Is an Increased Federal Deficit good or bad ?
As the Senate decides whether to send an additional $1400 to US residents, there are two macroeconomic policy issues. One is whether aggregate demand stimulus would be useful. The other is whether we should be concerned about the budget deficit.
I think that the case for fiscal stimulus is medium strong and the case for higher Federal Debt is very strong. Thus I agree with Donald Trump and Bernie Sanders and disagree with Larry Summers.
The case for stimulus is only medium strong. Unemployment is fairly high, but part of this is an efficient response to the risk of Covid Transmission. There are two ways to argue that demand is undesirably slack. One is below peak employment in sectors which are not especially directly affected by Covid 19 such as construction. The other is that core inflation is below target and falling. Both are enough to convince me that general stimulus is OK.
But mostly the amazing fact is that the 30 year TIPS real interest rate is negative. This means that investors are willing to pay the US Federal Government to store their wealth safely. Given this, I think there is a very strong case for selling more long term bills and giving the money to residents. The interest rates assert that the US Federal Government intertemporal budget constraint is slack. This can’t be Pareto efficient.
I anticipate the concern that interest rates might rise. That is why I graphed the 30 year rate, which is locked in now. If interest rates rise, investors will lose money, but it won’t create a new problem for the Treasury. Also these are real rates (paid in multiples of the consumer price index) so deflation wouldn’t be a problem for the Treasury (although it would be a catastrophe for the economy).
Given the market interest rate, the ration of the debt to GDP should fall roughly in half over the life of the bonds. If the rates lasted, rolling over the debt would be a source of income indefinitely. The argument is absurdly simple. It is also valid.
The only concern is that public debt might crowd out private investment. This could cause higher returns on capital and lower wages with undesirable distributive effects. This problem can be managed by shifting taxation from labor to capital.
I am convinced that raising the subsidy to $2000 is an improvement.
That does not mean it is optimal policy. It would be even better to increase and extend the additional unemployment insurance. The fear that people would turn down jobs if (temporary) unemployment insurance paid more than a permanent job, was contradicted by the empirical evidence. Also people staying home and collecting checks will continue to make sense as a public health measure, until the Covid 19 vaccines are no longer in short supply.
Also aid to state and local government is urgently needed (and politically impossible). There has already been a second decline in government employment. This makes no economic sense — it is the result of State Constitutions and GOP ideology.
More money in the hands of people who are not social distancing disturbs me.
Still can’t edit my poor proofreading.
More money in the hands of people who are are still employed but are not social distancing disturbs me.
But mostly the amazing fact is that the 30 year TIPS real interest rate is negative.
——–
The tips market is a separate insurance market. Look at CPI, zero for the year. Then take the .9&%rate, add in the .6% seigniorage and we get a 1.5% cost of money, real cost. Take the total interest charges we pay divided by total debt, the number of about 2%, our current cost on previous debt.
Or consider the trilemma. When reserves drop, seigniorage automatically goes up. That is a trilemma and subject to hedges that yield quite a net. The central bank is currently investigating certain suspicious activity that may have been a money maker on the trilemma, Soros variety.
Not convinced? OK, Why do rates always seem low? They always drop from current levels and we are told to borrow today, but never told us rates will drop later. Why are we consistently fooled?
The Fed is currently blind as a bat. Velocity near one implies the data we receive is noisy and later Look at velocities, M1 and M2, they flat lined at four and one, as on is collected monthly the other quarterly.
The flat lined velocity means everyone in the economy is avoiding the fed tax, moving more distribution in house, and none of the cities are collecting retail sales tax.
Still not convinced? In Spain they are closing bank accounts for deposits because the regressive EU central bank tax is too high. Retail credit across the USA is in decliner, fiat banks closing their doors.
We do not have low rates, we have a sever banking crisis as a matter of fact.
Good article and it is actually about economics. Who knew? OTOH, I am concerned about the comments though. Maybe there is a coffee shortage that I did not know about because I stockpiled ground Columbian a month ago.
Of course, it would be better if we did not need to increase the federal fiscal deficit, no pandemic, no trade deficit, higher capital gains tax for assets held under five years. I want a pony too.
“They said the old jewish system wouldn’t survive, but the Aristocracy were enjoying the debt game and acting like homosexuals.”
AB allows comments that smuggle in anti-semitism and homophobia. Sad.
Joel:
No, we don’t.
I was at the Infusion center early this morning. Just back now. I happened to go on line using my IPhone while being infused and noticed the complaint and the comment. Texted Dan who also has issues and he spammed the comment. I can not be everywhere and I just got home.
Even though we are not Jewish, we have been part of the Jewish community for a couple of decades now. Enough so that my wife’s boss says my wife is more Jewish than she is. I am sensitive to this type of issue, minority brutality, gender issues, etc.
I hope I am making sense as I am groggy right now and will be out of sync for the next couple of days.
The blog is cursed.
Joel,
“…Sad.”
[Censorship is sad. Ignorance is ubiquitous. It cannot be reasonably censored into oblivion. Echo chambers are oblivion.
Why not counter wrong headed tropes with historically or scientifically correct explanations of the conditions that have been misrepresented? Of course, sometimes liberal biases also get in the way of facts.
Reversal of cause and effect is where “the old jewish (banking) system” originated. The Jewish diaspora had fled Israel from invasions by Roman and Moslem armies only to find themselves persecuted in Eurasia wherever they settled. Their solution was to take up occupations that were so in demand that the local aristocracies would extend them some protection such as apothecaries (doctors of the times), accountants (dear to those with gold and monies), and bankers (ever so loved by those that had money even if despised by those that had none).
Even today anal sex is more prone to transmission of disease than other methods, but in antiquity there was no latex protection.]
EMike,
Cursed perhaps, but not by comments. I recall that you wanted greater censorship of comments back in our EV days, something that you had in common with Anne. However, EV had far more comments per thread, but more importantly the majority of articles posted by Doc Thoma to top threads or in the aggregated links threads were of much higher quality than we have here.
arne
i agree with you. “stimulus” may not be what the economy needs, but the people who cannot work need money. i think the answer is higher unemployment compensation paid for by higher unemployment insurance premiums paid by those who do have jobs. stimulus will follow, but is not the point. [well, will stimulus follow if more money for some is equal to less money for others? i think yes, because those who have money in an economy that is not working are more likely to try to save it, while those with less money have to spend it.
of couese i’d be happier if so much of the money they “have to” spend were not going immediately into the hands of banks and slumlords. no, not all landlords are slumlords, but our political system seems to find it impossible to make fine distinctions, especially those that might direct money away from people in high places.
Ron
i was a little confused by Joel’s objection to comments that smuggle in…
i had not seen the comment until he mentioned it.
as for smuggling in… i guess i’d rather see the nasty comments than have to guess what the people were thinking in the privacy of their own web sites.
but this is not a question of censorship… we are not “the government” or under the direction of the government for what we can publish. and we can certainly refuse to publish what we find offensive. i think we have a good chance of telling the difference between what is offensive and what we merely disagree with.
i am not in a position to compare the “quality” of AB to any other site. i like AB…after all, they let me publish…and i am not always so enamored of “high quality” essays which “smuggle in” high toned ignorance in a cloak of erudition and techno-speak.
Ron,
I never wanted greater censorship at all. I did ignore several different people, not because of disagreements, but because of lies.
I alos think the quality of posts in here are at least as high quality of EV. In some areas the quality is much higher. As an example, healthcare.
Coberly,
A gun in my face or a 2X4 swung at my head are offensive. Indeed though some words are better informed than others, not so much offensive as dumb though. What Joel found offensive I found grossly misinformed. JM Keynes was accused of antisemitism in the years before WWII, but Keynes was not misinformed but rather candid. Lying from people that we are supposed to trust is very disappointing, although Trump did find a way to take it to the level of offensive. On a personal level, then call me anything – just don’t call me late to dinner.
Most of the dumb words we get here would appear to be the mumbling of those not financially nor intellectually equipped to have their own web site. Although I frequently disagreed with the academic orthodoxy of articles that I read on EV, they were at least challenging to refute and provided useful insight into the status quo academic establishment that has so failed us.
EMike,
I am thinking economics.
Healthcare has lots of good sources of information available online. Family and friends in nursing provide the heterodox alternative views. Wife and her oldest sister work for Anthem BC/BS as business systems analysts. My own BSA experience in banking, life and health is ancient now, but sufficient to help sift the BS from my BSA contacts.
I recall a lot of whining from you regarding the EV troll factory.
Ron,
see there, we don’t disagree by much if any. my daughter runs a website that has nothing to do with politics. she still has occasion to delete comments that are offensive, “against the rules,” or so contrary to the philosophy she is promoting that she does not care to debate them endlessly.
i don’t think any of that is “censorship.”
in my own case i got tired of endlessly answering sammy and krasting and would have “censored” them if i had the authority. that goes against my nature which is to debate honestly and frankly. but sammy became insulting and offensive to no purpose except to bait me. and krasting was just so impervious to any argument that it was futile and time wasting to keep replying to him, yet left me feeling that giving him the last word looked like i was unable to answer his frankly mindless assertions.
so i have a lot of sympathy for censorship, or selective publishing, in a private site. less so in a public forum, though after watching the Trump and Fox News assault on sanity i began to find myself in sympathy with poor John Adams who signed the Alien and Sedition acts.
i think there is a balance to be found here, and i trust myself to find it. i’m not so sure i would trust anyone else.
and yes, i like intellectually respectable discussion, but i try not to fall in love with it just because it is intellectual. and i am grateful to those who can translate intellectual into understandable by the non-initiate into the mysteries.
your reply to Joel’s bigot would have been better than censoring his comment. would actually like to see your argument expanded. but after ten such comments by said bigot or others, i think i would just not give them the time or space.
One more argument: Net interest paid on the national debt averaged less than 1.5% of GDP in the past 20 years, down from more than 2.8% in 1981-2000. The CBO forecasts an average 1.44% in 2020-30.
Joel
you are making sense. as much sense as the rest of us.
Run
oops.
i thought i was answering Joel. Turns out I was answering you.
but you always make sense.
“What Joel found offensive I found grossly misinformed.”
A lot of offensive and bigoted speech is grossly misinformed. I don’t visit AB for misinformation either.
This isn’t about me personally. I’m neither Jewish nor gay. But I’m a mature adult and I can spot bigotry. My only question was whether this is the sort of sordid discourse that AB valorizes.
Joel:
I do not tolerate much and often times am way ahead of the this type of offensive speech.
Thank you for saying something about what was occurring.
Joel,
you have been around long enough to know this is not the sort of sordid bigotry that AB valorizes.
i guess that technically you are making “sense” but in a kind of overwrought way.
OK I want to make an argument that was made more extensively but in my view less clearly in the book Between Debt and the Devil. You can expand the money either by expanding government debt or expanding private debt, there is no other way. If we are agreed that the money supply should be expanding roughly in line with nominal GDP (at say 5% a year to avoid problems with debt servicing), then if we are not going to avoid expanding private debt then we need to expand government debt at up to 5% a year, greater than that if private debt is already overextended.
Just as an aside – there is also the possibility of the balanced budget multiplier if government spending has a higher multiplier effect than money that is taxed would have had. Robin Hood taxes would tend this way, but propensity to import may need to be considered if it is not used for direct subsidies.
Coberly,
“…i think there is a balance to be found here, and i trust myself to find it. i’m not so sure i would trust anyone else…”
[YES, my sentiments exactly.]
“…your reply to Joel’s bigot would have been better than censoring his comment. would actually like to see your argument expanded…”
[Too late now. It was exactly the kind of misunderstanding that got Mike Stathis blackballed by the media in 2008. Stathis had warned the world in his 2006 book America’s Financial Apocalypse: How to Profit from the Next Great Depression. Economists and politicians and most people ignored Mike’s warnings. Bernanke would not meet with him no matter how much Stathis tried. When the crisis did happen the embarrassed media pundits ignored him completely. Unfortunately enough Stathis did not take it well and became more and more like his accusers were saying (ranting against the Jewish banking conspiracy), but it was not at all the same Mike Stathis that I saw on CSPAN BookTV in 2006. CSPAN BookTV took Mike’s video down from their archives along with a very telling 2006 video of Greenspan. Sure Stathis had a personality problem, but in 2006 he was one of few voices in the wilderness that stood up to the establishment and warned of the coming problem with liar loans, subprime mortgages, and especially credit default swaps.
I had little patience with people after I returned from Vietnam. It was raising three girls that brought me back around. In Vietnam I had learned to suppress worry and fear in order to use the adrenaline. My two youngest were blonde and pretty little girls. There is nothing on Earth more frightening that having that responsibility. I learned to actually control my fear, rather than just suppress it. Somehow this process developed in me more self-confidence than I had since I was drafted. Now my girls are grown with grown children of their own and not such knockouts as they were as little girls. Nothing rattles me any more. At my age then there will always be time enough to die, so what is the hurry and what is there to be afraid of?]
P.S., such a level of maturity is called emotional intelligence. It is quite rare.
When we can freely choose who that is worthy of our empathy then is it still empathy or rather just peer selection?
Teach your children, your friends, and, most of all, your enemies.
Ron.
“who is worthy of our empathy…”
“love your neighbor as yourself”
repeating a point i tried to make above, but nobody heard:
we don’t need a “stimulus” we need to feed people and see that they can stay in thier homes. a tax on thee haves right now,paid out immediately to the have nots, would not increase the debt or decrease GDP.
when the pandemic is over we can go back to worrying about stimulus. but try to keep in mind that cancer is a “growth” and so is obesity and so is addiction.
it worries me that liberals and progressives, though they know better, ALWAYS jump on the endless growth “economics” bandwagon.
quite similar to the people who write pretty good books about the Big Lies told about Social Security and then propose “solutions” that assume the Big Lies are true.
I think I understand the brain mechanisms that make this almost inevitable, but that is another story i should not even mention… except to hope some people will keep it in mind when they offer first-thought solutions to problems they already know the deep reasons why those first thoughts won’t work.
not only do we not need a stimulus: a stimulus will not work. we are not suffering from a lack of investor confidence or a lack of funds available to the investor class
we are suffering from a lack of work due to a pandemic.
[but we have been suffering from too much money available to the investor class for quite a few years now.]
Coberly,
“love your neighbor as yourself”
[Exactly. Sympathy is not empathy and in some ways is almost the opposite. Empathy is for peers and sympathy is for others whose conditions are so terrible that it makes us feel guilty for our fortune. OTOH, empathy may make us feel guilty for our own darkness if extended too freely, so we seek greater comfort in denial.]
Coberly,
“…but nobody heard…”
[I hear you and I feel you too. Unemployment benefits and food top my list. Stopping payments to the rent collectors puts them behind with the banks, which I feel more as a matter of empathy than sympathy. If Uncle filled the gap payments it would be fine with me. Survival is more a worry than inflation.]
Coberly,
Happy New Year, Dude and best of luck to you.
ron
i am one of those evil rent collectors…due to a chain of circumstances not interesting enough to go into. the foreclosure moratorium is actually hurting my “tenants” and probably going to destroy me financially.*
nevertheless i have more sympathy (empathy?) for tenants than rent collectors.
(as for the distinction between sympathy and empathy… i’ll have to think about that)
*there is a difference between foreclosure and eviction. i need to foreclose in order to prevent eviction. the law is a wonderful thing.
https://www.6seconds.org/2018/10/30/empathy-vs-sympathy-what-the-difference/
Empathy vs. Sympathy: What’s the Difference?
What’s the difference between empathy and sympathy? Basically, emotion. Empathy means experiencing someone else’s feelings. It comes from the German Einfühlung, or ‘feeling into.’ It requires an emotional component of really feeling what the other person is feeling. Sympathy, on the other hand, means understanding someone else’s suffering. It’s more cognitive in nature and keeps a certain distance.
This hilarious RSA Animate, narrated by a clip from Brené Brown’s TED talk on empathy, highlights the difference perfectly:
*
[Go to link at top for the animation.]
Coberly,
In my youth and up until my middle age after raising kids and then reconnecting (or trying to) with my activist roots then I was a huge fan of Noam Chomsky. Then I wasn’t. It happened watching him on TV, which enabled me to read him in a way not afforded by articles and books. After that the I just wanted to see a midget mud wrestling act between Chomsky and Milton Friedman, a simple metaphor for what they were in real life.