Does the federal budget really need to be "balanced"?

Great Debates
21

My god that graph is scary!
Not because of what it shows but because of how it tries to show it. Writing it in terms of dollars on a linear scale over a number of decades is ludicrous. Its like saying that the 370 point drop in the Dow Jones that we had last week was ten times worse than the great depression where when the Dow only lost 30 points.

Add this to my set of gripes against the Motley fool. If I were king, all economic graphs of this sort would be presented on a log scale with all violators sent to a statistics reeducation camp.

22

Very sensible. Thanks.

Paul Krugman (my personal hero) wrote a column on this in January 2017. I’m not allowed to quote the whole thing, so here are the good parts. The italics are my summary of the parts I left out.

“Deficits Matter Again”

23

It’s what I call the “trombone problem”. The economy usually grows at a compound rate and so most economic things do as well. A stable economy would graph out like a trombone cut in half.

So it’s not that it should be on a log scale, it should be graphed as a percentage of GDP or something like that, lest people misunderstand what’s going on and think that everything’s tipping up into infinity.

24

That turning point happens fast. Politicians will ignore it, and the public is generally unaware of it. We will be told it’s not a problem, it’s not a problem, it’s not a problem. Till the day it is.

As for pushing the burden off to the future generations, well that is not a problem for today’s politicians.

25

For small developing nations.

In the real world outside of the paranoid American right fantasies, no it does not happen this way for the large developed industrial countries.

26

ThelmaLou, you might find this earlier thread interesting: At what point will the national debt trigger a default?

I commented (see post #8) that Canada in the early 90s flirted with just this problem. It manifested itself in two ways.

First, at one point the federal government almost wasn’t able to find buyers for a new bond issue. If the deadline for the sale had passed without buyers, it could have had serious effects. Canada’s bond-rating likely would have tanked, making it more expensive to borrow money internationally, and the federal government would have been forced to make major, almost instantaneous austerity cuts and tax increases, to find the money to retire the old series that the new series was to cover. Fortunately, at the last minute, the new series did sell on the market, but it was very much a wake-up call for Canada.

The other thing that was happening was that the provinces were finding that so much of their current revenue was being spent to service their debt that they lacked the financial resources to develop new programmes, new infrastructure, etc. Essentially, the policy choices of past governments were hampering the current governments’ ability to make their own policy choices.

Taken together, these developments forced the federal and provincial governments to make major changes to their spending patterns. It worked, and Canada went from being one of the shakiest G7 countries, in terms of debt load, to one of the strongest. But it took a lot of political will and determination.

Here’s an article with an interview with former PM Chrétien, talking about it: Lessons from Canada’s ‘basket case’ moment

27

It’s a nice theory, but can you back it up? No, because we’ve never seen a top-10 developed economy lose investor confidence in the manner you describe. US bonds are the gold standard (heh) for long-term investment. They are more likely to pay off in the future than literally anything you could otherwise put your money into. The world is going to keep offering us easy credit for as long as we need it.

That is not to say that long-term deficit spending is necessarily a good idea.

28

He will not be able to back it up because such things do not happen with the liquid developed country debt markets (for the large economies). The signs of demand stress begin to show up very clearly in the rising costs on issuance and the basis points are very closely tracked and commented on by multiple large financial actors.

The idea is purely finanically illiterate political fantasy thinking of a certain paranoid political fringe.

It is not to agree with your assertion that US credit will stay uneffected “as long as you need it” - that is an assertion beyond a factual evidence.

But the idea that a turning point happens “fast” as he put it, it is complete paranoid fantasy thinking.

In any case, for the persons wanting to understand a national debt, they are better served by looking not to a comparison of how a household budget debt works as this is a completely wrong approach, but how debt works with the large blue chip corporations of long lifespans. It is not exact but it is closer.

29

That is what I keep telling people. Spending more than you take in during the long-term is bad no matter who you are. The people that keep saying “the federal budget isn’t like a home budget” are correct in a way but not for the reasons they think they are.

A home can just declare bankruptcy and be clear of the whole thing in a decade. The federal government can’t do that. OTOH, the federal government can just print money like it is a unicorn shitting rainbows if it gets too bad. Joy all around! That means that inflation decreases the value of everyone’s saved dollars. It could also jeopardize the status of the U.S. dollar as the world’s reserve currency.

It doesn’t really matter if you are a single person household or a nation of over 300 million people. It is always wise to spend within your means unless you are a sadist that is especially fond of screwing over your own kids and grandkids. Fiscal responsibility and balanced budgets are never a bad idea. The only time is acceptable to overspend is during a crisis and every year is not a crisis.

30

You can keep saying it but it is not a financial economically useful statement.

It is a false analysis.

Of course it can, any nation can choose to default if it desires to.

This is simply statements of naive moralizing that has not any great value for the finance or the economics.

The moralizing of ‘fiscal responsibility’ which is not rooted in numeracy and really the household economics does not say anything useful about either a nation or a corporation usage of debt as permanent entities with objectives in investment beyond single human working lifespans.

But as the endless conversations here show it is difficult for the naive to understand.

31

OK, why is it a false analysis? Why aren’t we spending more if it is such a winning idea?

Sounds like a winner. Can we do it next month and just wipe 18 trillion dollars off the books? We can always just print more money right? Is there any downside to defaulting on domestic and international debts?

I am not not the one that is naive. You may want to look in the mirror. My concerns extend greatly beyond my own lifespan. I don’t want my children and grandchildren to have to pay to service debts that are incurred by my generation and that of my parents. Do you dispute that isn’t going to happen already? Again, fiscal responsibility and sound financial management are never a bad idea. We can dispute the details of what that means exactly but consistently spending more than you take in isn’t an answer (see Greece, Italy, Japan and countless other countries that wouldn’t listen).

32

It is a false analysis because the simple reflection of the current revenue contre the current spending ignores the analysis of the impacts as the increased future returns from the current investment, the time value of the money relative to the anticipated future cost of the money / capital among many such issues.

It is a naïve and economically illiterate analysis.

Your words, winning idea as a clumsy straw man.

The actual utility of the deficit spending is variable, but why you Americans are not spending more is a political question of choice divorced from the financial economic analysis.

An incoherent straw man.

I said not one thing about a default being a positive.

I noted you are incorrect that the US government can not do the equivalent of the bankruptcy. It can of course and the history of the sovereign defaults is a long one.

The USA making the choice to default when it is clear it is able to pay its debts of course would be a choice that is willfully stupid. But you did elect Trump.

You are indeed naive.

I know what the mirror image looks like. It looks like me, a financial economist.

This is the pure statement of naïveté, misunderstanding a national debt as something like the family debt.

It is the permanent case of mankind, so of course the debt - the financial debt or the implicit capital debt from the under-investment are the inheritance of a next generation.

Of course not, but the naive and economically illiterate ideas of what is a good management for a permanent multi-human lifespan entity like a large trading corporation or a national state, they are bad ideas.

You give both the phrases naïve moralizing meaning from the family budgeting perspective.

It is a naive moralizing.

Spending more than you take in is simply waiving the family budget concept flag around pretending it is an analysis.

The Japan, where it will go with its debt is a great unknown, but their economic under performance has nothing to do with their debt - to the contrary their deficit spending has avoided a profound depression. The ongoing problems they face appear to be deeply rooted in the internal economic inefficiencies, the end of the capacity to export away from that in the face of the Chinese competition and the South Korean, and the demograpic delcine that is not off-set by the internal domestic market reforms.

Pointing to the Japense case only confirms a naive understanding.

The Greeks, they are the great case of the bad usage of debt to cover the current consumption without the investment in the growth supporting investments (infrastructure, etc.).

Of course the debt can be used badly and not produce the economic return required. Or it can.

Naively chanting “do not spend more than you take in” is moralizing, not economics.

33

Thanks-- very interesting and informative discussion.

34

ThelmaLou, you might find “Modern Money Theory” (MMT) interesting as another way of thinking about government debt. It’s a bit above my pay grade, but this article/explainer gives three main tenets http://theconversation.com/explainer-what-is-modern-monetary-theory-72095:

As I understand it: Point 1 means that we don’t have to worry about deficits or debt per se – the government cannot go bankrupt EDIT or rather, never HAS to go bankrupt. Point 2 means we do have to worry about overspending (or, rather, spending unwisely). Point 3 means that government deficits are balanced by private saving, which can again be a good or bad thing.

It’s an interesting conceptual framework, although I get into the weeds very quickly. The big-picture takeaway is that debt is a red herring, and government spending & tax should focus on shaping/supporting economic goals in a sensible, sustainable way. Whatever THAT is.

35

Yes MMT is a dominant form of the analysis at the macro economic level. At the operational level it is conceptually approached in ways that can be said to be similar to how the analysis of the credit worthiness potential of the large company as for the bonds is approached - indeed in some ways the bonds analysis of the rating agencies share some tools between their corporate and their sovereign.

However, it is not debt is a red herring, it is simply a debt number by itself is.

The ratio of the debt and its service cost, against the current income and with relationship to prospective future growth is what is of greatest interest.

the government that adds debt at a rate less than its GDP growth is in a position different from one that is adding it faster. And if the government spending is heavily in the areas that are clearly the current consumption like the social subsidies (income equializations, the retirement, the direct subsidies) and is not investing in future capacity (this can be the education, as well as the clear things like the infrastructure and its maintenance and the research and development), then there is the great concern.

It is like the company taking on the debt to pay out the dividends but not investing in its marketing in its R&D, in other productive growth areas.

36

Nor can you tell me it won’t happen that way. I am not saying we are close to that point at all. I am simply saying when these things go, they turn fast.

There is a term for it, an economic bubble. Bubbles burst very fast. A few see it in advance but most do not.

37

PS…perhaps you should see The Big Short again.

38

The record of large developed economies in terms of the debt over the last century says substantially that this is not the case, the signs of the financial stress in the escalating return demanded accumulate clearly.

That is a term. It is not the term for this subject, however.

You now speak of the private asset bubbles, a very different subject.

39

I will take your claim that you are an expert on this subject at face value. Is what the U.S. doing now in terms of debt ideal or could it be improved upon? If so, in what way? It seems highly unlikely to me that we have been pursuing the ideal long-term debt strategy all the way from Reagan to Obama to Trump. Are there any potential dangers?

40

Expert? I did not at any time claim to be an expert on this subject of the sovereign debt. I have a certain advanced professional education in the subject and sometimes it is of the professional concern, but I am not a sovereign debt expert. But I am educated in the subject as the matter of the analysis although it is not what I do in the daily business.

Ideal, no, very far from it. But I was not commenting on the policy of the US government right now in the management of the debt.

I was and am only reacting to the moralizing non-analysis about the concept of the debt as such, as inaccurate and not useful at all.

you are the person now injecting the word ideal.

The question is not the same as the discussion, the ideal strategy is a different question from the concept of the utility usage of debt for the effectively permanent entities.

of course, if the rate of the accumulation of the debt (the deficit) is greater than the expected economic growth rate, there is a point of danger and of the potential financial stress.

Then there is the question of the percentage of the debt as the percentage of the GDP. above 100 percent of the GDP is a warning sign according to the historical - not of the imminent crisis for the developed country but of reaching a zone of the potential stress if not managed down or if the economic growth does not then bring the ratio down. The case of the USA after the WWII.

Finally these ratios must be examined in the eye of the capacity to pay, which can be taken as the tax burden as the share of the GDP. If the tax burden as share of the GDP is low, there is room to address a crisis by generation of revenue. If it is already high, then there should be great concern as the potential income generation potential additional to the current can not be said to be expansive.

The US ratio of the debt to the GDP is relatively high now, but the ratio of the tax generation to the GDP is among the lowest in the OECD and at a historical low. The Ability is clearly there.

The actual usage of the spending is of course of great importance, the addition of a large amount of debt for the renovation of the infrastructure, for example, will not scare the instititonal investors at all, it would be considered a great positive usually unless done very stupidly.

The final question is beyond the Ability to Pay, it is the Willingness to Pay. That is your politics.

All of this has a subjectivity.

But it is all in a framework that says clearly that the idea of analyzing the national debt in the way you think of your household budget is complete and utter nonsense.

It is not saying you have the right amount of debt, or the right or even a good policy in the area, or if you are spending the money on the right things.