“Yes, the government must pay its bills in the long run.” (Every few centuries?) Questions for Krugman.
I’d like to push back on Paul Krugman a bit, on this bit in particular:
Yes, the government must pay its bills in the long run
You hear this from him a lot. And I want to ask him:
Paul, are you letting yourself be sucked into the very syndrome that you so bemoan and berate? Are you saying this because you feel the need to cast yourself as being sensible, responsible, moderate, and somewhat centrist — in short, as a Very Serious Person?
I ask because over four centuries and two centuries respectively (six hundred years combined), the U.K. and the U.S. governments have paid off their debts exactly once: the U.S. in 1836.
This happy event was followed, in 1837, by one of the most catastrophic depressions in either country’s centuries-long history. Likewise, the one other time that the U.S. got close to paying off its debt (the U.K. never has), in 1893, a disastrous depression followed immediately thereon.
Every depression in U.S. history has been preceded by a major decline in nominal Federal debt. It’s not a sufficient condition for, or reliable predictor of, depression (many declines have not been followed by depressions), but it does seem to be a necessary condition.
So we haven’t had to pay off our debt, and the one time we did (plus one time we got close), we were not happy with what ensued. From that history, how can you conclude that, now, “the government must pay its bills in the long run”?
To quote Chris Cook (HT Izabella Kaminska; emphasis mine), the national debt:
…is a national equity…
At least two-thirds … came into existence as mortgage loans, and are therefore backed by claims over the productive value of the US land and buildings which they fund. Much of the rest consists of claims over the value of US assets which fund the productive capacity of US corporations. The remainder – which provides the credit necessary to finance the circulation of goods and services in the US – is based upon the magnificent productive capacity of the US people.
Only by liquidating US Incorporated could this National Equity [read: Debt] ever be redeemed.
Such a liquidation, of course, would involve liquidating our overwhelmingly largest real asset: the ability of the American people to work. (Something your ideological opponents seem intent on doing.)
Of course you might well mean that we can’t increase deficits faster than GDP growth forever. But in today’s monetary world you have to at least question even that. Since 1971, when the U.S. stopped promising to redeem its dollar for anything besides…dollars (perhaps in some other “dollar” form, like Fed reserves), that proposition has become at least questionable. Dollars really might be like points issued by a bowling alley, and we may be able to issue a lot of them before we see problems with inflation.
I don’t think we really know; we don’t have any comparable situation to look back on (except maybe Japan, and that’s a glass, darkly). For a decade or so after the ’71 sea change, monetary authorities and markets flailed to adjust their reaction functions to the brave new world. Then those interacting functions settled down and we saw twenty years of steady inflation and steadily-declining interest rates. That may have been the inevitable emergent path for the world’s dominant economy and currency issuer, resulting inexorably from the game rules put into place in ’71/’73.
The place we are now — where Japan landed two or three decades earlier — may be the inevitable (and perhaps enduring) result.
Yes, rising globalization and the political rise of neoliberal Reaganomics may have contributed, but it seems possible that even absent those trends, we would have ended up in this place, perhaps sooner perhaps later.
So now, having arrived at this point, reaction functions are getting rejiggered again, and in a big way. (The institution of IOR was a big change, for both the Fed’s and the markets’ reaction functions.) One key element of those reaction functions is the belief that “we can’t keep running deficits forever.” But at least some parts of the market are acting as if we (and certainly Japan) can. And they may very well be right.
All of which is to say, think again. Think deeply. I’m not sure you’re thinking in your usual clear-eyed manner about a belief that may not be true. At least, given the new rules of the game, we might be a very long way — decades? centuries? — from a point where large government deficits or debt might pose any danger to our economy.
All my tentative language above should make clear that I’m not at all certain of this. I’d sure like to hear what you think.
Cross-posted at Asymptosis.
I won’t claim this is definitely what Krugman means, but yes, the government has to pay it’s bills, but that doesn’t mean it has to pay off all it’s debt. Ever. Even a household can pay the bills but still carry an outstanding balance on, say, it’s credit cards. As long as they like. But the bills get paid. And if the average household could get a credit card with a 1% interest rate like the government can, that’s what they should be doing.
@JDM:
See the second half of the post, on deficits vis-a-vis GDP growth.
Debt and bills are two different things. It is the rhetoric of politicians, and the result of politics, to confuse the two terms.
PK & Co have been fighting on the right side of the overton window so long they forgot to keep the left side open…
My only issue is “trade balance”. We’ve been negative for ages, Japan is only just getting there. It will be interesting to see what happens with two drivers of global business run negative.
@RJS: 😉
@Daniel Becker: Maybe with some real helicopter money we’d see a bit more inflation, which (in addition to the presumed hot-potato effect in real goods or at least financial portfolios) would leak into currency devaluation, which would make our exports more attractive, and their imports less so, and…
well, without knowing what krugman meant.. pay off, pay down, or just pay bills…
i wonder if the model isn’t the very high national debt run up during WW2 which has not been “paid off” but was certainly paid down as a percent of GDP.
this had something to do with “growth”…. something missed by Reinhart and Rogoff?…
Or maybe Krugman was just thinking that “a tax cut will fix everything” may not.
Coberly —
If all the individual obligations taken on to fund WWII have been paid — and since we are now almost 70 years later, I assume they have been paid off — the national debt run up during the war has been paid off. The government has paid every obligation when it has come due, and the infinitesimal interest rates demonstrates that lenders have virtually absolute confidence that the U.S. government will continue to do so for at least the next 30 years.
Confusion between “the national debt” and the specific obligations that make up that “national debt” has been extremely damaging.
It is never a problem, until it is. It seems that the issues with Europe arose within a matter of months and have resulted in a great reset of sorts. It would appear that the same scenario could easily happen in the US within the next 20 years should those lending the money loose faith in the ability of the US to even recognize the problem, let alone take steps to address it in even the smallest manner (such as the recent sequester).
Are we not on the same path of other great societies being crushed by a combination of currency devaluation, corruption by the elite, and special interest groups?
Jerry Critter was right on target:
Debt and bills are two different things.
I’m so happy to see this line of thought — that governments do not have to pay off all their debt — finally get the attention it deserves.
It is the best-anti-austerity thesis we could have.
Jeff Rickard,
“Are we not on the same path of other great societies being crushed by a combination of currency devaluation, corruption by the elite, and special interest groups?”
I agree with you depending on who or what is put in the category of “special interest”.
@Jeff Rickard: “Are we not on the same path of other great societies being crushed by a combination of currency devaluation, corruption by the elite, and special interest groups?”
I agree on B and C, cf Mancur Olson, The Rise and Decline of Nations.
But I’m not at all sure about A. There are upsides and downsides (short-term and long) to currency devaluation/upvaluation, for a currency-issuing nation, relative to other currencies, with a lot of complex interacting factors at play.
I note that the word devaluation doesn’t appear in Olson’s book, FWIW…
“Debt and bills are two different things.”
Yes you’re right and more careful language is in order. There’s some rhetorical/semantic sleight of hand going on here, and I may be participating in it. Will think further. Need to understand how definitions are being juggled mid-argument, by whom, and at what cost to accurate/useful understanding.
i find myself wondering what jeff rickard meant by “those lending the money” to us…
obviously, a lot of those treasury instruments are owned by trust funds such as social security, FERS, etc; others are owned other retirement funds or by banks and as part of their required capital…is BofA going to divest itself of Treasuries because of some perceived crisis? what else is there enough of they could hold?
you’ll often find those who think foreign governments such as china are in some way “loaning us money” – but they really have no choice – as long as they continue to run a trade surpus with us, they are paid in treasuries by the corporations that buy from them; sure they can swap them for Yen bonds, but then the Japanese will end up buying Treasuries to keep their currency from appreciating…
i would really like someone who envisions a crisis in US script within 20 years hence to explain how it occurs…
@Rjs:
Right. While those bonds are nominally or at least conceptually claims on U.S. real resources (perhaps at one more exchange remove), notably claims on our labor (again perhaps at one or more removes), I have to wonder if they are realizable claims, especially in aggregate.
This essentially a “Road to Serfdom” argument, and I have some sympathy with that argument (think: the financial classes backed by government physical coercion), but I very much wonder whether China will ever be in a position to “enslave” U.S. workers via that enforcement.
Sure, some decades hence U.S. workers may be working more to produce goods that are sold in China. But isn’t that pretty much exactly what we wish was happening now?
Jeff Rickard
your mistake… and it’s huge… is to assume that “government debt” created the problem. (the current recession). no. that problem was created by fraud in the unregulated financial industry. it “arose in a matter of months” because that’s the way it is with fraud. it works until it doesn’t.
urban legend
just to be clear, I am not confusing paying off debt with paying the specific bills. but the bills have been paid… or rolled over… the “debt” has not been “paid off.” it has, however, been “paid down” at least as a percent of GDP.
So we need to stop confusing ourselves with words… because this is the game the politicians play. It works for them.
It is also the case that “the politicians” are working for the financial fraud corporations, as are the academic “economists.”
steve, my real objection is to the phrase “lending us money” because US treasury instrruments, what everyone mistakenly calls “debt” are and perform the function of money in international trade and the banking system in the same way a greenback is money in your wallet…we cant “pay back our loans”; because without Treasury bills, irrationally referred to as our “debt”, financial markets would freeze and international trade would come to a halt..
@rjs: “objection is to the phrase “lending us money” ”
Yes.
The real problem here is that we should stop using the word “money.”
I poke at the crux of this issue here:
http://www.asymptosis.com/currency-is-equity-equity-is-currency.html
(And see my reply to JP Konig there.)
But I think a new post is in order: “Why ‘Money’ Should Be Abolished.”
thanks for the reminder, steve – it was a busy saturday & i had meant to get back to that dizzynomics post but it slipped my mind…
once had a long exchange with JP Koning on the shortage of safe assets; he pretended he wanted to understand what it was about & i got suckered in…dont thik i’d bother engaging him again..
coincidentally, U.S. to pay off debt for first time in six years
RJS,
Gee, are we going to start to hear about the fears of paying off the debt now? I believe that was the argument for the tax cuts too?
it wouldnt surprise me, dan…
it was greg mankiw, then chair of bush econ advisors, and greenspan who feared that a shortage of safe assets resulting from the clinton surpluses would harm the financial markets, and that tax cuts should be initiated to increase the supply of AAA bonds available…
here’s an article from 2001 showing the Treasury acting then, in the face of a debt shortage: U.S. Acts On Shortage Of Treasuries – NYTimes.com
of course, when he was campaigning with romney, mankiw was heard to say we were on the road to become greece…he knew that was untrue…
Steve
you seem to go from “we don’t need to pay off the debt”
to
“we might be a very long way — decades? centuries? — from a point where large government deficits or debt might pose any danger to our economy.”
i would point out that this is a non-sequiter… but i get tired of people using latin phrases from logic books… mostly because they don’t know what they are talking about…
so, simply, “large government deficits” might indeed pose a danger to our economy… or they might not. but this is not the same as saying we must pay off, or pay down, all debt, now.
here’s an article at zero hedge that says we may need $11.2 trillion in new Treasury debt or the safe asset equivalent for the banks to meet Basel III teir 1 capital requirements:
Over a year ago, we first explained what one of the key terminal problems affecting the modern financial system is: namely the increasing scarcity and disappearance of money-good assets (“safe” or otherwise) which due to the way “modern” finance is structured, where a set universe of assets forms what is known as “high-quality collateral” backstopping trillions of rehypothecated shadow liabilities all of which have negligible margin requirements (and thus provide virtually unlimited leverage) until times turn rough and there is a scramble for collateral, has become perhaps the most critical, and missing, lynchpin of financial stability.
Not surprisingly, recent attempts to replenish assets (read collateral) backing shadow money, most recently via attempted Basel III regulations, failed miserably as it became clear it would be impossible to procure the just $1-$2.5 trillion in collateral needed according to regulatory requirements.
The reason why this is a big problem is that as the Matt Zames-headed Treasury Borrowing Advisory Committee (TBAC) showed today as part of the appendix to the quarterly refunding presentation, total demand for “High Qualty Collateral” (HQC) would and could be as $11.2 trillion under stressed market conditions.
whoops,. forgot the link: A href=”http://www.zerohedge.com/news/2013-05-01/desperately-seeking-112-trillion-collateral-or-how-modern-money-really-works” target=blank jQuery1367601790818=”72″>Desperately Seeking $11.2 Trillion In Collateral, Or How “Modern Money” Really Works
im with beverly, we need a preview button…
lets get it right: A href=”http://www.zerohedge.com/news/2013-05-01/desperately-seeking-112-trillion-collateral-or-how-modern-money-really-works”>Desperately Seeking $11.2 Trillion In Collateral, Or How “Modern Money” Really Works
Desperately Seeking $11.2 Trillion In Collateral, Or How “Modern Money” Really Works
obviously its NOT tier 1 capital they’re talking about…sorry; didnt get much sleep; having a bad day…