What's wrong with US national debt?

[Gucumatz]

What if we had a new Robert Byrd? A relatively moderate Democrat obsessed with keeping manageable deficits? His power in the senate waned slightly in his last decade as a Senator - but if you wanted to look at a single politician/reason why budgets remained relatively stable for decades it has to be Robert Byrd. Obviously no senator [particularly Democratic] has taken as hard of stances as Byrd did since his influence waned - but if we were to keep a relatively stable budget from year to year wouldn't that re-add some security in credit? Currently the interest we pay on debt is mostly minimal but cumulatively if we do keep expanding the budget we are without relative increases in taxes and private creditors adjust to ever increasing demand, won't demands on new interest rise?

 

[Cutlass]

What if we had a new Robert Byrd? A relatively moderate Democrat obsessed with keeping manageable deficits? His power in the senate waned slightly in his last decade as a Senator - but if you wanted to look at a single politician/reason why budgets remained relatively stable for decades it has to be Robert Byrd. Obviously no senator [particularly Democratic] has taken as hard of stances as Byrd did since his influence waned - but if we were to keep a relatively stable budget from year to year wouldn't that re-add some security in credit? Currently the interest we pay on debt is mostly minimal but cumulatively if we do keep expanding the budget we are without relative increases in taxes and private creditors adjust to ever increasing demand, won't demands on new interest rise?

No one senator could make any difference. The US deficit problems are primarily political. That is, Republicans see deficits as a means of damaging the Democratic party by damaging the Democratic party's base. The primary political strategy of the Republican party is to be the party of cutting taxes and to force the Democratic party to be the party of cutting benefits. Simply put, cutting taxes and raising spending is good for elections, raising taxes and cutting spending is bad for elections. Republicans see the strategic use of deficits as the best tool that they have available to overcome the handicap they are under because the demographics of the country are against them in the medium term. And so when they are in charge, they claim deficits don't matter, and they have to cut taxes and spend more for the economy, and when Democrats are in charge they say deficits are destroying the nation's future, and try to force the Democrats to cut spending.

Economics never enters into it. It is exclusively politics.

 

[Hygro]

What if we had a new Robert Byrd? A relatively moderate Democrat obsessed with keeping manageable deficits? His power in the senate waned slightly in his last decade as a Senator - but if you wanted to look at a single politician/reason why budgets remained relatively stable for decades it has to be Robert Byrd. Obviously no senator [particularly Democratic] has taken as hard of stances as Byrd did since his influence waned - but if we were to keep a relatively stable budget from year to year wouldn't that re-add some security in credit? Currently the interest we pay on debt is mostly minimal but cumulatively if we do keep expanding the budget we are without relative increases in taxes and private creditors adjust to ever increasing demand, won't demands on new interest rise?

Not necessarily because budget deficits actually drive down the natural rate of interest if the debt is denominated in your own currency, when inflation is not a concern.

Small deficits made sense in the late 40s, 50s, and 60s because we were A) on the gold standard and so we could only push it so far but more important was
B) coming out of the New Deal + WW2 we pushed our economy to its known limits. To maintain a more flexible peacetime version of vaguely full employment we only needed small deficits. There's a reason interest rates kept going up while growth was solid and deficits persisted and that's because we were going near capacity. Lots of things undid this, but deficit spending was not among them.

Gone are the days that economists can tell politicians to say "as long as its in line with growth deficits are fine". The American public let economists work their medicine successfully. Now Americans want to know for themselves--awesome! Except people tend to believe whoever convinces them of an idea first and the people undermining our economy got to folks first by demagoguing under the auspice of academia and "responsibility".

 

[Aleksey_aka_al]

It is a bit malnourished (being fat you have to eat more, you know) so it gonna cannibalize Ukraine.

 

[potatokiosk]

But you have if-then statements that rest on conflated premises! The rest of your post illustrates your marriage of the logic of price levels and the money supply.

I believe monetary neutrality holds in the long run.

Let's recap:

Demand side inflation can be stopped by:
Monetary policy
and if that doesn't work fiscal policy
and if that doesn't work, price controls.

Of them the most effective is fiscal policy, and the easiest to use is monetary policy. Price controls are used in two cases: two keep incomes higher by maintaing high prices (farmers during the GD), or to keep access to goods while suppressing wages (i.e. during WW2, which is a far better case study of demand-side economics than the 1970s supply side driven oil shock inflation). So yeah, price controls tend to suck, but I included it because sometimes we need a reminder that inflation is something we can deal with, even though demand side inflation comes as a consequence of the good life: rising wages, investment, and employment to its limits.

High aggregate demand, and the inflation it brings, does provide you with "the good life" but only in the short run before higher inflation expectations are "built in". The good life comes from stable aggregate demand, and more importantly, increasing aggregate supply.

It does require full employment, by definition. Full employment happens to be where attempts to push out demand result in inflation instead of more employment: ergo, according to the logic of that economy (a function of laws, culture, distribution, and most of all labor and capital inputs) employment is full. However, if employment at current wages is full and there's persistent unemployment, that happens because of supply side inflation which is another way of saying a loss on aggregate supply. The same inputs do less (oil price rise), or there are fewer inputs (crop-failure famine).

Earlier you said "The number of years we've been genuinely running up against full employment in the last century is probably like 8, mostly during world-war time." If you're defining "full employment" as the non-accelerating inflation rate of unemployment then you must think NAIRU is really low.

Hyperinflation is caused by supply shocks first. In Weimar Germany, the French annexed Germany's industrial base and the workers striked. If that's not a loss of AS i don't know what is. The government then pushed demand to its maximum point to maintain living standards until they got their factories back. They did, and then the government ended the inflation on a dime. Poof. Orchestrated brilliance.

In Zimbabwe, well run farms were appropriated and given to those who lacked the skills to run those farms. Huge AS shock. The government tried to maintain peoples' living standards despite a vastly weaker economy by again, pushing AD to its limits.

In cases of hyperinflation, governments understand that people don't accept backwards-moving standards of living, so politically they push AD as far as it can go to fight backwards moving supply shocks, which are themselves inherently inflationary without the demand stimulus.

I had a professor who works with the IMF, a French dude who finds inflation abhorrent. Even he acknowledged that central banks themselves have the power to stop demand side inflation when they want. And again inflation is not particularly harmful below a certain amount far higher than we've seen because...

...there's no such thing as demand driven stagflation.

Yes, the scenarios did have a supply shock that triggered them. My point is when Zimbabwe reached a peak of over 79,600,000,000% inflation per month it was demand-driven, and aggregate demand growth in the 11 or 12 digits didn't wipe out unemployment.

one moment you're saying the Fed doesn't have nearly that much power to set rates, another moment you're saying that it exercises near complete control to not only set rates but to dictate who gets what money and how that money is spent.

Can you back this up? Normally literature just states that central banks often move in the opposite direction of the fiscal authority, but nowhere are those equal, and in nowhere I've read thinks that monetary offset is used to redistribute wealth.

You've misinterpreted. I only mean that fiscal policy is irrelevant for managing aggregate demand. I see the goal of "2-6% inflation and 3% unemployment + real rising wage levels" as being a matter of managing aggregate demand. I don't know how fiscal policy would lower the "natural" unemployment rate although if that's possible I'm all for it.

Yes there are lots of interest rates, I mentioned four of them in the very quote you were responding to. (discount window, interbank lending, treasuries, reserves). Yes investments take time to pay off. Interest rates are not generally high when AD is high, unless you mean AD relative to AS, in which case you can say that interest rates are often higher at the peak of a business cycle because central banks choose to raise them. It's a rookie mistake to raise interest rates during a bubble to fight the bubble, btw.

All of which is to say that the Fed controls the rates it was designed to control, and has power to control more rates if it chooses to.

The central banks are forced to raise their interest rates during the peak of a business cycle because demand for credit is rising and if they don't raise rates aggregate demand will get too high. Likewise they're forced to lower rates at the trough of a business cycle or else they would make things worse. So it's the business cycle that's driving interest rates. If the Fed finds they need low interest rate targets, it's a legacy of money being too tight in the past, and vice versa.

Pray tell can you explain why the central bank buying bonds directly from the treasury boosts aggregate demand. I'm not seeing the connection. Once you do, you can explain why that would lead to inflation when buying bonds from banks who bought the bonds from the treasury days earlier doesn't?

Causal mechanisms, please.

Where did I say that the central bank could boost aggregate demand by buying treasury bonds from the treasury but not by buying them from banks who bought them from the treasury...? If we were truly in a "liquidity trap" then the government could continue issuing bonds even when no one is willing to lend to the government without causing inflation, up to the point where we're no longer in a liquidity trap.

 

[Farm Boy]

Except people tend to believe whoever convinces them of an idea first and the people undermining our economy got to folks first by demagoguing under the auspice of academia and "responsibility".

Ever wonder why the proud almost-poor tend to be pretty patriotic? Why enlistment rates are high amongst the lower middle class? Because a large part of the resources those people can call their own is in the form of their family, community, country. The wealthy can be their own little islands. They can move to a different country. They can acquire citizenship and renounce it. Those with less are fixed in place. Aside from the fact that this system entrenches capital rich people even more firmly than they would be anyways, don't you find it a bit well, sensible, from a moral perspective that these people would look at "their" share in their country and find it deeply offensive that it is perpetually in debt and rewarding the rich proportionally more because of it? That the rich can be so rich that they're too big to fail? It doesn't matter, really it doesn't, if your theories are right Hygro and we should issue Treasury Bonds until the computers can't count any higher, the system is fundamentally unjust. And I think a lot of people can grasp that it is, even if they can't identify why(I'm pretty bad at that myself). The deficit and debt are one key issue where the liberal forces in society are losing to more rapacious capitalists and I think those liberal forces are being too busy smelling their own farts and being dense(since they themselves are rich enough, often, to benefit directly from this system) to understand that they might actually not be entirely in the morally correct stance and they might need to, you know, hope and change.

 

[Hygro]

I do understand that Farm Boy.

But "their" share isn't in debt. That's a lie being sold to them over the past 40 and particularly the past 20 years. Because "their" share isn't a government's negative account balance, but their own positive account balance that is literally the inverse of the government's negative account balance. Every dollar they own is a debt instrument of the US of A. They don't need to own treasuries, it's the same. thing.

So unless they want to give allllll of their money back, they have to be okay that the laws of accounting, i.e. accounting science laws, has to have both sides of the ledger add up to zero. But only the government can go infinitely negative. But guess what, since we measure in dollars, the government can't go positive. It's impossible, unless they take counterfeit bills as legal tender.


What I don't understand is why the solution is do the most harmful thing to the little guy--the thing that gives the guy at the top less wealth but a bigger percentage of the wealth which IS what he wants--which is have the money supply slowly shrink instead of grow with the economy.

I really don't understand why the very folk you talk about then let themselves get completely suckered by the very people who are doing it to them (i.e. those who support austerity and/or stimulus to the top) and have been doing it to them for 40 years, and aim their sights on the very folks who are trying to make the system work for the whole lot of us. Smelling their own farts, get real. Liberals bought into "debt is bad" too, making a tiny minority of us in the know. And we don't have a platform.

So that tells me that they are being lied to. Because I believe such people when they tell me they love America. That they believe we should be the best, richest, most powerful nation the earth has ever known. I believe them when such folk articulate growing prosperity through all as something they stand for. So unless you can explain it differently, why those things, which directly contradict fighting for austerity, are not signs that folks have been lied to about how the system actually, literally, mechanistically works.

How the morally correct stand can be the slow burn of this very country is beyond me.

 

[Farm Boy]

If a lot of people who are complicated worry that debt is bad, and a large percentage of the simple worry that debt is bad, and a tiny minority is "in the know" it smells of cult my man. Not to say cults can't be right, but they're deeply suspect.

What I think people would prefer is the government does increase the monetary supply, but it doesn't increase it by taking loans from the rich then paying them back with interest to increase dollars in circulation. They probably prefer the government to buy things, subsidize things, and give people currency, paying for that with a steady increase of dollars which previously did not exist. If they must do it with loans, perhaps take them from the states? From the people instead of people?

 

[Cutlass]

That's politics though. You say people want that, but they are not electing politicians that do that.

 

[El_Machinae]

You'll have a hard time convincing people that "Every dollar they own is a debt instrument of the US of A". What's it a debt promise of? They'll give you a new dollar bill if you give them an old one?

 

[Farm Boy]

You'll have a hard time convincing people that "Every dollar they own is a debt instrument of the US of A". What's it a debt promise of? They'll give you a new dollar bill if you give them an old one?

I don't get this either. Maybe it was when dollars were backed by heavy metals. But now dollars are heavy metals. Which means they have arbitrary value all of their own, based entirely on confidence. Biggest main differences are dollars are easier to transport since their physical manifestation is less cumbersome and the treasury can mine them in an entirely more controllable format?

That's politics though. You say people want that, but they are not electing politicians that do that.

Fair enough, perhaps people do want the rich to get more powerful in exchange for bread and circuses. But then what we're doing already is fine?

 

[Hygro]

If a lot of people who are complicated worry that debt is bad, and a large percentage of the simple worry that debt is bad, and a tiny minority is "in the know" it smells of cult my man. Not to say cults can't be right, but they're deeply suspect.

What I think people would prefer is the government does increase the monetary supply, but it doesn't increase it by taking loans from the rich then paying them back with interest to increase dollars in circulation. They probably prefer the government to buy things, subsidize things, and give people currency, paying for that with a steady increase of dollars which previously did not exist. If they must do it with loans, perhaps take them from the states? From the people instead of people?

Then there's your answer, man.

This is Krugman's response to that. He's comfortable with it. http://krugman.blogs.nytimes.com/20...e=blogs&smid=tw-NytimesKrugman&seid=auto&_r=1

Here's the explanation for that
http://ftalphaville.ft.com/2013/12/...n-drop-money-gather-bonds-or-just-fly-away-3/

And here's the paper that the explanation is based on
http://www.scribd.com/doc/58324026/Bell-Stephanie-Do-Taxes-and-Bonds-Finance-Government-Spending

 

[Gucumatz]

Different ways of thinking about money I think. Robert Byrd the guardian of the budget in the Senate for decades grew up a poor farmer's boy in the great depression [In West Virginia no less].

I consider my different than average Americans financially too. I use credit cards too [but only to maintain a high credit score, paying off the full amount I owe each month regardless]. My father didn't own his first store bought shirt until he was a teenager. My grandfather has never taken a loan in his entire life. Each member of our family here in the US spends significantly less than they make and saves a proportion of their income. When my father came to this country he was shocked at how readily people accepted debt and interest payments for their entire lives. I understand American would basically collapse if everyone acted like me and while I am sure while most of the poor in the US rack up heavy debt in the US, there are people too like me that refuse to spend more than they make. Obviously this kind of thinking is a dying breed of thinking [See lack of Robert Byrds]

Debt is obviously not bad when controlled in a federal budget - but I am sure there are also still some people like me out there and that's where part of the thinking comes from "that debt unrightfully belongs to me"

Historically its the kind of argument thats been happening ever since Hamilton vs. Jefferson. Still, I tend to be weary of cumulative interest payments in any government [Although if it ever gets too bad there is always the Stresseman option ]

 

[Cutlass]

Fair enough, perhaps people do want the rich to get more powerful in exchange for bread and circuses. But then what we're doing already is fine?

I think it's more complex than that. Voters have priorities, and those priorities are on a number of subjects. Subjects that are sometimes incompatible. Voters also have imperfect information, and are subject to being mislead. Voters also tend to take the word of 'our people' and discount the word of 'those people'. Then you have the party primaries, which are dominated by big money and big ideology voters. Then there are complex subjects where the soundbite works because the real explanation isn't so easily delivered. Then there are gerrymandered districts, which makes most people's votes not really count at all, and voter suppression efforts to block people from even having a chance to vote. And on top of all of that, there is a real large scale effort to demonize opponents in politics.

What this leaves is voters have to put in a real effort to know what a given candidate will do, and how what that candidate will do will affect them. These and other factors often lead to voters who don't really know where their best interest tells them to vote, or where they have issues that are just so much more important to them in one regard, and so they ignore the other factors.

So you have the 'values voters', the 'I vote pro life' voters, their first priority is not economic issues. And they tend to see their political opponents as bad, and untrustworthy, people, and so reject everything that they say. There is a very big overlap between these people and the 'salt of the earth' types you were describing above. These people are not voting on the debt, they are voting on other issues. But they are voting for the debt! So these people may be against the debt, but they are voting for the debt. And they vote for the debt, in part because they don't have the information to make a more informed choice, in part because the system is rigged against their making an informed choice. And in part because, when push comes to shove, other issues simply matter more to them.

And that's what brings us all to the irony of the Tea Party and people who call themselves fiscal conservatives being the most pro-debt faction in American politics. Really the only faction in American political history who have ever tried to get the debt as high as possible as a tool to accomplish their other objectives.

 

[potatokiosk]

According to Krugman all we need to get out of a "liquidity trap" is a credible promise of higher inflation:
http://www.princeton.edu/~pkrugman/japans_trap.pdf
There's no need for a ballooning national debt to stimulate the economy if the central bank is actually doing its job.

 

[Farm Boy]

Then there's your answer, man.

This is Krugman's response to that. He's comfortable with it. http://krugman.blogs.nytimes.com/20...e=blogs&smid=tw-NytimesKrugman&seid=auto&_r=1

Here's the explanation for that
http://ftalphaville.ft.com/2013/12/...n-drop-money-gather-bonds-or-just-fly-away-3/

And here's the paper that the explanation is based on
http://www.scribd.com/doc/58324026/Bell-Stephanie-Do-Taxes-and-Bonds-Finance-Government-Spending

So, and bear with me, I did not create an account so as to be able to read the second link, so after finding two different articles to define "helicopter money" for me: We're arguing for essentially the same thing, but you want the trickle-down-economics-flavored incarnation of the tool? Which is what I've been having problems with instead of the concept of government spending all along?

 

[Gucumatz]

@ Potato

But higher inflation indirectly will hurt new loans for the national debt won't it? I prefer to leave it to the FED to deal with liquidity trap issues than raising the inflation rate beyond natural levels

 

[Winston Hughes]

Great explanations in this thread of when debt isn't a problem and why. Made things much clearer to me.

I wonder, though, could someone explain in simple terms when debt would be a problem and why?

 

[Farm Boy]

And they tend to see their political opponents as bad, and untrustworthy, people, and so reject everything that they say.

That's why it takes so much work, and why you have to be flexible. If a stable agricultural commodities market is in the best interest of everyone, but direct payment subsidies are vastly unpopular with issue-uneducated urbanites, then you kill those and accomplish things differently. Maybe you move those funds to crop insurance to try and achieve the desirable stability with another tool. Maybe you couple agricultural supports with the linked issue of food security by the end consumer and you pass the funding with the food stamp program attached. Maybe the flavor of the original policy gets changed. Maybe, if you are lucky, that might even be a good thing. Then it'll start all over again. The dedicated zero-sum warfare will lead some camps to start up their campaign to either discredit crop insurance, or separate food stamps from the funding, and other camps will start trying to insert enough loopholes that most of the funding winds up funneling to the largest and most stable agri-operations. Isn't this how just about every single contentious issue works all the time?

 

[MacAttack]

My 2 cents. What's wrong with US national debt? the US Government is too big. It's trying to fund too many things. There is plenty to cut from the federal budget. Some people (special interest groups mainly) would be upset and some politicians would lose elections, but it would be in the best interest of the country and down the line, the rest of the world.