Delightfully Wonky

I thought I was going to have to do it myself, but this slide-deck from the White House puts together the graphical evidence about economic performance under Obama quite nicely.  Highly recommended for people who want to get a sense of context for the economy.

http://www.treasury.gov/resource-center/data-chart-center/Documents/20120502_EconomicGrowth.pdf

Debunking the "US Budget is like a Family Budget" Nonsense

Because I'm fed up with hearing this crap from even my smart informed friends, I am doing you all the favor of collecting the relevant facts, figures, and context and systematically addressing the common objections.  Please don't make me do it again.

(Mini-Summary For Lazy Readers:
On its face, the Family Budget metaphor ignores assets and misrepresents the US debt situation to make it seem more severe than it already is.  Furthermore, countries that borrow in their own currencies (not the euro states, not most "3rd world" nations because no one trusts their money) need never default because they can print any amount of money they like to service their debt.   And, none of the things we might see if we were actually in "too much" debt are even close to happening.)

The annoying meme that is being passed around looks something like this if you use the CBOs numbers for 2011:

Family Budget

Annual Income:	$23,025
Annual Spending:	$35,981
New Credit Card Debt:	$13,628
Total Credit Card Debt:	$147,900

Looks pretty ugly, right? But then why are there all these articles and op-eds about the debt thing being overblown?  Well, probably the first thing to look at is the "Total Credit Card Debt" thing.  It turns out that that can be split into "Debt Held by the Public" (money the government owes other people) and "Debt Held by Agencies and Trusts" (money the government owes itself), so maybe the budget should look like this:

Family Budget

Annual Income:	$23,025
Annual Spending:	$35,981
New Credit Card Debt:	$13,628
Total Credit Card Debt:	$101,300
Money Dad Owes Mom:	$46,580

That 46k doesn't seem to be a real issue so long as Mom and Dad are on good terms, and thankfully, our government agencies can't divorce the treasury.  Say Mom paid Dad's way through lawschool; but hes only a legal clerk now.  This kind of stuff happens all the time in families and few think of it as part of their debt burden.

Now, absent from the Family Budget is the rather important aspect of "assets".  This isn't by accident... the credit card debt framing makes it seem like all the money was spent frivolously, that the interest rates are high, and that nothing of value is retained by the Family.  Of course none of this accurately reflects reality, and in no place is this more egregious than in the case of foreign debt.  It turns out that one of the assets that are left out of this budget is the foreign stuff we own. We own almost as much foreign debt as we owe:


And we're actually making more money on our foreign investments than it costs us to service the money we owe them:



So where does that leave our family again?  Well according to FRED, we owe 4,660 billion dollars to foreign investors, or in the parlance of our family: $46,600.  Since our income from foreign investments exceeds our payments to foreign investors and our total foreign debt is similar in size to our total foreign holdings, I think it's fair to say that debt is a wash.  Let's look at our family now:

Family Budget

Annual Income:	$23,025
Annual Spending:	$35,981
New Credit Card Debt:	$13,628
Total Credit Card Debt:	$54,700 ( $101,300-$46,600 )
Money Dad Owes Mom:	$46,580

Well, that looks like a tough year (all that new debt), but pretty manageable in the long run so long as we can get spending under control, and that's just what we can do playing by the silly rules of the metaphor.

And those rules are very very silly.  US Government debt isn't like household or business debt for a few very important reasons.  First and foremost, the government happens to own a device called a "printing press" which is miraculously capable of printing any sum of money at virtually no cost.  Secondly, the government is capable (at least in theory) of giving itself a raise through increased taxation, and its revenue stream is much more secure than a regular family on account of it is very difficult to be fire the government, and if you did its debt would disappear anyway.  Finally, all that remaining debt ($54,700) is borrowed from US tax payers and will be payed off by US tax payers, so there's no money actually being lost to the US (though of course the US government would be better off without the debt, but that's very different from the nation of the US).  It might be more appropriate to say that the entirety of the debt in this family budget is owed between members of the family.

If that's true, though, then why would any level of debt be bad, and what signs could we see that we've really gotten to the bad level of debt?  Well, if you borrow in a currency you can't print, and primarily from other countries (like Greece) then your situation IS actually like the family budget, and you might be in trouble.  But, what if you are like the U.S.? What bad things could a large debt do to us?

1. It might increase borrowing costs or reduce access to credit by some other means (such as no one being willing to lend you money at any interest rate at all).
   
2. In the government case, it might "crowd out" business investment (by soaking up all the loan-able funds or by driving up interest rates for businesses and private citizens
   
3. It might transfer large amounts of wealth from our economy to some other nation's central bank.
4. It might transfer large amounts of money from some American Taxpayers to other American Taxpayers in a systematically destabilizing way (like maybe we give all the poor people's money to very rich people and impose huge hardships)
5. It might force us to engage in money printing at a scale which produces dramatic inflation

How does that stack up against our actual situation?

1. It is currently cheaper in real terms to borrow money to pay for things than to pay for things out of current tax revenue. (because the real interest rate on government loans is negative... you can buy a bridge for 100 inflation adjusted dollars now and charge tax payers 100 dollars for it, or you can build it for 100 inflation adjusted dollars on credit and pay back your creditor with 99 inflation adjust dollars later)
2. Banks have massive excess reserves available for loaning and borrowing costs are historically low... no crowding out
3. Our government spends the vast majority of its money on buying things in america, and our net foreign debt is close to zero, so none of this money is leaving our economy.
4. Hard to say on this one.  Our current tax code is mildly progressive (rich people pay a little more than poor people), and bonds are owned primarily by rich people, so it is likely that the wealth transfer caused by debt will be largely from rich people to rich people, but if the tax code got mixed up maybe something systematic and bad could happen.  Doesn't look like a big problem so far though.
5. Inflation is. you know, average...

US Inflation Rates

The 14th Amendment and the Debt Ceiling (Rory versus Harvard Constitutional Scholar, round 1)

Some people think that the Debt Ceiling is unconstitutional, others don't.  I think the others are wrong.  Here's a sample of the argument against.  I feel uncomfortable going head to head against a Harvard constitutional law scholar (though, to be fair, he'll never read this and wouldn't care about my opinion if he did, so that reduces my discomfort significantly), but I have to say that his line of thought seems to be pretty shoddy.  Let's take a look at the relevant extract:

Some have argued that this principle prohibits any government action that “jeopardizes” the validity of the public debt. By increasing the risk of default, they contend, any debt ceiling automatically violates the public debt clause.

This argument goes too far. It would mean that any budget deficit, tax cut or spending increase could be attacked on constitutional grounds, because each of those actions slightly increases the probability of default. Moreover, the argument is self-defeating. If it were correct, the absence of a debt ceiling could likewise be attacked as unconstitutional — after all, the greater the nation’s debt, the greater the difficulty of repaying it, and the higher the probability of default.

Other proponents of a constitutional deus ex machina have offered a more modest interpretation of the public debt clause, under which only actual default (as opposed to any action that merely increases the risk of default) is impermissible. This interpretation makes more sense. But advocates of the constitutional solution err in their next step: arguing that, because default would be unconstitutional, President Obama may violate the statutory debt ceiling to prevent it.

The Constitution grants only Congress — not the president — the power “to borrow money on the credit of the United States.” Nothing in the 14th Amendment or in any other constitutional provision suggests that the president may usurp legislative power to prevent a violation of the Constitution

Okay, so, he's right so far as he goes.  The argument that the "increased risk of defaulting" is the reason the debt ceiling would be unconstitutional is indeed stupid, for exactly the reasons he points out.  Furthermore, his assessment that the president does not have the constitutional authority to borrow money on the credit of the United States is correct.  But he's arguing against straw men.  The real issue is this: the debt ceiling mandates a default on the full faith and credit of the united states, given certain conditions (the rising of government expenses).  Not only does it make this mandate, but forcing a default under this condition is in fact the only purpose of the debt ceiling.  It has no other function.  In the event that it actually acts, that is what it does.  This seems obviously to "question" the "full faith and credit of the United States", and must therefore be unconstitutional.

As to what the president (or anyone) can do about it.  It's hard to say.  One could argue that congress approved the spending by signing the various bills doing the spending into law, but that doesn't necessarily mean that they approved the borrowing, they could have planned to pay for it some other way.  However, since they didn't make any laws to pay for it in another way, one might reasonably assume that they meant for the money to be borrowed, because that's how it works any time we don't run up against the clearly unconstitutional debt ceiling.  Ergo, Congress has implicitly approved the borrowing and no one is usurping any legal powers by going ahead and implementing their implied will.

This is all stupid though.  We can't enact contradictory laws, and if we do, we implicitly repeal the contradictory bits of the older law.  The current contradiction is that in February of 2010, congress passed a law limiting public debt at 14.294 trillion dollars, and since then, has mandated spending and revenue such that public debt must exceed 14.294 trillion dollars sometime in early August.  Present law supersedes past law.  Problem solved.

Signs of Sanity (even on RedState)

For those of you who don't know, RedState is the foaming at the mouth conservative blog that manages to occasionally include some form of evidence or (more rarely) reason in their discussions.  I like to highlight these moments as a matter of principle.  Here's one in which they admit that the debt ceiling absolutely has to be raised and that it was stupid to use it to do the deficit reduction thing.   Now, the post has some weird ideas about government spending.  For instance, this line:

The underlying politics is as follows: the American people are sick and tired of deficit spending. The pundits are completely wrong when they downplay this issue, because deficits are FAR worse now than they ever have been in peacetime (10+% of GDP). And they got far worse at almost the exact moment Obama was elected president.

I don't know why people keep forgetting that we are AT WAR, and that this is the first war in American History that wasn't paid for with higher taxes.  Maybe I got the direction of that wrong; people keep forgetting that we are at war because we have neglected to pay for the two we are in.   And as for the "got far worse at almost the exact moment Obama was elected president" thing, that is completely true, which sort of highlights the fact that he couldn't possibly have been at fault for it.  I mean, if we want to talk about deficit spending... the only president who didn't do it in recent memory has been Clinton.  I'm really not sure why that would give us the idea that Democrats are the ones who don't care about fiscal responsibility, but that sure seems to be the popular opinion.

The other strange thing about the article is that it starts with the premise that the debt ceiling was a bad place to raise the issue, and ends with the conclusion that Republicans should use the debt ceiling to raise the issue, but consistency is maybe too much to ask for.  Still, my complaints about this post have to do with its mission, not its sanity, and I greatly prefer that so kudos to Francis Cianfrocca.