The National Debt Disappeared
Other than a small number of fiscal conservatives who are ignored by their own party, it doesn’t seem like anyone really cares about the National Debt any more. That’s a relatively new thing. Doing something about the Debt was one of the platforms of the GW Bush campaign in 2000. Of course, what he actually did to the Debt was the precisely the opposite of what he told us he was going to do. Then came Obama, whose economic policies – certainly with respect to anything that could affect the Debt – could best be described as a continuation of what GW started. Why anyone would look to a disaster as an example to follow, I cannot say, but people who become President tend to be unusual.
At present, it seems that we have entered a period of unholy alliance between most Democrats and most Republicans. The former want to spend taxpayer money on social programs, the latter want to cut taxes and to spend taxpayer money on things that aren’t social programs, and both groups essentially get what they want the most. At least for now. Which brings me to the point. I can’t tell you how all this ends, but I can tell you that the longer it goes on, the less well it ends.
Here’s a simple thought experiment…. say the Democrats could magically make the new tax cut disappear and either made zero or be replaced in its entirety with an equivalent amount of spending on social programs. Would they worry about the debt?
Or say the Republicans could magically make, say, all welfare disappear and either stay at zero or be replaced by tax cuts of the same magnitude. Would they choose the tax cuts or worry about the debt?
Dude! Get with the program!!
The republican messaging on the debt is all part of the plan. They downplay deficits when cutting taxes on their cronies and then “rediscover” it afterward when they tell us all that they have to cut medicare to reduce the debt.
Heck, the WaPo even had a story about it on December 6…
Ryan says Republicans to target welfare, Medicare, Medicaid spending in 2018
” ‘We’re going to have to get back next year at entitlement reform, which is how you tackle the debt and the deficit,’ Ryan said during an appearance on Ross Kaminsky’s talk radio show. “
At least spending on social programs puts money in at the bottom of the money pyramid. Unlike tax cuts.
The issue with the deficit is how we have spent the money. If we were truly acting as a company (as the repubs suggest) we would have debt and we would be investing that in something that made the company and the share holders more money. Though, it seems these days, it is all about short term gain. Reacting instead of setting goals that fit get closer to the mission statement.
Really, where have we seen a company grow without taking on debt? Where would the financial sector be if not for companies taking on debt of some form?
The fiscal balance and national debt have been politicized. The New Democrats have been hypnotized by the Clinton surpluses as supposedly good policy. It was not, since surpluses reduce non-government income and retiring the debt reduced non-government saving. This leads to household sector borrowing to maintain lifestyle, which eventually becomes unsustainable unless incomes rises to service the increasing obligations. That hasn’t been the case.
Keynes explained the economic realty: “Look after the unemployment, and the budget will look after itself.” (January 1933, CW XXI, p. 150). Bill Mitchell unpacks this here .
See also Geoff Tilly, “Keynes and the financing of public works expenditures” (2009).
So what’s new is the neoliberal politicization of the fiscal balance and public debt. This is in aid of narrowing fiscal space in order to augment the market state and contract the welfare state.
The Democratic establishment is in the pocket of the donors that recommended this policy in the first place and are still doing so, since it benefits them.
New Democrats either have to wake up to the fact that narrow fiscal space necessitated by fiscal conservatism and a progressive agenda are mutually exclusive.
Bernie, whose chief economic adviser was Stephanie Kelton, got this, but he did not explain it to the public.
The public needs to understand the difference between a sovereign currency issuer, that is, a government that issues its own currency, floats the exchange rate and doesn’t incur financial obligations other than its own currency, is constrained only by available real resources and the potential for inflation. However, generally speaking, it not excessive government spending that leads to inflation anyway.
I’ve written posts on the higher MPC of the poor before. I think you may have too. So I am sympathetic to the argument and mostly believe it. But it isn’t 100% true. Some social spending has greater benefits than other social spending. Some is probably harmful. (And to forestall Coberly) Sonetimes you do things even if it doesn’t make financial sense if it’s the right thing to do.
But the left isn’t honest enough to try to figure out what social spending pays for itself and what spending is a drain, and certainly doesn’t on that basis.
Keynes also was for paying down the debt in non-recessionary periods. Going hog wild at all times doesn’t result in good things.
The cost of servicing the national debts — that’s with an “s” because there is no suh thing as “the” national debt, only millions of individual debts with different times they come due over the next 30 years — is about as low as it’s ever been as a percentage of either GDP or Federal spending. Agonizing about it is silly.
The Democrats always had the political answer — which also happened to be the policy answer — to the deficit-debt chicken-littles: first, we have to get everyone back to work. When the economy is humming we an deal with the debt easily. Instead, too many adopted the loser “adults-in-the-room” argument that we are the ones who actually mean it when we talk like Republicans
MK: Keynes also was for paying down the debt in non-recessionary periods. Going hog wild at all times doesn’t result in good things.”
Sounds like Samuelson?
“I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say “uh, oh what you have done” and James Buchanan argues in those terms. I have to say that I see merit in that view.” — interview Paul Samuelson gave to Mark Blaug (in his film on Keynes, “John Maynard Keynes: Life/Ideas/Legacy 1995″
Peter Cooper, Balancing the Budget Over the Cycle. See the comments also.
Some Post Keynesians and all MMT economists follow Lerner over Keynes reading the need to balance the budget over the business cycle. The fiscal balance is non-discretionary owing to automatic stabilization and fluctuating revenue.
Bill Mitchell, The roots of MMT do not lie in KeynesThe roots of MMT do not lie in Keynes
Abba Lerner, “Functional Finance and the Federal Debt” (1943)
Public policy economists need to realize that the fiscal balance and public debt have been politicized and the American public misled on the economic and financial realities based on sound analysis.
Unless the public perception is shifted, progressive policy will seem “unaffordable” when affordability is not the issue for a currency sovereign like the US. The issue boils down to the fact that where there are idle real resources, governments can employ them through targeted spending. When there are idle resources, bringing them online is unlikely to result increased inflation.
There are two canards associated with the objections to government using its fiscal space. The first is fiscal irresponsibility and the second is hyperinflation (Weimar, Zimbabwe). These objections as well as others have been refuted in the Post Keynesian, Institutionalist, and MMT literature, MMT being a subset of Post Keynesianism and Institutionalism (Fullwiler).
This was all part of the economic debate before the rise of neoliberalism, the ascendancy of the Chicago School, the “bad” Hayek (there was a good Hayek, too), Milton Friedman’s monetarism, etc.
For a resurgence of the left, economists and policymakers need to familiarize themselves with the relevant literature. I would also encourage looking at the contributions of contemporary Marxian economists also.
This is all highly nuanced and it doesn’t fit into sound bites very well, So strategy is also required in framing the issues in order to correct widespread misunderstanding. Owing to such misunderstandings voters are voting their interests. The challenge is not only formulating correct analysis but communicating it effectively to the voting public.
Hi Tom…welcome to AB
While democrats may tax and spend.
Republicans borrow and spend.
Thanks for the welcome, Dan.
What’s interesting to me is what economists have to say about the national debt. For many years they claimed it was not a problem as long as it remained below a certain percentage of GDP. As I recall, that figure started at somewhere around 75% and migrated upward to 100%. Now that ours is well above 100% they have stopped talking about the issue altogether, other than Dean Baker, who said the other day that ours was “well below the sustainable maximum.”
I am fairly agnostic on the debt, but the constant refrain about the low cost of servicing the debt worries me. Since the debt is constantly being rolled over and never paid down, as interest rates rise that cost will certainly increase, and this insistence that huge debt is acceptable because rates are low and it is cheap strikes me as short sighted and unwise.
Dean Baker has the theory that when rates rise we can “buy back the debt at a discount” and rescue ourselves, but the math on that simply does not work out. There is no such thing as a free lunch.
Mr. Kimel knows the formula full well.. he’s educated as an economist.
You can increase taxes to cut deficit as long as increase in taxes is more than increases in spending.
You can’t decrease taxes and increase spending to cut the deficits.
If you look at administrations since an including Carter it’s pretty clean that the GOP has continually decreased taxes and increased spending to increase the deficit. The Dems have maintained or made the lowest deficit increases or even reduced them. I have done the analysis several times using the 1st year of a new administration as the effect of the past administration since it’s nearly impossible to change the tax change &/or spend effects in the 1st year a new administration.
The GOP’s strategy has been to starve the beast by increasing the deficits to eventually force the federal gov’t into default. That’s the apparent game plan.
Kimel: “Here’s a simple thought experiment…. say the Democrats could magically make the new tax cut disappear and either made zero or be replaced in its entirety with an equivalent amount of spending on social programs. Would they worry about the debt?”
You don’t have to do a thought experiment. We have empirical data. In 2010 Democrats passed Obamacare, perhaps the most important social program since the New Deal, and they did it with tax increases that made it not only deficit neutral, but reduced deficits by over $100 billion.
Enough of your ignorant “both sides” garbage.
As mentioned in the post, sometime in either the GW or Obama administration the relationship broke. Democrats stopped being tax and spend. Debt as a percentage of GDP didn’t shrink during the Obama years, not even when Democrats controlled Congress. Tax and spend stopped being the Democrat’s strategy, and got replaced with spend and spend. There is still a vestigial view that low taxes, particularly for the wealthy is a problem, but there aren’t all that many people articulating why.
Keynes didn’t say the budget had to be balanced at all times. Keynes said you run a deficit when private spending slows, and you run a surplus when times are good. I think that advice makes sense. I don’t feel a need to look at contemporary Marxist theory until someone points to an example of an economy that claims to be Marxist that works for more than a few years before a substantial part of the population starts trying like hell to get out.
Yes. Plus, if you run deficits when you don’t need to, you also constrain your freedom of movement when you need it. Say a debt of 100% of GDP is fine as per Baker et. al.. But is the borrowing we will need to do when the doo doo hits the fan the next time around going to bring us to a level where the debt is not OK, particularly if interest rates have gone up at that point?
Increasing the Debt is always the GOPs preferred strategy:
Approximate Surpluses & [-] Deficits
Bush 1……..-175………….. -200……… ..-25
Bush II…….+450………….. -450……….-900
Obama ….. -450………….. -585 ………-135
DEM +315 (average per Admin = +105)
GOP -670 (average per Admin = -223)
I don’t know why people think the GOP is opposed to national debt and deficit spending since they’ve generally created far more national debt than the Dems. Rhetoric by the GOP is worthless bullshit… pay attention to what they do, not what they say the will do or did.
In fact on average the Dems have reduced debt while the GOP has increased it.
Obama doesn’t look as good when you put those same figures on a graph. Although, in fairness, the figures should be shown as a pct of GDP. Obama looks better that way, but still not all that great if you consider the baseline for him was the bailout, and by the end of his term there was no Great Recession.
“looks” or do the arithmetic. Is this about perceptions or facts?
Mike, please spend a few minutes reading the links Tom posted above and allow the possibility that your perspective on the debt could be improved with different glasses. At the very least come to a deeper understanding of his position and then allow yourself to choose. The point is that there is no “debt burden” because the private sector has too much of their own private debt and not enough public debt ( which is in reality an equity position) to offset those private debts, at least for the bottom 90 percent. Do you consider the dollars in your wallet or the Treasuries in your brokerage account to be a liability? No, but it’s been sold to you as such. Public debts drive private profits. Balancing the budget during good times will almost certainly lead to recession because there will be no private sector surplus without a public sector deficit (and especially so in a goods importing country).
Mike, what happens if we balance our budget and pay down our debt? since there’s only $1.5 trillion currency in circulation, we’d have to start by printing a lot more cash than we now have to pay off $20 trillion in debt. then what happens to those accounts that previously held Treasuries? would the Social Security Trust Fund would end up with $2.8 trillion in non-interest bearing cash? how about the other $2 trillion of our debt held by other Federal pension funds? another $900 billion of our debt is held by state and local governments and their pension funds; & i can’t see that they’re clamoring to cash those Treasuries in, either…are the banks, insurance companies, mutual funds, and private pension funds all going to want to hold cash if we eliminate all Treasuries and pay off the debt we owe them? for that matter, would our foreign trade partners want to sit on a pile of cash in exchange for their exports if that cash doesn’t earn interest until they decide to spend it?
think about what you’re saying here, and you’ll see that paying down our debt (cashing in all US Treasuries) would be much more disruptive to the US and global economy than would be our adding another $1.5 trillion to those Treasuries now in circulation…
Unless I got it wrong, the issue you posted about was national debt and the statement that either it was during either GW or Obama’s admin things changed.
I take issue with that based on the information on deficits by admin’s in my prior post… and since Nixon-Ford in fact… he’s the one that started with near 0 debt and handed a 50 billion deficit to Carter. I chose to just count from Carter to keep the administration periods of office equal between GOP and Dem admin’s.
The GOP has been the deficit spenders and tax cutters for the wealthy (based on fictional “trickle down”, which started with Andrew Mellon’s theory during Coolidge’s administration.. cut taxes and improve GDP to increase Federal Revenues… which Mellon implemented as Treasury Sec. How’ed that work out? )
Reagan over doubled the national debt in one administration without a war… never before had that happened.
Bush 1 increased it a bit more to limit the damage fallout from Reagan’s tax cuts.
Then Bush 2 decided to undo the huge Clinton surplus big time and handed Obama the worst economy since Coolidge handed to Hoover, plus the largest deficit to boot.
The deficit spending business began with Nixon-Ford, carried through even more by Reagan, Bush 1, and GW. This didn’t start with GW.. it started with Nixon, or if you don’t think that’s a valid take, then with Reagan for certain.. cut taxes, increase spending and voila, increase the deficit… all the while knowing full well “trickle down” per Andrew Mellon’s theory doesn’t work without creating a bubble economy..
The whole idea by the GOP is to create small federal gov’t…. and the strategy being employed is to drive the deficits up to force Dems or a future GOP to have to cut defense or cut welfare or both.. and we know that the GOP will cut social spending to the bone and privatize it if possible to profit on it since “its their own fault” anyway.. all THOSE people. This is about federalism v anti-federalism… and has been.
And just btw, Andrew Mellon was a silver spoon banker’s son who inherited the Mellon bank and enterprises (Mellon Steel). By 1900 the Mellon Bank was the largest Bank in the US outside of NY.
That’s who Harding appointed as Treas. Sec, who Coolidge kept on as did Hoover… all three where huge laissez-faire proponents as was Mellon.
And Mr. Kimel,
Your post title is National Debt, not National Debt as % of GDP. In fact not once did you say one thing about debt as a percent of GDP in your post.
This might be enlightening. It’s a study that was done in 2000 on the probable result of paying off the federal debt: http://neweconomicperspectives.org/2012/11/life-after-debt.html
It’s really quite an eye-opener.
Welcome to Angry Bear. First comments go to moderation to weed out spammers and advertising.
And the same year, Wynne Godley predicted–in remarkable detail–the consequences of the runup in private debt that the surplus was causing:
Rjs and Zapster,
1. I will read, but not this morning. I am rushed this morning so I have to make this very short. IIRC, our debt as a pct of GDP was at a max during WW2, and got to its lowest postwar level in the mid 60s before the Great Society programs kicked in. Note – lower than in the late 1990s when we started talking about paying off the debt in its entirety. That was a period of very rapid increase in real GDP per capita. Again, working off memory, 1961 to about 1965 when debt / GDP hit a low point would be faster growth in real GDP per cap than any equivalent set of years since that time. So shrinking debt is not, by itself, a problem.
2. There are countries with much smaller debt than we that seem remarkably well run – Denmark, Singapore, etc.
3. I do remember going through some of the Marxist lit on the topic a couple of decades ago. It reminded me of Megan McArdle’s nonsense about how its a good thing we don’t let the gov’t keep down the prices of pharmaceuticals in the US because the only reason the pharma companies keep coming up with new, wonderful products is that the US pays premium prices. If we were like other countries and kept prices down there’d be no R&D in pharma. The obvious question – even in the unlikely event that is true, why does the sucker have to be us? Or in the case of the debt – why exactly does the sucker have to be the US gov’t?
Better phrasing… “if it is true that every game needs a sucker, why does the sucker have to be us?”
To clarify, while my emphasis is on Post Keynesianism, Institutionalism, and MMT above in mentioning Marxian economics, I wanted to call attention to the need to discuss class and power with respect to political economy, specifically, economic analysis oriented toward public policy. A lot of inequality is attributable to rent-seeking and rent extraction, and that is a function of power — social, political and economic. Policy is the result of application of power asymmetrically.
I would suggest following the these blogs by Marxian economists that deal also with public policy.
Michael Hudson (UMKC, Levy Institute)
heteconomist (Peter Cooper)
David Ruccio (Notre Dame)
Stumbling and Mumbling (Chris Dillow, Investors Chronicle)
Michael Roberts Blog (economist in the City of London for over thirty years)
Also check out Fred Mosley (Mt Holyoke), Andrew Kliman (Pace), Anwar Shaikh (New School), and Michael Perelman (Chico State).
I think more than three links throws you into moderation. Just keep it in mind if your comment takes a while to come up.
Summarizing wht Rjs December 27, 2017 11:53 pm is saying,
What happens to the domestic and global risk profile when the US stops issuing the primary “safe asset.”
Bill Michell relates that when Australia started running surpluses and therefore ceased issuance of public debt, the financial and business communities prevailed on the government to issue public debt on demand to meet the need for a safe asset denominated in the unity of account.
There is no operational need for a currency sovereign to issue interest paying debt at all, since government is capable of self-funding through “overt money operations.” As a result interest on public debt constitutes a subsidy, which is inefficient and should be eliminated unless justified. The operational justification is provision of safe assets.
Tom & Rjs,
Looking at some of the links you suggested, it would seem that government debt is needed to allow the private sector to save in order to invest. To me there are a lot of holes in this argument.
1a. Empirical observation. The most recent instance of a period of sustained surpluses in US history was most certainly not characterized by a stagnant private sector starved for investment funds. That period also didn’t end with an economic catastrophe.
1b. Another problem with the links is that the authors seem to suffer from a misunderstanding of how the money supply is created. This can also be seen with a look back to the mid and late 90s. Simply put, M1 was relatively flat, the growth rate of M2 increased relative to previous few years, and the growth rate of M3 grew even faster relatively to recent prior periods. By any measure MS was not an issue.
1c. Even if we assume that the issuance of debt is the Fed’s favored method of regulating the MS, it doesn’t assume this is the Fed’s only method of regulating MS or that other methods cannot be added. Sovereign money predates sovereign debt in history, so it is certainly feasible.
2a. We have an open economy. In the infinitesimally unlikely event that Trump et. al. know what they are doing and the upcoming tax cuts lead to a sustained period of 4% growth in real GDP per capita and we start paying down debt… it isn’t as if there aren’t plenty of governments looking to borrow money.
2b. If Japanese government debt is measurably worse or less safe or whatever than US treasuries, and this difference is somehow vital to corporate lenders, exactly why is it up to the US taxpayer to maintain these quality financial instruments?
2c. If we assume a need for the US taxpayer to be the patsy. is there not some limit to the patsy-hood? We survived just fine with much smaller debt levels prior to the GW & BO debt explosion.
There are two disjointed worlds in Washington: the spending and the revenuers. Revenuers include printers in the treasury to make cash to borrow abetted by the federal reserve banksters to further muddy the waters.
The spending side is divided between the discretionary spending wolf whose wars consume 60% (IOU’s from war disabilities are paid in ‘entitlements’) and gnawing pork displaying varying degrees of mismanagement. The image of discretionary mismanagement to transferred to entitlements’ lamb.
Entitlements lamb includes welfare and the thugs always link welfare and the New Deal payroll tax funded “insurances”.
The revenue/fleecing side is a flock of two sheep. Progressive taxes which are bad, and payroll taxes which since the 1940 (except a short time in early 70’s and the past few years) cover cash thrown around in discretionary pork that was not collected by evil progressive taxes.
The New deal side of the entitlements lamb was only attacked by the sponsors of Ronald Reagan while it provided cash to hide the discretionary wolf packs predations.
Since the great recession the New Deal lamb has stopped feeding the wolves.
“They have been after the New Deal since it was new”.