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

Sad Day for my Constitutional Debates

The Debt Ceiling is constitutional, demands massive inflation after August 2nd if we don't fix it, and I am a fail at thinking.

Unfortunately, when considering the legal options for making payments on our obligations I made a rookie mistake.  Brad DeLong cleared things up for me, with help from Yglesias. I forgot that the United States Government is not anything like businesses or households with respect to its finances.  It holds debt in a currency that it has the legal authority to print.  Sadly, this deeply undermines all of my earlier arguments re: constitutionality:

1. Because we can print the money that our debt is in, we need not ever default on our debts.  We can simply print money to satisfy them.  Therefore, the debt limit does not specify a mandatory legal point of default, but instead specifies a mandatory legal point of printing money to pay for things.
2. Because of 1, there is no reason to believe that in passing laws of a certain cost, congress intended to pay for it through borrowing rather than money printing, ergo, making a decision to borrow rather than print money seems clearly to be out of the powers of the presidency.

To add insult to injury, all this implies that there IS a legal way out of this mess if we don't raise the debt ceiling, and since it's the only way I can figure out that doesn't require us to either default (unconstitutional), fail to pay our obligations (illegal), or borrow more money (illegal), we actually have to do it.  Unfortunately, that way is to cause massive inflation and behave like a banana republics or a failed state.

Now, lots of smart people think a little inflation might be nice for our economy right now, but somehow I don't think a shot of a couple trillion new dollars straight into the pockets of real people doing actual spending (rather than, say, giant and growing uninvested bank reserves ala QE1&2) is the safest way to do it.  Either way, I can't imagine our creditors will be thrilled with the whole "let me print you some money for that bill" strategy, so it would probably do bad things to our borrowing ability in the future, but it seems like the only legal way out.  THIS IS STUPID.  

Dear Congressional Republicans, I fire you.  Love, Rory.

P.S.  On an Ironic note, the Gold Bug Anti-Inflation Hawk Republican Congress may be forcing us to adopt highly inflationary policies.  I love politics.

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.

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.