1) Declare the debt ceiling unconstitutional and keep on borrowing. Bruce Bartlett, Bill Clnton, and I support this one, based on Section 4 of the 14th Amendment. If it held, as it would be challenged in the courts, it would effectivly abolish this uniquely idiotic device. OTOH, aside from serious people like Laurence Tribe who say the debt ceiling is constitutional, Obama would certainly face impeachment by the House, if not removal by the Senate, and the financial markets might demand higher interest rates on US securities due to the uncertain legal foundation of any new borrowings. While his press secretary has supposedly ruled this out, Obama himself has never specifcally commented on this issue, indeed, has refused to do so. Non-trivial possibility he might follow this one, if he has the chutzpah.
2) The full haircut. Under the constitution the president (and the treasury secretary acting on his behalf) does not have the right to decide to pay some bills and not others (although this has been done in the past during hilariously labeled "government shutdowns"). So, to avoid violating this law, he simply cuts all spending across the board by the necessary amount to immediately balance the budget, everything. This would mean a technical default as interest payments on the debt would not be made. This has serious legality, but very unlikely.
3) Partial haircut. Avoid technical default by paying interest and principal on coming due debt, but cut other spending. This has many variations from applying (2) but not to the debt itself or also preserving some other categories not to cut, with pensions for veterans having perhaps the strongest constitutional argument for being preserved based on the specific language in Section 4 of Amendment 14 that speaks of pensions for Union soldiers in addition to the national debt as being inviolate. Some variatoin on this may be his most likely choice, legally problematic as it would be.
4) Mint high-value platinum coins. I have posted here on this idea of beowulf's, legal under a 1997 law. So, US Treasury mints trillion dollar platinum coin and deposits it with the NY Fed, continues to pay bills without having to borrow. This is indeed legal and would avoid a constitutional crisis, but would kick the can down the road on the broader debt ceiling and deficit issues, and would also probably be ridiculed and poorly received by the financial markets.
5) Have the Fed forgive portions of US debt it holds. This would allow for borrowing without breaching the debt ceiling, and is probably legal. However, no other central bank has ever done such a thing, as near as I can discern from some googling (although some have forgiven interest payments on debt), and would also be received poorly by financial markets. Also, House in particular would probably go after the Fed big time, led by Ron Paul. Indeed, I suspect that if Ben Bernanke and Tim Geithner were to discuss this, Ben would say to Tim, "you mint that coin."
I shall make one final note on the debt ceiling itself. Many are loudly declaring that it has always been there to "discipline" the budgetmakers, even though the budgetmakers are Congress itself and should tie the debt ceiling to their making of a budget, as I recommended in my most recent post here. However, back in 1917 when the ceiling was first adopted, it was done so as a mechanism to allow for flexibility on the part of the Treasury in connection with financing for WW I. Previously, in following the explicit mandates in the Constitution, Congress had always specifically approved (or disapproved) every specific act of borrowing money by the US government, much in the way one sees at state and local government levels. But the debt ceiling was put in place to allow the Treasury to engage in borrowing on its own, although within the limits set by the debt ceiling, very far from the current interpretations by so many people, including a lot of idiots in Washington who, as Paul Krugman describes them, claim to be Very Serious People.
Sunday, July 31, 2011
Friday, July 29, 2011
If No Abolition, Then At Least Link Debt Ceiling Changes To Budget Passage
So, nobody at all is responding to my and Moody's call to abolish the debt ceiling, and probably nobody is going to follow up on the semi-wacko coining large platinum coins scheme either. So, while this will not avoid the current oncoming train wreck, if all these people want to hang onto this silly anachronism of a debt ceiling, then the obvious thing to do is to in the future tie changes in it to passing a budget. So, when Congress actually passes a budget, it should make sure that the financing for that budget is in place, either through taxes or borrowing. Part of making sure the latter is in place is to make sure the debt ceiling (if there is one) is high enough to accommodate that borrowing, preferably with some wiggle room for an unexpected deficit surge due to an unexpected decline of the economy. Why do we not see any politician proposing this obvious remedy for the future in the face of what Moody's predicted, a likely default due to "political gridlock in the Congress"? Mandating spending while witholding the ability to pay for it (or finance the paying for it) is the utter height of irresponsibility.
Moody's Says "Abolish The Debt Ceiling"
This actually dates back to July 18, but has somehow gotten nearly zero coverage in the MSM, somewhat like Bill Clinton's argument that the debt ceiling is unconstitutional, something that Obama's press secretary seemed to move him away from agreeing with this past Monday. In any case, one link to the declaration by Moody's that the US should abolish the debt ceiling is at http://economicsnewspaper.com/policy/german/moodys-u-s-should-abolish-debt-limit-47142.html. That Moody's has threatened to downgrade the US credit rating has received a lot of attention, but this piece of their threat has somehow been completely ignored, and so far there are exactly zero members of Congress of either party who have even remotely suggested that we do what Moody's suggests, which is clearly what needs to be done.
I remind everyone again: no other nation in world history has ever had such a ridiculous thing as a nominal debt ceiling. Whether or not it is unconstitutional, it is utterly incoherent. It forces the president to break the law if Congress neither raises the ceiling nor prescribes which bills are to be paid on time (if at all). I find it bizarre that all sorts of people are loudly declaring how the president has no authority raise the debt ceiling but somehow has the authority to "prioritize" which bills will be paid and which will not, meaning that somehow it is his responsibility rather than Congress's to actually destroy the "full faith and credit of the United States" that is demanded by the Constitution. Again, not paying legally mandated bills is a default, not just a failure to pay interest on securities on time.
I remind everyone again: no other nation in world history has ever had such a ridiculous thing as a nominal debt ceiling. Whether or not it is unconstitutional, it is utterly incoherent. It forces the president to break the law if Congress neither raises the ceiling nor prescribes which bills are to be paid on time (if at all). I find it bizarre that all sorts of people are loudly declaring how the president has no authority raise the debt ceiling but somehow has the authority to "prioritize" which bills will be paid and which will not, meaning that somehow it is his responsibility rather than Congress's to actually destroy the "full faith and credit of the United States" that is demanded by the Constitution. Again, not paying legally mandated bills is a default, not just a failure to pay interest on securities on time.
Tuesday, July 26, 2011
Fun and Games
Josh Marshall on the debt ceiling impasse: "Yes, it's a game of chicken. But one of the cars doesn't have a driver in it."
Monday, July 25, 2011
What the Other 95% Reads
It’s easy to forget that the vast majority of Americans don’t read econ blogs and know almost nothing about economics. From time to time it’s helpful to check in with them to see what they’re thinking.....like this. (Note: over 360,000 hits from the US.)
What would you say to someone who believes this visual demonstration of how US sovereign debt translates into paper conveys an important truth? My approach would be a variant on the classroom game, “What’s the Denominator?” Everything has to be measured in relation to something else. A million dollars is a lot for me but not Bill Gates. If we put $1M in the numerator, what should we put in the denominator in order to make sense of it? Now do this with the government’s debt: we know what goes in the numerator, but what goes in the denominator? How much room does all that denominator paper take up? What have you learned? (When governments and corporations move lots of money around, it’s better not to use paper.)
What would you say to someone who believes this visual demonstration of how US sovereign debt translates into paper conveys an important truth? My approach would be a variant on the classroom game, “What’s the Denominator?” Everything has to be measured in relation to something else. A million dollars is a lot for me but not Bill Gates. If we put $1M in the numerator, what should we put in the denominator in order to make sense of it? Now do this with the government’s debt: we know what goes in the numerator, but what goes in the denominator? How much room does all that denominator paper take up? What have you learned? (When governments and corporations move lots of money around, it’s better not to use paper.)
Sunday, July 24, 2011
Bill Clinton Says Debt Ceiling Unconstitutional
It was nearly a week ago on Monday evening when Bill Clinton gave an interview to the National Memo, http://www.nationalmemo.com/article/exclusive-former-president-bill-clinton-says-he-would-use-constitutional-option-raise-debt . However, it only got picked up by the New York Times yesterday and still has not really gone national.
So, he says he "would not hesitate" to use the constitutional option, that the 4th section of the 14th amendment overrides the debt ceiling and he "would dare" the courts to stop him, which would take a lot of time. Obama has said his lawyers say this is "not a winning case," but has continued to refuse to unequivocally rule out using this tool. The article notes many consequences, including a possible impeachment by the House, not to be implemented by the Senate. It also notes that not bringing this forward makes it more likely that there will be a deal, which may be a lousy deal. In any case, Clinton's waying in on this is important.
So, he says he "would not hesitate" to use the constitutional option, that the 4th section of the 14th amendment overrides the debt ceiling and he "would dare" the courts to stop him, which would take a lot of time. Obama has said his lawyers say this is "not a winning case," but has continued to refuse to unequivocally rule out using this tool. The article notes many consequences, including a possible impeachment by the House, not to be implemented by the Senate. It also notes that not bringing this forward makes it more likely that there will be a deal, which may be a lousy deal. In any case, Clinton's waying in on this is important.
Transcending Medieval Economics
In my new book, Sex, Lies and Economics, about early economics of the late seventeenth and early eighteenth centuries, one of the constant themes is the struggle against the medieval thinking. Beginning with William Petty, the early economists I am analyzing were following the new science, which emphasized close observation to replace received dogma. Here is a nice description of how the dogma was presented at the time. Notice how closely the medieval method resembles the scholastic method that the early economists opposed. In this sense, we are losing ground.
Matters of exchange: commerce, medicine, and science in the Dutch Golden Age by Harold John Cook:
15-6: "Universities were the preserve of the professors who had studied and disputed for long years and then passed on their knowledge to students by lecturing and debating. They valued demonstrative certainty above all else, wishing to draw conclusions that could be shown to follow from necessity. Such demonstrative certainty came from reasoning by clear and certain steps from premises known to be true. The classic examples are demonstration by dialectic, in which a proposition (thesis) is contradicted (antithesis) and resolved by a proposition containing truths from both (synthesis) or by the use of syllogism, in which a proposition known to contain true and universal assertions is linked to another that refers to a new premise, yielding new truths conclusively (as in "All men are mortal, Socrates is a man, Socrates is mortal"). These methods could be clearly explained and could be tested not only by writing things down but by debating with an opponent. Because such methods yielded demonstrative certainty, knowledge of this kind could be built into philosophical systems of great range and power capable of being passed on to others by explanation. Above all, they had the capacity to reason about the causes of change, probing for why matters were as they were."
Matters of exchange: commerce, medicine, and science in the Dutch Golden Age by Harold John Cook:
15-6: "Universities were the preserve of the professors who had studied and disputed for long years and then passed on their knowledge to students by lecturing and debating. They valued demonstrative certainty above all else, wishing to draw conclusions that could be shown to follow from necessity. Such demonstrative certainty came from reasoning by clear and certain steps from premises known to be true. The classic examples are demonstration by dialectic, in which a proposition (thesis) is contradicted (antithesis) and resolved by a proposition containing truths from both (synthesis) or by the use of syllogism, in which a proposition known to contain true and universal assertions is linked to another that refers to a new premise, yielding new truths conclusively (as in "All men are mortal, Socrates is a man, Socrates is mortal"). These methods could be clearly explained and could be tested not only by writing things down but by debating with an opponent. Because such methods yielded demonstrative certainty, knowledge of this kind could be built into philosophical systems of great range and power capable of being passed on to others by explanation. Above all, they had the capacity to reason about the causes of change, probing for why matters were as they were."
A Game Plan for Rational, Self-Interested Republicans
Let’s suppose for a moment that all this talk about ideology—about the evils of big government, the flood of debt that threatens our moral and economic collapse, and of course the line that must be drawn in the sand against any new taxes of any kind on anybody—is simply a fig leaf, and that Republicans are pursuing their own partisan advantage without any scruples whatsoever. What would such a strategy look like?
As an unpaid advisor to Boehner and company, here is what I propose:
Using any arguments at hand, however implausible, delay an agreement on raising the debt ceiling. At some point, just before moment of reckoning, the markets will be spooked, and interest rates will begin to take off. Use this crisis to reach a compromise that raises the ceiling, but only for a couple of months or so, signaling to the markets that default risk remains on the table. With luck, interest rates will stay relatively high. Continue doing this, again and again, until next year’s elections.
The advantages practically scream out to be heard. Above all, the interest rate spike will doom the economy, more or less guaranteeing a second, even more painful dip. Obama will have to go before the American people with the economy in tatters and unemployment at a post-FDR high. He might as well stay in bed.
Second, the added interest expense guarantees that there will be no resources for the government to initiate any new programs under Obama’s watch or even implement the few he has started. The public sector at all levels will be tied in knots.
Third, higher interest rates mean more transfers to the bondholders, a core constituency of the Republicans. True, at the moment it may look like a risk premium that simply compensates the rich for the added risk of default, but in reality the Republicans have their hands on the dial and can keep averting default at the last moment so that there is a real ex post transfer.
To put it bluntly, a perils-of-Pauline debt ceiling strategy will force the Democrats to run on a ruined economy, bleed them of fiscal resources and cleverly funnel yet more money to the rich. What’s not to like?
There is a risk, however, that the Democrats will be able to make the argument that Republican intransigence and guile has tanked the economy and made them unworthy of election. My assessment is that this risk is minimal for four reasons:
1. Democrats would have to be capable of taking a strong partisan stand. Simply by continuing to play the (illusory) negotiating game, and by presenting the image of a clash of honestly-held principles, they would undermine their ability to go partisan. If Republicans were using the debt ceiling standoff as a ruse to depress the economy, what were the Democrats doing?
2. It would have to be clear that Republican actions had caused the renewed economic slump. It is never so simple, however, because there are always lots of other things going on at the same time that might have an effect on recession and unemployment. There will almost certainly be more bad news coming out of the Eurozone, for instance, as well as natural and man-made disasters, corporate scandals, etc. It could be this or it could be that.
3. Above all, the public would have to acquire a sufficiently sophisticated understanding of financial and economic matters to see the connection between debt ceiling brinksmanship, interest rates and economic pain. Since the evidence is clear that they don’t have this understanding now, they would have to learn in a hurry. This is unlikely, especially since there will be a steady flow of analyses coming out of academia, think tanks and the mass media to cast doubt on truly valid explanations. The climate debate shows that this is entirely doable.
4. There remains the worry that business interests may become alienated from the Republicans due to the losses they incur as a result of this kill-the-economy strategy. Without doubt, some will see it this way and support the Democrats. By this point, most of this segment of the business community is already leaning to blue, so the net effect is likely to be small. The rest of the corporate and financial upper tier will have the discipline to recognize that short-term suffering is the price that has to be paid to restore complete conservative dominance of American politics. Come 2013, a Republican president and congress will go ape-Keynesian, slashing taxes and increasing spending on various emergency and national security initiatives. The economy will come back, and meanwhile a serious, unimpeded assault will begin on what remains of the public sector. The profit opportunities will be spectacular.
As an unpaid advisor to Boehner and company, here is what I propose:
Using any arguments at hand, however implausible, delay an agreement on raising the debt ceiling. At some point, just before moment of reckoning, the markets will be spooked, and interest rates will begin to take off. Use this crisis to reach a compromise that raises the ceiling, but only for a couple of months or so, signaling to the markets that default risk remains on the table. With luck, interest rates will stay relatively high. Continue doing this, again and again, until next year’s elections.
The advantages practically scream out to be heard. Above all, the interest rate spike will doom the economy, more or less guaranteeing a second, even more painful dip. Obama will have to go before the American people with the economy in tatters and unemployment at a post-FDR high. He might as well stay in bed.
Second, the added interest expense guarantees that there will be no resources for the government to initiate any new programs under Obama’s watch or even implement the few he has started. The public sector at all levels will be tied in knots.
Third, higher interest rates mean more transfers to the bondholders, a core constituency of the Republicans. True, at the moment it may look like a risk premium that simply compensates the rich for the added risk of default, but in reality the Republicans have their hands on the dial and can keep averting default at the last moment so that there is a real ex post transfer.
To put it bluntly, a perils-of-Pauline debt ceiling strategy will force the Democrats to run on a ruined economy, bleed them of fiscal resources and cleverly funnel yet more money to the rich. What’s not to like?
There is a risk, however, that the Democrats will be able to make the argument that Republican intransigence and guile has tanked the economy and made them unworthy of election. My assessment is that this risk is minimal for four reasons:
1. Democrats would have to be capable of taking a strong partisan stand. Simply by continuing to play the (illusory) negotiating game, and by presenting the image of a clash of honestly-held principles, they would undermine their ability to go partisan. If Republicans were using the debt ceiling standoff as a ruse to depress the economy, what were the Democrats doing?
2. It would have to be clear that Republican actions had caused the renewed economic slump. It is never so simple, however, because there are always lots of other things going on at the same time that might have an effect on recession and unemployment. There will almost certainly be more bad news coming out of the Eurozone, for instance, as well as natural and man-made disasters, corporate scandals, etc. It could be this or it could be that.
3. Above all, the public would have to acquire a sufficiently sophisticated understanding of financial and economic matters to see the connection between debt ceiling brinksmanship, interest rates and economic pain. Since the evidence is clear that they don’t have this understanding now, they would have to learn in a hurry. This is unlikely, especially since there will be a steady flow of analyses coming out of academia, think tanks and the mass media to cast doubt on truly valid explanations. The climate debate shows that this is entirely doable.
4. There remains the worry that business interests may become alienated from the Republicans due to the losses they incur as a result of this kill-the-economy strategy. Without doubt, some will see it this way and support the Democrats. By this point, most of this segment of the business community is already leaning to blue, so the net effect is likely to be small. The rest of the corporate and financial upper tier will have the discipline to recognize that short-term suffering is the price that has to be paid to restore complete conservative dominance of American politics. Come 2013, a Republican president and congress will go ape-Keynesian, slashing taxes and increasing spending on various emergency and national security initiatives. The economy will come back, and meanwhile a serious, unimpeded assault will begin on what remains of the public sector. The profit opportunities will be spectacular.
Friday, July 22, 2011
Is Platinum Coin Seignorage A Way Out Of The Debt Ceiling Impasse?
So, the latest rumblings are that Obama and Boehner may be near a deal, but if they are not, or if it will not pass in time, there may be another way to get around the debt ceiling without provoking a constitutional crisis and possible impeachment by having Obama ignoring it, as I have supported, or in conjunction declaring it unconstitutional, which I also think it is, or violating the constitution by making arbitrary cuts in spending not approved by Congress. This is to coin one, or maybe several, platinum coins of very high value, depositing it or them in the NY Fed, and keep on paying bills.
This can be done due to a peculiar and little known act passed in 1996 that allows the US Treasury to mint platinum coins of arbitrary value, but no other metals. Why this was passed, I have no idea, but it is in the code apparently. A single one trillion dollar platinum coin deposited at the NY Fed by the Treasury would do the trick for some time.
I thank James Galbraith for bringing this to my attention. Apparently this was suggested initially some time ago by the commentator known as "beowulf." Matt Yglesias provides more discussion at http://tinyurl.com/6xub2ab .
This can be done due to a peculiar and little known act passed in 1996 that allows the US Treasury to mint platinum coins of arbitrary value, but no other metals. Why this was passed, I have no idea, but it is in the code apparently. A single one trillion dollar platinum coin deposited at the NY Fed by the Treasury would do the trick for some time.
I thank James Galbraith for bringing this to my attention. Apparently this was suggested initially some time ago by the commentator known as "beowulf." Matt Yglesias provides more discussion at http://tinyurl.com/6xub2ab .
Trigger Madness: A Clue to How Dumb the Debt Ceiling Deal Truly Is
Garry Kasparov not withstanding, life is not much like chess, but sometimes the wisdom of one does rub off on the other. One thing I learned in my playing days is that you are at your greatest risk of doing something dumb when you think you are being clever. A current case in point is the crucial role played by “triggers” in the emerging debt ceiling deal.
First, let’s look at it from the point of view of Obama. He thinks the problem is that credit markets may shift their sentiment regarding the long-range US fiscal position. Long rates on Treasuries are low right now, but how can we be sure they will stay that way? Wouldn’t it be better if we could lock in a decade-length deal that would stabilize public debt as a percentage of GDP?
But the problem is that we live in a democracy. Every two years there is an election, and the new politicos in charge may want to reverse the policies of their predecessors. How can we lock in any policy for the long run? This is the time consistency problem.
Ah, but there is an oh-so-clever solution: impose on yourself and your negotiating partner a horrible outcome that will come to pass unless you follow through with your commitments. This self-threat is the “trigger”.
Like many economists, I first heard about this strategy from Thomas Schelling. He describes a situation in which you are being held by a kidnapper. You want to be released, but the kidnapper is rationally afraid that you will reveal his identity. Of course, you could promise to never do such a thing, but how can the kidnapper know that you will keep this promise? Once you are released, it will be in your interest to go to the police: your incentives then will be different from what they are today. Schelling’s very clever solution is for you to share with the kidnapper some awful fact about your life that you want to keep secret. What this does is to keep your post-release incentives the same as your pre-release. The ability of the kidnapper to spill your secret is the trigger that keeps you honest. (I have always wondered how common it is for people to have a secret that is awful enough to do the job, but that’s another story.)
In effect, Obama and Boehner are offering to share secrets, to each bind their future selves to a long-term deal so that something horrible, like repeal of the Bush tax cuts (horrible to Boehner) or the removal of the health insurance mandate (horrible to Obama) doesn’t happen “automatically”. One convenient feature of this strategy is that the timing of the various aspects of the budget deal don’t matter. If the cuts come first, but the revenue increases don’t happen until several years from now, it’s not a problem because the triggers ensure that all aspects of the deal will eventually materialize.
Except that it’s all an illusion. The triggers being negotiated by Obama and Boehner are legislative, not constitutional. They can be undone by a future Congress or president. If Michele Bachmann is our new president come 2013 (gulp), I’m sure she will be happy to remove the tax increase trigger, especially if she has a Republican congress to work with.
The general point is that the hold-yourself-hostage trigger strategy does not solve the time inconsistency problem in a democracy, because part of the meaning of democracy is that new governing majorities have the power to undo the acts of those they replace. It is not possible for Obama to negotiate a ten (or more) year plan with the Republicans—period. He can push for actions to be taken during his term, and after that it’s up to the next president.
Of course, the markets know this well. Suppose there is a change in investor sentiment, and, against all logic, potential creditors decide that the US government is at risk of being unable to service its debts. Do you suppose they would be placated by promises to cut deficits several years down the road? Look at Greece and Italy. When interest rates shoot up, the only bone governments can throw is immediate austerity. Bondholders are perfectly aware of the time consistency problem, and promises mean nothing to them.
But that’s why the whole debt ceiling charade is so dumb. Bondholders are happy to hold Treasuries, even with long maturities. We don’t need austerity any time soon. And if the tide ever changes, distant promises will be irrelevant; the only thing that will matter will be fiscal policies at the moment of crisis.
The only thing we can do, although it is apparently too much for us, is to act intelligently in the present. Getting current fiscal policy right would be a good place to start, and addressing longer-term challenges through investments in people and infrastructure, along with cost controls in health care, would be a good way to continue.
First, let’s look at it from the point of view of Obama. He thinks the problem is that credit markets may shift their sentiment regarding the long-range US fiscal position. Long rates on Treasuries are low right now, but how can we be sure they will stay that way? Wouldn’t it be better if we could lock in a decade-length deal that would stabilize public debt as a percentage of GDP?
But the problem is that we live in a democracy. Every two years there is an election, and the new politicos in charge may want to reverse the policies of their predecessors. How can we lock in any policy for the long run? This is the time consistency problem.
Ah, but there is an oh-so-clever solution: impose on yourself and your negotiating partner a horrible outcome that will come to pass unless you follow through with your commitments. This self-threat is the “trigger”.
Like many economists, I first heard about this strategy from Thomas Schelling. He describes a situation in which you are being held by a kidnapper. You want to be released, but the kidnapper is rationally afraid that you will reveal his identity. Of course, you could promise to never do such a thing, but how can the kidnapper know that you will keep this promise? Once you are released, it will be in your interest to go to the police: your incentives then will be different from what they are today. Schelling’s very clever solution is for you to share with the kidnapper some awful fact about your life that you want to keep secret. What this does is to keep your post-release incentives the same as your pre-release. The ability of the kidnapper to spill your secret is the trigger that keeps you honest. (I have always wondered how common it is for people to have a secret that is awful enough to do the job, but that’s another story.)
In effect, Obama and Boehner are offering to share secrets, to each bind their future selves to a long-term deal so that something horrible, like repeal of the Bush tax cuts (horrible to Boehner) or the removal of the health insurance mandate (horrible to Obama) doesn’t happen “automatically”. One convenient feature of this strategy is that the timing of the various aspects of the budget deal don’t matter. If the cuts come first, but the revenue increases don’t happen until several years from now, it’s not a problem because the triggers ensure that all aspects of the deal will eventually materialize.
Except that it’s all an illusion. The triggers being negotiated by Obama and Boehner are legislative, not constitutional. They can be undone by a future Congress or president. If Michele Bachmann is our new president come 2013 (gulp), I’m sure she will be happy to remove the tax increase trigger, especially if she has a Republican congress to work with.
The general point is that the hold-yourself-hostage trigger strategy does not solve the time inconsistency problem in a democracy, because part of the meaning of democracy is that new governing majorities have the power to undo the acts of those they replace. It is not possible for Obama to negotiate a ten (or more) year plan with the Republicans—period. He can push for actions to be taken during his term, and after that it’s up to the next president.
Of course, the markets know this well. Suppose there is a change in investor sentiment, and, against all logic, potential creditors decide that the US government is at risk of being unable to service its debts. Do you suppose they would be placated by promises to cut deficits several years down the road? Look at Greece and Italy. When interest rates shoot up, the only bone governments can throw is immediate austerity. Bondholders are perfectly aware of the time consistency problem, and promises mean nothing to them.
But that’s why the whole debt ceiling charade is so dumb. Bondholders are happy to hold Treasuries, even with long maturities. We don’t need austerity any time soon. And if the tide ever changes, distant promises will be irrelevant; the only thing that will matter will be fiscal policies at the moment of crisis.
The only thing we can do, although it is apparently too much for us, is to act intelligently in the present. Getting current fiscal policy right would be a good place to start, and addressing longer-term challenges through investments in people and infrastructure, along with cost controls in health care, would be a good way to continue.
Wednesday, July 20, 2011
Cut, Cap, and Balance Made Personal
The House of Representatives passed the “Cut, Cap, and Balance” Act, which Brian Beutler says (if it became law)
And I think Brian has this right. But going over Federal budget numbers might not quite drive my point home as to what should rightly be called Duck, Dodge, and Dismantle. So let me recast Jay Carney’s point by an analogy to a family in Manhattan struggling to make ends meet. The husband is making $70,000 (gross) a year on his primary job and is considering part-time work that would pay him an additional $30,000. The wife in addition to taking primary care of their two children – who both have medical conditions that cause them to spend $2000 a month on medical care – works receiving $50,000 a year. If the husband took the second job, their $150,000 in gross income would net $120,000 after taxes or $10,000 a month. While that might seem like a nice income – this is Manhattan and their apartment runs them $4000 a month, and they spend $1000 a month on food, $1000 a month on other necessities, and $1000 a month on entertainment.
The husband just happens to be a Republican and really does not understand why he needs to take this part-time job. After the wife – who just happens to be a Democrat – lays out the simple arithmetic of their budgetary situation, the husband replies by arguing that they could just reduce their spending by 20 percent. The wife – having counting to ten so she doesn’t scream in front of the kids – asks the husband where do they cut spending. After all, it is the husband who wants to stay in their Manhattan apartment and insists that they not cut back on the entertainment budget. She then points out that reducing the food and other necessities budgets by any feasible amount is not going to come close to making ends meet if the husband chooses not to take the part-time position.
Well – I guess the husband might suggest that they eliminate their medical spending but he should be forewarned that divorce attorneys in Manhattan are also expensive.
would slash federal programs deeply, and restrict dramatically the government's ability to do anything constructive for the country.
And I think Brian has this right. But going over Federal budget numbers might not quite drive my point home as to what should rightly be called Duck, Dodge, and Dismantle. So let me recast Jay Carney’s point by an analogy to a family in Manhattan struggling to make ends meet. The husband is making $70,000 (gross) a year on his primary job and is considering part-time work that would pay him an additional $30,000. The wife in addition to taking primary care of their two children – who both have medical conditions that cause them to spend $2000 a month on medical care – works receiving $50,000 a year. If the husband took the second job, their $150,000 in gross income would net $120,000 after taxes or $10,000 a month. While that might seem like a nice income – this is Manhattan and their apartment runs them $4000 a month, and they spend $1000 a month on food, $1000 a month on other necessities, and $1000 a month on entertainment.
The husband just happens to be a Republican and really does not understand why he needs to take this part-time job. After the wife – who just happens to be a Democrat – lays out the simple arithmetic of their budgetary situation, the husband replies by arguing that they could just reduce their spending by 20 percent. The wife – having counting to ten so she doesn’t scream in front of the kids – asks the husband where do they cut spending. After all, it is the husband who wants to stay in their Manhattan apartment and insists that they not cut back on the entertainment budget. She then points out that reducing the food and other necessities budgets by any feasible amount is not going to come close to making ends meet if the husband chooses not to take the part-time position.
Well – I guess the husband might suggest that they eliminate their medical spending but he should be forewarned that divorce attorneys in Manhattan are also expensive.
From Chaos To Catastrophe?
I once wrote a book entitled (partly) _From Catastrophe to Chaos_, which my interviewer on the NPR show kept mentioning. However, the way things are going, it looks like this situation regarding the debt ceiling may well be a matter of the chaos of a decisionmaking process leading to a catastrophe in the economy.
Tuesday, July 19, 2011
Quote of the Day
From the abstract to “Student Attitudes and Knowledge Change in an Introductory College Economics Course”:
I take back every cynical comment I have ever made about the student portion of the human race.
Students’ attitudes towards economics as well as their knowledge of economics before and after taking a college introductory economics class is examined using standardized multiple choice economics knowledge and attitude questions. Prior knowledge of economics, having a bank account, and other biographical information are used to hold constant many factors influencing pre/post performance in an economics class. Students who gained in economics knowledge appear to have a more negative attitude towards the subject compared to students who exhibited no knowledge gained.
I take back every cynical comment I have ever made about the student portion of the human race.
Whose Responsibility Is it that the Public Doesn’t Understand Public Finance?
While education wonks debate microscopic movements in the NAEP and other standardized measurements of student learning, those of us who care about the capacity of democracy in the modern world face data like this
:
Obviously, a great majority of the American people lack the elementary knowledge of government budgets to formulate a sensible answer—and, yes, there is only one sensible answer.There are at least three things they apparently fail to understand:
1. An increase in the debt ceiling simply follows through on the revenue and spending commitments that Congress has already made. Not raising it is like check kiting.
2. The only way the debt can fail to rise each and every year is if the government runs a budget surplus. Such a surplus is impossible this year, all but impossible for the next several, and has been a rare event not only in the US, but in every other modern economy. Moreover, there is no theoretical reason why such surpluses should be the norm, and many why moderate, intelligently directed borrowing should be.
3. Failure to raise the debt ceiling would lead to an immediate economic calamity. US Treasury bonds play a crucial role in the national and world economies, and all of us depend, directly or indirectly, on the income people get from government employment and social programs.
But there’s no point in complaining. The question is, how did we get into this political mess, and how can we get out of it? Real answers depend on real data, but in the meantime here are some speculations:
1. There is no functioning incentive in the media (print and electronic) from which most people get their information to be factually correct. Whether to portray the world as it actually is or make stuff up is a choice, and those who go for option #2 suffer no ill effects. Hence there is a vast amount of misinformation out there. The solution is not government regulation of the media, but a societal effort to build incentives for journalistic integrity. For instance, professional associations could not only give awards for exceptional service, but also black marks for incompetence and deceit. Teams of journalists could noncoercively “accredit” news outlets (including megablogs) the way colleges and universities are accredited, through an open process with transparent criteria.
2. Economists have collectively taken little responsibility for public education. For instance, I know of no attempts to identify the critical gaps in the public’s understanding of economics in order to mobilize a response. Even in the obvious places, like introductory textbooks, there is no systematic attempt to address economic illiteracy. If you think I’m exaggerating, show me the textbooks that speak to the three elementary observations made above—that make it clear that public debts are rarely capped, much less “repaid”, and that these debts are also economically vital assets.
3. There is a deep cognitive dimension to economic illiteracy. The term “national debt” is perceived by most people to be ominous and threatening, especially when numbers in the trillions are thrown around. They think governments are like households, going on consumption binges and waking up to debt bondage. In other words, they have a one-way view of causation, beginning with one’s own economic choices and leading to debt, and cannot see the other, from debt choices made by the government back to the economy, since each individual household’s insertion into the economy (their frame of reference) has only the first dimension. In addition, they see their own debts only from the liability side and not from the asset side. In other words, they are applying a personal, household template to the systemic terrain that economics is supposed to illuminate. Without getting more specific, all I can say is that a defective frame can be countered only by a better one: we need a coordinated effort to popularize a framework for visualizing the economy that is also based on us as a community, not just me as an atom.
4. The first three of these causal factors are exploited and amplified by a wealthy and politically powerful business-conservative coalition. They bankroll media that cynically make stuff up, and where none exist they create them. They reward economists who twist evidence and invent fanciful models that just happen to justify misinformation and cognitive errors regarding the real-world economy. And of course they make constant reference to images and framing devices that reinforce the inability of the public to think clearly about economic choices. Their political strategy is predicated on mass ignorance and error, so any movement for rationality and honesty has to be political as well.
:
Obviously, a great majority of the American people lack the elementary knowledge of government budgets to formulate a sensible answer—and, yes, there is only one sensible answer.There are at least three things they apparently fail to understand:
1. An increase in the debt ceiling simply follows through on the revenue and spending commitments that Congress has already made. Not raising it is like check kiting.
2. The only way the debt can fail to rise each and every year is if the government runs a budget surplus. Such a surplus is impossible this year, all but impossible for the next several, and has been a rare event not only in the US, but in every other modern economy. Moreover, there is no theoretical reason why such surpluses should be the norm, and many why moderate, intelligently directed borrowing should be.
3. Failure to raise the debt ceiling would lead to an immediate economic calamity. US Treasury bonds play a crucial role in the national and world economies, and all of us depend, directly or indirectly, on the income people get from government employment and social programs.
But there’s no point in complaining. The question is, how did we get into this political mess, and how can we get out of it? Real answers depend on real data, but in the meantime here are some speculations:
1. There is no functioning incentive in the media (print and electronic) from which most people get their information to be factually correct. Whether to portray the world as it actually is or make stuff up is a choice, and those who go for option #2 suffer no ill effects. Hence there is a vast amount of misinformation out there. The solution is not government regulation of the media, but a societal effort to build incentives for journalistic integrity. For instance, professional associations could not only give awards for exceptional service, but also black marks for incompetence and deceit. Teams of journalists could noncoercively “accredit” news outlets (including megablogs) the way colleges and universities are accredited, through an open process with transparent criteria.
2. Economists have collectively taken little responsibility for public education. For instance, I know of no attempts to identify the critical gaps in the public’s understanding of economics in order to mobilize a response. Even in the obvious places, like introductory textbooks, there is no systematic attempt to address economic illiteracy. If you think I’m exaggerating, show me the textbooks that speak to the three elementary observations made above—that make it clear that public debts are rarely capped, much less “repaid”, and that these debts are also economically vital assets.
3. There is a deep cognitive dimension to economic illiteracy. The term “national debt” is perceived by most people to be ominous and threatening, especially when numbers in the trillions are thrown around. They think governments are like households, going on consumption binges and waking up to debt bondage. In other words, they have a one-way view of causation, beginning with one’s own economic choices and leading to debt, and cannot see the other, from debt choices made by the government back to the economy, since each individual household’s insertion into the economy (their frame of reference) has only the first dimension. In addition, they see their own debts only from the liability side and not from the asset side. In other words, they are applying a personal, household template to the systemic terrain that economics is supposed to illuminate. Without getting more specific, all I can say is that a defective frame can be countered only by a better one: we need a coordinated effort to popularize a framework for visualizing the economy that is also based on us as a community, not just me as an atom.
4. The first three of these causal factors are exploited and amplified by a wealthy and politically powerful business-conservative coalition. They bankroll media that cynically make stuff up, and where none exist they create them. They reward economists who twist evidence and invent fanciful models that just happen to justify misinformation and cognitive errors regarding the real-world economy. And of course they make constant reference to images and framing devices that reinforce the inability of the public to think clearly about economic choices. Their political strategy is predicated on mass ignorance and error, so any movement for rationality and honesty has to be political as well.
Monday, July 18, 2011
Priorities in a declining empire
Schumpeter, Joseph A. 1954. "The Economic Crisis of the Tax State." International Economic Papers, 4; reprinted in Schumpeter, Joseph A. 1991. The Economics and Sociology of Capitalism, ed. Richard Swedberg (Princeton: Princeton University Press): pp. 99-140.
"... public finances are one of the best starting points for an investigation of society. The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare -- and this and more is written in its fiscal history." He cites Goldscheid. 1917. Staatsozialismus order Staatskapitalismus. "the budget is the skeleton of the state stripped of all misleading ideologies."
Following Schumpeter, the budget debates illustrate the kind of life that the rich and powerful wish on the rest of society. Get rid of the social safety net, destroy unions, turn the clock back to the nineteenth century. And yes, a bloated military to fight in every corner of the world.
The one area that the Obama is willing to rein in military spending is on medical care for the troops -- at least Robert Gates emphasized that approach.
What is weird is that virtually nobody with access to the public media is talking sense. Even the unions seem to be swallowing the Kool Aid.
"... public finances are one of the best starting points for an investigation of society. The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare -- and this and more is written in its fiscal history." He cites Goldscheid. 1917. Staatsozialismus order Staatskapitalismus. "the budget is the skeleton of the state stripped of all misleading ideologies."
Following Schumpeter, the budget debates illustrate the kind of life that the rich and powerful wish on the rest of society. Get rid of the social safety net, destroy unions, turn the clock back to the nineteenth century. And yes, a bloated military to fight in every corner of the world.
The one area that the Obama is willing to rein in military spending is on medical care for the troops -- at least Robert Gates emphasized that approach.
What is weird is that virtually nobody with access to the public media is talking sense. Even the unions seem to be swallowing the Kool Aid.
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