The site belongs to an avowed religious conservative. That doesn’t imply that his data is biased. I find it to be a useful and objective presentation drawn from official sources. His data on the debt and deficit show that it is not a current issue. Dick Cheney would agree with that but it’s not conservative orthodoxy in this election.
Kudos. This is completely correct. It’s standard Keynesian theory, which has a better track record than the alternatives.
As others have pointed out, American treasuries serves a very important role in global finance.
For example, it would be harder for us to control the money supply (which we control by buying and selling treasuries from and to banks), and it would make it harder for us the financial markets to price other debt. If we didn’t need the money we would still want to have some debt outstanding.
[quote]
What is the pro/con of not keeping a moderate deficit?
[/quote
As adaher points out, economies are cyclical. We want to maintain borrowing capacity for when we need it. These will also tend to be the times when interest rates will be lowest (see exception: stagflation). So the idea is to build up debt during recessions and pay them down over time (or at least defease them if you need to keep some debt outstanding).
Our economy can afford to carry a moderate debt balance forever, I don’t know what the magic number is but we can continue to carry a debt equal to some percentage of our economy forever but like I said, we should keep our powder dry for when we need it.
balancing the budget is different than zeroing out the debt. Even if the budget gets balanced every year, we still have the debt unless you run a surplus that is used to pay down the debt. Budgets should see surpluses during good economies and deficits during bad ones.
A chronic large deficit turns into a large debt. If your debt becomes too large, people start to become nervous about your debt and demand higher and higher interest rates to carry your debt, eventually this will suffocate you and you will default on your debt and lots of bad shit happens. Our interest rates are still very low but thats only because everyone else is worse off than we are.
Inflation makes the debt worth less but it tends to make interest rates higher.
This is exactly right. I didn’t realize you were a Keynesian.
False. There were chronic and modest deficits run from 1945-1980, and the debt as a share of GDP declined. This occurred because percentage additions to the numerator (debt) were smaller than percentage additions to the denominator (economic growth). During the Reagan era, deficits were sufficiently high that the debt/GDP ratio rose.
I support hefty budget surpluses during times of economic expansion, but I want to get the underlying economics correct. Technically it depends on your definition of “Debt load”, but the proper measure of debt burden is the debt/GDP ratio.
Not acknowledging basic Keynesian theory as correct is like not acknowledging the laws of thermodynamics. I just disagree with what many Keynesians like Krugman have to say about modern economic issues. I disagreed with the idea of stimulus in 2009 because I felt that it would dig us a deficit hole we’d never climb out of. Krugman and others who were pro-stimulus thought we could add another $1 trillion of debt and it wouldn’t matter because of low borrowing rates.
If we’re talking really, really small, like 1% of GDP or under, fine. But it should also be noted that during that period, the government also shunned serious stimulus. So we never really ran huge deficits either. If the government had ramped up deficit spending to 10% of GDP during every recession in the 1945-1980 period, Reagan would have inherited a huge mess.
Maintaining an ongoing debt is like missing a leg. You can get along for your entire life with a missing leg if you have to but you’re a lot better of not doing it.
Around eight percent of federal government spending is interest payments on the debt. We get nothing for that money. If we paid off the debt and eliminated those interest payments, we could cut all taxes by eight percent and make no reductions in any government spending.
This is confusing. You agree with Keynesian theory but believe it should never be applied?
Not sure where we’re going here but…
There’s a chart that decomposes the sources of the budget deficit here. In 2011, during peak stimulus, most of the budget deficit consisted of the sum of a) Bush tax cuts, b) the War in Iraq and c) predictably lower tax revenues and higher automatic safety net spending caused by the downturn. Not the stimulus efforts. Cumulatively: By themselves, in fact, the Bush tax cuts and the wars in Iraq and Afghanistan will account for almost half of the $18 trillion in debt that, under current policies, the nation will owe by 2019.[1] The stimulus measures and financial rescues will account for less than 10 percent of the debt at that time.
Deficit spending peaked at 10% during fiscal year 2009 (which started in ~Oct 2008, before the election).
Budget deficits during the 1960s averaged 1.0%, including the 2 years of budget surplus. Budget deficits during the 1970s averaged 2.2%: no surpluses were run during that time. Budget deficits during the 1980s averaged 3.7%, which led to a rising debt/GDP ratio.
It should be applied to recessions where the boom that preceded it saw sound fiscal management, preferably surpluses. If we’d been in Canada’s financial position heading into 2008, sure, spend $2 trillion. But we didn’t. Our debt to GDP ratio is now nearing 100% and we still haven’t got an economy that isn’t reliant on stimulus according to some Keynesians like Krugman.
That’s what I said. They didn’t run surpluses, but they didn’t do huge stimulus either during recessions. That’s a viable policy as well, although it’s not really Keynesian.
If we’d had Clinton and then Obama and left out the Bush years, that would be ideal Keynesian policy: Clinton running surpluses in good times, Obama running deficits in bad. But Bush and the Delay Congress ran up big deficits in good times and severely damaged our financial position such that deficit spending drags our economy down.
It only drags our economy down to the extent that investment is crowded out or an appreciated dollar squeezes exports. Neither applies during this Lesser Depression: think about the accelerator effect. As the economy approaches potential GDP, these things will start to matter though.
Actually, the Reinhardt/Rogoff paper demonstrates that whenever debt gets to 90% or higher of GDP, it starts to be a major drag on growth in itself. And the CBO assumes that deficits reduce growth in their scoring models.
Yeah, people keep forgetting that the federal fiscal year starts in the third quarter (not really sure why they do this). The majority of the deficit was not stimulus.
Ok, I’m going to risk making a somewhat exotic argument in favor of hefty surpluses during times of prosperity.
The interest rate represents an equilibrium between the savings decisions of those planning for retirement and the demand for investment. It reflects the preferences of today’s workers, but not those of future generations. So investment of various kinds gets shortchanged. I would address that with a forced national savings program, otherwise known as “Budget surpluses during times of prosperity”.
Counterargument: “Why should I care about future generations? What have they done for me?”
Also: the above is in addition to the usual arguments for prudence, saving for a rainy day, war, recession, depression or financial crisis.
“Debt” or accumulated deficits might be a drag on growth (though this matter is contentious). But higher aggregate demand should also fuel higher investment spending. Both effects could exist simultaneously. Reinhardt/Rogoff are serious scholars though and may someday acquire a well deserved Nobel.
AFAIK, the CBO avoids such dynamic scoring techniques.
Damuri Ajashi: Yeah, all the budget numbers that I’ve played with are mucked this way. I’ve never seen a breakdown that tied taxing and spending to the legislation of various Presidential terms.
Lots to take in here… I’ll pour over all these posts and write later when I have questions
The charts in Measure for Measure’s link are important here. No argument for stimulus should be tied directly to the size of the deficit. A stimulus is designed to counter an economic downturn in which spending and demand for goods is greatly reduced. That was indeed the case and Krugman’s argument that the stimulus should have been much greater needs serious attention.
The debt to GDP ratio is never predicted to reach 90% in that extrapolation, so the argument over its effects - which is hardly a settled argument - is irrelevant. Moreover, ending the Bush tax cuts by themselves would do all the good things that are wanted.
But they exist and their effect on the deficit must be accounted for. You can’t say that a stimulus should be applied only in textbook conditions and ignore the real world effects of bad decision-making. You’re arguing for perpetuating a disaster because it falls outside of the textbooks. That’s foolish reasoning.
Don’t those low borrowing rates imply that there isn’t a capital squeeze so borrowing would not be harmful at least in the short term?
We haven’t had a reasonaby balanced budget after a Republican president since Ford.
How much stimulus do you think we’ve had? Most of the accumulated deficit during this recession has not been stimulus.
Its not a viable policy during a systemic failure.
They use some things. Their static scoring isn’t really static, they just don’t use the version that Republicans want. Actually even Republican heads of the CBO and former Republican treasury officials believe in the sort of robust dynamic effects that the politicans seem to still hold onto. It depends on WHY they think high national debt is a drag on growth.
Because a lot of money has to pay interest rather than being put to productive purposes. Granted, some of those interest payments go back into the economy, but a lot of it just pays off foreign creditors or pads rich people’s savings.
I don’t know what the multiplier is, but paying interest on debt is very likely the least stimulative thing the government does.
There’s another less visible cost to the ongoing debt. It soaks up investment capital.
I’m not one of those people who believes all government spending is bad. In many cases, I think government spending does accomplish something. But generally speaking, I think investment capital does more good when it’s spend in private investment not to fund government spending. Investing in government debt is basically a minimally risky but also minimally productive investment.
If government borrowing didn’t exist, investors would have to find other places to invest their money and I feel the economy as a whole would benefit.
Probably yes, which is one of the reasons I stated explicitly that it’s necessary to lower debt payments in the long term.
But stopping there is a half truth. The entire debt payment of $200 billion or so is a tiny percentage of total spending. And the amount that it increases from a stimulus is even tinier. If you do $1 trillion in stimulus that’s a huge jolt to the economy, even if it adds to the total debt. But the amount it adds to debt spending is $12 billion (because you’re adding 6% to the debt), not optimal but insignificant in a $4 trillion budget. And of course, this is gross rather than net, because the stimulus should add to the economy and bring in taxes that offset part of the spending.
Lowering debt payments is vital long-term. You’re trying to make it a reason for not doing a properly-sized stimulus in a downturn and that just won’t wash.