fund Perspective, SMI is always 'fully funded.'
From the Budget Perzpective, SMI draws huge transfers."
Page 17 "Net results for Budget Perspective - Revenues from public less expensers to public.
Net results for Trust Fund Perspective - Revenues from public less expenses to public PLUS GENERAL FUND TRANSFERS PLUS TRUST FUND ASSETS."
http://www.treas.gov/offices/economic-policy/reports/budget_trust_fund_perspectives_2009.pdf.
Don Levit

Jack said...

I posted the following on the AngryBear thread of the same name. Don, for your information, in case you haven't checked lately.
Hmmm, all this talk about government debt and the issuing of something called money to pay that debt got me to thinking though not to an answer to any question. So I pull out of my pocket Jack's portable wealth, the green paper we all call money. It's used to pay debt I say to myself. I know because I read it on the internet and other people and organizations will accept some of it and tell me that I don't owe them as much money afterwards. I guess its true. Then I take a more careful look at my money while wondering why it has such an extraordinary characteristic of being able to satisfy debt. I look closely at the lovely engraving and the picture of some long dead historical figure. To my utter amazment and concern I see and read the few words written on the paper called money. The word money does not appear any place on the paper called money. So how do I know that it is what we call it? People treat it as what they call money. If I'm told, "Give me some money," and I give over the pieces of paper that I call money, but don't have that word writtent any where on the paper, it is still accepted and acknowledged that I have correctly complied with the demand for money. That is truly strange. I keep reading (there aren't that many words, but I have to think a lot about the words that aren't there) and come across the words Federal Reserve Note as well as The United States of America. In much smaller print, as though the printer of the "money" were hopeful they won't be seen, I see the words, "This note is legal tender for all debts, public and private." Ah ha!!! It isn't money. It is something called "legal tender," and it is for the purpose of paying debts of all types. Who says so, I think to myself? The Note is signed by both the Treasurer of the United States and the Secretary of the Treasury, but I keep in mind that it is inscribed, Federal Reserve Note, and the United States of America is the only entity described that I have any faith in. True that Andrew Jackson's picture is displayed, but I doubt seriously he is the likely payee. So I'm really confused at this point because my money has nothing of value backing it up. Nothing other than all of our mutual agreement that it somethiing called "legal tender" and I can tender these Notes as payment of my debts. Hmm, but they are Notes, Federal Reserve Notes. Just so many I.O.U.s as I recall. This is really getting circular. I pay debt with other debt that is given over to me to satisfy someone's debt to me. So when do I get some money and how do we reduce the debt?

rjs said...

don, i didnt say treasury bills were exactly like money; that was quoting andy harless; i hedged by saying virtually identical...my sematics notwithstanding, i dont see how the excerpt from the treasury paper you cited is germane to anything i've been trying to explain...we've decided that the wrong words are being used to describe aspects of fiscal policy...debt, for instance, can no longer be used to describe government note, bill, & bond issuance, because the nature of a government issue is closer to creating money than it is to what the public & the lamebrained policy makers think of as "debt"...even obama suffers from the same delusion, saying that the government is like household and should also tighten its belt when times are tough...& the mistake theyre all making is whats costing us this prolonged & deep recession...

The Arthurian said...

rjs: "...debt, for instance, can no longer be used to describe government note, bill, & bond issuance..."

I think that conclusion is what drives the whole argument. I think the desire to reach that conclusion is what shapes the argument. And I think that is the wrong way to do logic and the wrong way to do economics.

rjs said...

"I think the desire to reach that conclusion is what shapes the argument. And I think that is the wrong way to do logic and the wrong way to do economics."

tell that to brad delong, who says "the U.S. Treasury, the Bundesrepublik Treasury, the Japanese Treasury, the Fed, the ECB, and the BoJ Need to Be Pumping Out Safe Assets at a Much Faster Pace..."

http://delong.typepad.com/sdj/2011/12/why-the-us-treasury-the-bundesrepublik-treasury-the-japanese-treasury-the-fed-the-ecb-and-the-boj-need-to-be-pumping-o.html

clearly, he is using "safe assets" in place of the four letter word you would favor...

Don Levit said...

rjs:
Who is Brad Delong?
I am familiar with the Treasury, the GAO, the CBO, The Social Security Administration, etc.
Are they all wrong that government bomnds are not debt, yet you, Brad, Jack, and Bruce Webb say otherwise.
Don Levit

rjs said...

FYI: brad delong is a macroeconomist who served in the clinton admisistration...

evidence everyone has got it wrong?

simple: an economic, financial & political system that idles nearly one-fifth of its citizens & has another fifth working below their capacity is a failure...

The Arthurian said...

rjs: "clearly, he is using "safe assets" in place of the four letter word you would favor... "

I do not favor doublespeak. Nor I do favor changing the vocabulary to suit political ends.

you said: "debt, for instance, can no longer be used to describe government [debt]"
i said: "I think the desire to reach that conclusion is what shapes the argument"
you said: "delong... says... [central banks] Need to Be Pumping Out Safe Assets at a Much Faster Pace..."
Don said: "Who is Brad Delong?"
which is the funniest insult I've seen in a long time. (Delong is sort of like Paul Krugman's mistress.)
anyway rj
the people who think we need more government debt
seem to think that if we stop CALLING it debt
they will get more people to agree with them.
maybe they would.
that doesn't say much for human intelligence, on either side.

I think that is the wrong way to do logic and the wrong way to do economics.

rjs said...

"the people who think we need more government debt
seem to think that if we stop CALLING it debt
they will get more people to agree with them.
"

my dissing of the word resulted from a longer discussion elsewhere which sprung from the fact that word debt itself is already loaded with too many unfortunate connotations, and that those connotations are not apropos to the complex issues associated with government bond issuance...it's not simply changing a word "to get people to agree with me", it's looking for an more appropriate word to describe sovereign issuance that doesnt carry the negative baggage that "debt" does...

Don Levit said...

rjs:
Soveriegn debt issuance still is a two-party transaction, with a debtor and a creditor - even if in government sovereignty, they are the same entity!
Don Levit

rjs said...

thats the point im trying to make; US sovereign issuance is not debt; it is more like money within the global financial system, and its in such short supply that its being hoarded, just as one would hide paper money under a matress in times of uncertainty...why do you think the Fed coordinated with 5 other central banks a few weeks back to lower the price of dollar denominated currency swaps? it was in order to ease worldwide bank funding strains resulting from that shortage...

recommend you all read steve roth's new piece at angry bear for more background:

http://www.angrybearblog.com/2011/12/surfeit-of-dearth-tight-money-and.html

saleem mohd. said...

Free Social Media Marketing where Every thing will be Free, Facebook Likes, Twitter Followers, Twitter Tweets, Twitter Re-Tweets, Twitter Favorites, Google Plus Followers, StumbleUpon Followers, Youtube Views, Youtube Likes, Youtube Subsribes, Pinterest Followers, Pinterest Likes, Pinterest PinIt, Free Website Visitors.
Just Join now and Free Increase your Social Media Networks.
GetLikeFast.com