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
Showing posts with label debt reduction. Show all posts
Showing posts with label debt reduction. Show all posts
Thursday, May 10, 2012
Sunday, February 26, 2012
Why the current level of debt not mattering matters
Last post, I went to some lengths to deflate some of the distortions in the popular "If the U.S. budget was like a household budget" meme. The point of that was to try to put the discussion into a more useful context, and to point out that none of the bad things we'd expect if our debt was actually too high are happening. However, some friends pointed out that none of that is any reason not to reduce the debt. Presumably some good stuff will happen if we do since being in debt is "bad". That would be fine, except that deficit reduction is anathema to many important policies that can and should be implemented under the current circumstances.
When you look at the national debate, the competing visions are basically stimulus & infrastructure programs on the "liberal" side and severe spending cuts on the "conservative" side. Ignoring for the moment the fact that "conservatives" are preaching spending cuts as essential for deficit reduction while simultaneously promising to increase the deficit even more by lowering taxes on the rich, let us simply consider these arguments as "economic stimulus" versus "deficit reduction".
If the key priority is deficit reduction, then certain policies suggest themselves very strongly: reducing investment in our most expensive programs, curtailing aid to state and local governments, raising taxes, freezing federal payrolls, and maybe even liquidating obsolete or unnecessary government assets. If the key priority is stimulus, then increasing investment in infrastructure, expanding or maintaining social safety net programs, and providing additional aid to state and local governments all seem pretty important.
I pointed out last time that none of the bad things we'd expect based on high debt are happening. By contrast, tons of bad things we'd expect from a bad economy are happening: high unemployment, wasted resources, stagnant wages, and slow growth.
All the stimulus priorities cost money, so "deficit-hawks" are likely to object to them, and if we have bought into the idea that the deficit is indeed at dangerously high levels, it is much harder to override those objections. Even if we did see evidence that our debt was dangerously high, we might conceivably want to pursue stimulative policies, but that would be a debate worth having. The current debate is not worth having, and it is completely distorting our national priorities away from a genuine need towards an imaginary one.
When you look at the national debate, the competing visions are basically stimulus & infrastructure programs on the "liberal" side and severe spending cuts on the "conservative" side. Ignoring for the moment the fact that "conservatives" are preaching spending cuts as essential for deficit reduction while simultaneously promising to increase the deficit even more by lowering taxes on the rich, let us simply consider these arguments as "economic stimulus" versus "deficit reduction".
If the key priority is deficit reduction, then certain policies suggest themselves very strongly: reducing investment in our most expensive programs, curtailing aid to state and local governments, raising taxes, freezing federal payrolls, and maybe even liquidating obsolete or unnecessary government assets. If the key priority is stimulus, then increasing investment in infrastructure, expanding or maintaining social safety net programs, and providing additional aid to state and local governments all seem pretty important.
I pointed out last time that none of the bad things we'd expect based on high debt are happening. By contrast, tons of bad things we'd expect from a bad economy are happening: high unemployment, wasted resources, stagnant wages, and slow growth.
All the stimulus priorities cost money, so "deficit-hawks" are likely to object to them, and if we have bought into the idea that the deficit is indeed at dangerously high levels, it is much harder to override those objections. Even if we did see evidence that our debt was dangerously high, we might conceivably want to pursue stimulative policies, but that would be a debate worth having. The current debate is not worth having, and it is completely distorting our national priorities away from a genuine need towards an imaginary one.
Saturday, February 18, 2012
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
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
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
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?
(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?
- 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).
- 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
- It might transfer large amounts of wealth from our economy to some other nation's central bank.
- 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)
- 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?
- 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)
- Banks have massive excess reserves available for loaning and borrowing costs are historically low... no crowding out
- 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.
- 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.
- Inflation is. you know, average...
 |
| US Inflation Rates |
Tuesday, July 19, 2011
Reason #1 that the debt debate is insane
1. Lenders want to give us money for free.
For most people, borrowing money now means paying back more money later, so of course it seems reasonable to think the same is true for the government, but as Yglesias points out current interest rates on short term loans to the US government are less than inflation expectations. To put this another way. We can borrow 100 real dollars and pay back 95 real dollars (fake numbers for example purposes). THIS IS FREE MONEY. Under these circumstances, it is insane to believe that we need to borrow less in the short term. Obviously these interest rates wont last forever, and are subject to supply & demand &c, but consider that if we refinanced our whole debt at current rates we would effectively reduce its size.
For most people, borrowing money now means paying back more money later, so of course it seems reasonable to think the same is true for the government, but as Yglesias points out current interest rates on short term loans to the US government are less than inflation expectations. To put this another way. We can borrow 100 real dollars and pay back 95 real dollars (fake numbers for example purposes). THIS IS FREE MONEY. Under these circumstances, it is insane to believe that we need to borrow less in the short term. Obviously these interest rates wont last forever, and are subject to supply & demand &c, but consider that if we refinanced our whole debt at current rates we would effectively reduce its size.
Everyone (sane) agrees that any austerity measure (whether it be tax increases or spending reductions) will negatively impact the economy, so why do it when investors are willing to give us money for nothing (which we could then use to improve the economy through Keyensian stimulus). In the long run, we have a deficit problem that needs to be addressed, but in the short run people are willing to give us free money that can help address our long term problem by a) reducing our real debt long term, and b) allowing us to accelerate the recovery by increasing demand for goods and services through further stimulus spending.
People are complaining that politicians want to kick the can down the road on deficit reduction. It turns out that that's the fiscally responsible thing to do.
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 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.
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.
Tuesday, February 22, 2011
Entitlement (edited for improvement)
EDIT: This post is badly written and reasoned. I have other better opinions about this that I will one day expound upon. I'm leaving this up as a sort of "history of Rory's thoughts" post, but it no longer reflects my views on this subject.
Today we will settle once and for all the argument about entitlement programs. People hate these for all sorts of reasons. Commonly cited:
1. We can't afford them
2. Big Government is bad
3. Government shouldn't enforce redistribution of wealth (related to 2); leave charity to the choice of individuals
4. Moral Hazard (Perverse incentive encouraging them what are poor not to do work)
In brief, my responses to 1-4 are as follows:
1. As they are now, agree
2. what does that even mean?
3. I am too angry to briefly address this, but it is stupid and I can prove it with Science and also Reason (related to 2)
4. Sure, there is moral hazard, but you know what else is morally hazardous? allowing innocent people to suffer and/or die when you could have given up money to stop it (related to 3, and 2)
Later, when I am less angry, I will write some stuff about how misguided beliefs 2 through 4 are. For now, I will content myself with my proposal to remove the legitimate objection (that's number 1 for those of you who werent counting, or can't)
Once again, I propose a rights based approach. Here's the deal: the thing I care about most is that people who are poor don't die or get sick or get injured on account of being poor. I think that when that happens it is bad and also not good. That's my primary concern. So I figure, we should do with other entitlement programs what we've done with our most successful entitlement programs to date (education and the post), give them to everyone, everywhere, and make everyone, everywhere, pay for them.
In practice, I think it would look something like this:
1. Mail everyone a multi-vitamin with the stuff that peeps actually need in it (as much as medical science can anyway)
2. Mail everyone food stamps or maybe even actual food to the point where every person has the means of acquiring enough calories to be healthy
3. Guarantee FREE emergency and routine medical care (though only for bottom shelf medicines, treatments, &c)
4. Provide some baseline housing allowance to all people, payed directly from the government to the provider of housing (so the money can't be redirected to, you know, drugs or the like)
Please note that this system would apply equally to everyone. Any purchases you made above and beyond this would of course be up to you, but there would be no reason for (for instance) health insurance companies to provide a basic coverage package, though there's still plenty of incentive to buy health insurance if you want to benefit from the pinacle of medical science and have the money to do so. Furthermore, the government would be paying hospitals for all of their procedures, rather than forcing them to eat the cost of emergency medical care for the uninsured (as they currently do). Likewise, the rich could put their housing allowance towards their second or third home, and would benefit as much (monetarily) as the poorest people. The rich would also get their vitamins and food stamps, but would have the opportunity to go out and pay the premium on top of those food stamps to get nicer food or eat at restaurants and the like.
How would we pay for this? Taxes! and yes, stepped taxes, that means that the rich will pay out more in taxes than they take in in government living support. On the upside, they will never ever ever have to feel guilty when they don't want to give a beggar money, on account of they KNOW BEYOND A SHADOW OF A DOUBT that that person has enough food, nutrients, shelter, and medical care.
Incidentally, if we do this we can get rid of social security, medicare and medicade, which would be nice. Since we're not providing any income or luxuries, people would still be motivated to find work, but if they didn't find work, no one's health would be at risk. As a bonus, no one would ever die from neglect-by-society which, you know, could be cool. Let me know what you think, and feel free to point out how I might be an idiot and am also almost certainly a communist.
EDIT: How does this save us money on entitlements?
This saves us money in a few key ways. First of all, it lets us get rid of social security. Secondly, it dramatically reduces the benefits provided to people (no cell phones, no cash-per-kid). Thirdly, it eliminates the possibility of fraud and all of the resources that attempting to combat that would take up. Fourthly, it simplifies the system, greatly reducing the administrative cost of running it. The administration required to support such a system would basically be post office infrastructure, and maybe a way to connect landlords and their client's housing allowance.
Today we will settle once and for all the argument about entitlement programs. People hate these for all sorts of reasons. Commonly cited:
1. We can't afford them
2. Big Government is bad
3. Government shouldn't enforce redistribution of wealth (related to 2); leave charity to the choice of individuals
4. Moral Hazard (Perverse incentive encouraging them what are poor not to do work)
In brief, my responses to 1-4 are as follows:
1. As they are now, agree
2. what does that even mean?
3. I am too angry to briefly address this, but it is stupid and I can prove it with Science and also Reason (related to 2)
4. Sure, there is moral hazard, but you know what else is morally hazardous? allowing innocent people to suffer and/or die when you could have given up money to stop it (related to 3, and 2)
Later, when I am less angry, I will write some stuff about how misguided beliefs 2 through 4 are. For now, I will content myself with my proposal to remove the legitimate objection (that's number 1 for those of you who werent counting, or can't)
Once again, I propose a rights based approach. Here's the deal: the thing I care about most is that people who are poor don't die or get sick or get injured on account of being poor. I think that when that happens it is bad and also not good. That's my primary concern. So I figure, we should do with other entitlement programs what we've done with our most successful entitlement programs to date (education and the post), give them to everyone, everywhere, and make everyone, everywhere, pay for them.
In practice, I think it would look something like this:
1. Mail everyone a multi-vitamin with the stuff that peeps actually need in it (as much as medical science can anyway)
2. Mail everyone food stamps or maybe even actual food to the point where every person has the means of acquiring enough calories to be healthy
3. Guarantee FREE emergency and routine medical care (though only for bottom shelf medicines, treatments, &c)
4. Provide some baseline housing allowance to all people, payed directly from the government to the provider of housing (so the money can't be redirected to, you know, drugs or the like)
Please note that this system would apply equally to everyone. Any purchases you made above and beyond this would of course be up to you, but there would be no reason for (for instance) health insurance companies to provide a basic coverage package, though there's still plenty of incentive to buy health insurance if you want to benefit from the pinacle of medical science and have the money to do so. Furthermore, the government would be paying hospitals for all of their procedures, rather than forcing them to eat the cost of emergency medical care for the uninsured (as they currently do). Likewise, the rich could put their housing allowance towards their second or third home, and would benefit as much (monetarily) as the poorest people. The rich would also get their vitamins and food stamps, but would have the opportunity to go out and pay the premium on top of those food stamps to get nicer food or eat at restaurants and the like.
How would we pay for this? Taxes! and yes, stepped taxes, that means that the rich will pay out more in taxes than they take in in government living support. On the upside, they will never ever ever have to feel guilty when they don't want to give a beggar money, on account of they KNOW BEYOND A SHADOW OF A DOUBT that that person has enough food, nutrients, shelter, and medical care.
Incidentally, if we do this we can get rid of social security, medicare and medicade, which would be nice. Since we're not providing any income or luxuries, people would still be motivated to find work, but if they didn't find work, no one's health would be at risk. As a bonus, no one would ever die from neglect-by-society which, you know, could be cool. Let me know what you think, and feel free to point out how I might be an idiot and am also almost certainly a communist.
EDIT: How does this save us money on entitlements?
This saves us money in a few key ways. First of all, it lets us get rid of social security. Secondly, it dramatically reduces the benefits provided to people (no cell phones, no cash-per-kid). Thirdly, it eliminates the possibility of fraud and all of the resources that attempting to combat that would take up. Fourthly, it simplifies the system, greatly reducing the administrative cost of running it. The administration required to support such a system would basically be post office infrastructure, and maybe a way to connect landlords and their client's housing allowance.
Subscribe to:
Posts (Atom)