Some points:
(1) The interviewer’s hysterical reference to the explosion of debt (“50,000 every second” – which I am not sure is correct or not) is misleading: government debt might be rising, but so is GDP, and it is net government debt as a percentage of GDP that is a better measure of its burden.In summary, the tax burden on most individuals from repayment of future US government debt is likely to be small, given that the US has a progressive tax system, and most debt is rolled over. Other debt is bought back by the central bank – which does not even involve taxes at all.
(2) The notion of present generations “living at the expense of future generations” is utter nonsense. Any future generation cannot send real goods and services back in time, and our wealth today is dependent on the real goods and services produced, owned and consumed today, not in the future. The repayment of future government debt comes from three sources:(i) Central bank open market operations. This does not even involve taxpayers’ money at all: money used to pay back debt in this way is simply created by central banks.(3) The only really serious burden associated with government debt is that part of the debt owed to foreigners (as Abba Lerner argued). But even here the US is in a unique position: the US dollar is the world’s reserve currency and US dollars can just as easily be used to buy other nation’s goods and services, rather than just US goods and assets.
(ii) The government has the power to roll over much of its debt. As long as people keep purchasing the debt, there’s no problem.
(iii) The government’s repayment might be from current tax revenues. But, with expanding GDP, the government has access to tax receipts which grow over time, which effectively means that the burden of interest servicing and paying back debt falls as the population rises, GDP grows and tax revenues rise. Since the US has a progressive tax system the “individual” burden of government debt repayment differs markedly depending on income anyway.
The future “individual” burden of government debt is simply a redistribution of money at a future time point or period, and, if the money is spent, a redistribution of real goods, services or assets within the society at some future point in time: it cannot be a robbery by present generations of future wealth, because there is no way that future, real goods and services can be magically transported back in time to today.
(4) Underlying this obsession with government debt is the completely mistaken and fallacious analogy with private debt. In reality, government debt is different from private debt for these reasons:(i) the government is the monopoly issuer of its own currency; no private individual can print money;(5) If anything, it is the present generation and its incompetent unwillingness to restore strong GDP growth and high employment that robs future generations of a stronger economy and greater wealth, by permanent loss of the higher level of output and real assets we would enjoy if GDP was hitting its potential.
(ii) the government has the power to roll over much of its debt, unlike private individuals;
(iii) the government’s central bank has the power to control interest rates and bond yields, if necessary.
(iv) the government has access to tax receipts which grow over time, which can effectively mean that the cost of interest servicing on government debt falls as the population rises.
Above all, the burden of taxes for future generations to repay debt or interest on debt would be much reduced if the right macroeconomic policies were restored.
In fact, the truth is that vicious deflationary policies and budget balancing is what will really rob future generations of wealth: it will rob them of the larger economy they would have had in the future from a larger base of GDP and capital stock today.
Above all, destroying present employment, income and leaving millions unemployed will probably prevent potential parents from having children that they might wish to have, because of present poor job prospects, low income, reduced growth and economic stagnation: thus the wages of austerity and budget balancing will prevent some members of future generations from even being born. That is the real crime against future generations.
I have to laugh every time I hear this “robbing future generations” balderdash. The extreme proponents of free market economics would rob potential members of future generations of their very existence.
Note
I highly recommend these classic articles by Abba Lerner on the issue of government debt:
Lerner, A. P. 1943. “Functional Finance and the Federal Debt,” Social Research 10: 38–51.
Lerner, A. P. 1947. “Money as a Creature of the State,” American Economic Review 37.2: 312–317.
"I'm not going to ask you to characterize the ABSURD views of your opponent..."
ReplyDeleteYeah, he's not going to ask him to do that, because he wants to do it himself, and you don't want Fox to become a literal echo chamber instead of just a figurative one.
I know it's not popular among free marketers to accept the "lump" or "aggregate" style of thinking.
ReplyDeleteStill, it is worth pointing out that the general public is simultaneously:
a) the creditor to the government;
b) the group from whom government purchases its goods and services; and
c) the group to whom government provides its goods and services.
This relation is almost entirely different from the role of any particular household or firm in an economy. The government is not a household or firm, but an apparatus or an indirect channel through which people conduct certain activities **for themselves**.
The same group receives the interest on government debt, salaries for government employment, sales proceeds for government contracts, and the real public services provided by government. And all they gave away was some money which is to be repaid back to them in the future. Once they are paid back their principal, where will they keep a portion of their savings? Again, back with the government all over again.
Government debt is really not a problem at all.
I appreciate you writing in response to Bob's appearance on TV. I enjoy reading both sides the argument on issues as important as the economy and debt, even though I may not agree with you.
ReplyDeleteThe explanations you provide in this blog post all seem to boil down to one thing: we will inflate away the debt. You take for granted that the central banks will simply print money, and that that does not involve taxes. Do you reject that such printing causes inflation? Or that inflation is a hidden tax, one that weighs more heavily on the poor, who typically don't own assets that rise with inflation, who have most of their savings in cash, who depend on fixed incomes?
To Prateek Sanjay:
Your points make sense, and sound great, if the government wasn't in its current state of rampant corruption. You lump the country into "the same group", when in reality, the bondholders receive the interest, and favored corporations receive government contracts and influence regulation. You say this is not a problem while nearly 100% of our federal income tax is used for military budget.
"The explanations you provide in this blog post all seem to boil down to one thing: we will inflate away the debt."
ReplyDeleteMy explanations do not "boil down to one thing: we will inflate away the debt."
Real outgrowth growth and a much larger amount of such wealth in the future does not involve inflation.
Anyway, most government debt is short-term and is rolled over every few years: it IS paid back with interest in a short period of time with minimal inflation, so that inflation has only a small impact on the educing its purchasing power.
"Do you reject that such printing causes inflation? "
Price inflation (movements in relative prices or the price level measured by some index) has complex causes.
If money created by the central bank is spent on commodities, it might or might not contribute to inflation.
"Or that inflation is a hidden tax, one that weighs more heavily on the poor, who typically don't own assets that rise with inflation, who have most of their savings in cash, who depend on fixed incomes? "
Most people do not hoard their money as cash at all: they put it in banks. People with significant savings (even the relatively poor or middle classes) have bank accounts, financial assets, term deposits that pay interest on their money, usually providing a return that protects against inflation.
As for people who are really poor, a social democratic system would protect them anyway with a generous welfare state.
Inflation might erode the value of money, but deflation increases the value of debts and punishes debtors, especially our wealth-producers: capitalists, corporations and businesses taking out debt for production cycles. Allowing endless deflation would shock expectations, impose debt deflation and most probably have real output costs.
A environment of perpetual deflation is no solution to economic problems, nor is it desirable. Anyway, to believe that you can have complete price stability is a myth.
Mild but steady inflation has advantages over deflation.
This has nothing to do with this post, but i want to propose an alternative critique of Hayek-glasner proposal of new natural rate of interest based on Sraffa's critique. Since I do not know if it's correct I wanted to ask your opinion.
ReplyDeleteFirst of all, I would say that Sraffa paid no or little attention to holding costs and current service flows, nor he did in Production..., so we may say that every commodity can be the "no cost no service commodity", ie the expectated rate of apreciation of each good of Glasner could easily be Sraffa's natural interest rate of that capital good. (This isn't important to the critique, but I'd rather mention it before I start.)
What I see in Glasner's proposal is a pair of equilibrium intertwined: first, a sort of dynamic equilibrium which unifies "the rate of return net of holding costs an current system flows" and the second equilibrium which implies the relation between the monetary rate of interest and the "natural" one, as a result of the first process.
The second equilibrium is a matter of correct expectations an monetary policy, but the first one Glasner takes as a given, which makes almost all his theoretical point rather a tautology (a very insightful one, however): if all capital goods markets are in equilibrium on a single rate of interest, then single equilibrium is possible. But, are there equilibratinr forces in those markets? Let's imagine Apples with an expected rate of apreciation of 10% and oranges of 30%, and monetary interest is 20%. People demanding oranges will think 20% is a very low price, ie they will start a boom of orange demand, with a disequilibrium between invest and savings. Thus, orange prices will grow, and that means that the expected appreciation will grow too. In the case of apples it is the contrary: prices will fall and the expected appreciation too. Even if money interest is above or below both, there is no sure mechanism that will equalize those rates. That means that equilibrium is a very rare case, and if some expectations of appreciation rise, there would be an explosive dynamic.
If we consider uncertainty, we may say that even in "all capital goods market equilibrium", to really achieve expectations by equalizing the money rate and the natural rate, is something almost impossible. And if we believe in the possibility of little distortions in prices expected appreciation when there is inflation/deflation caused by the mistaken money rate, equilibrium would turn into the explosive mechanism exposed above, in which there is, as Sraffa said, no money rate that would return the system to equilibrium. Also, a private change of price appreciation will have the same effects.
This has a policy point: even if it's the government who distorts equilibrium (maybe by ignorance), the private sector is causing the amplified, endless crisis, and interest management isn't enough to solve the problem.
I really don't know if it's right. I might say that reading your blog made me want to read more of Austrian economists, even if I don't agree with them.
I'm sorry for my English and thank you.
LK I'm interested in your comment that there is a concern for debt held in foreign hands. I understand your logic as it applies to USD.
ReplyDeleteI'm part way through reading the MMT Primer on New Economic Perspectives, and my reading of it suggests a disagreement on this point. MMT's concern seems to be only the currency in which the debt is denominated in.
Am I correct in that? And what do you attribute to that too? Is the development of MMT to US-centric?
Apart from Bill Mitchell (an Australian), many of the MMTers seem to be Americans. It is therefore no surprise that their view of government debt is a bit US-centric.
ReplyDeleteLK,
ReplyDelete"The only really serious burden associated with government debt is that part of the debt owed to foreigners (as Abba Lerner argued). "
Where did Lerner argue this?
The only burden I can see is where government debt denominated in the liability of the third party (e.g the Euro problem).
If a foreign entity owns financial assets denominated in your liability then that puts them at risk of a real loss when they choose to swap that asset for real stuff.
There is no guarantee that they will have access to the full purchasing power of the asset when they decide to swap it for real stuff. Taxes may be at different levels in the future.
"The only burden I can see is where government debt denominated in the liability of the third party (e.g the Euro problem). "
ReplyDeleteThat is undoubtedly another burden I should have mentioned.
"Where did Lerner argue this?
See A. P. Lerner, 1948. "The Burden of the National Debt," in Lloyd A. Metzler et al. Income, Employment and Public Policy, Essays in Honour of Alvin Hanson, W. W. Norton, New York. 255-275.
[reprinted W. W. Norton & Co, New York, 1964].
Nick Rowe recently attributed 3 positions to Lerner for how government debt might be a future burden:
(1) public debt held by foreigners
(2) if you have a reduced capital stock (i.e., if GDP/GNP has contracted significantly in the future as compared with the past)
(3) (possible) disincentive effects of distortionary future taxes
http://modeledbehavior.com/2012/01/05/debt-and-regret-public-choice-edition/
Now I don't have a copy of "The Burden of the National Debt" handy, and it has been a while since I read it, so I can't be certain about (2) and (3).
Discussion of Lerner's argument here:
http://books.google.com.au/books?id=8HX0cKtkY-cC&pg=PA198&dq=%22the+classic+statement+of+the+keynesian+position+was+set%22&hl=en&sa=X&ei=TFgoT7rtBai3iQfNxv3TAg&ved=0CDcQ6AEwAA#v=onepage&q=%22the%20classic%20statement%20of%20the%20keynesian%20position%20was%20set%22&f=false
The only problem with debt are deficits and productivity, too much deficit + lower productivity = higher inflation. Sign that there are structural problems within the economy.
ReplyDeleteAs long as there is spare capacity and inflation is really under control this is not real. the diagnosis right now is actually quite simple, there are a couple of inputs that have a trend higher (commodities like oil), but the rest of the economy is trending towards a deflation (specially some asset classes like real estate).
I would like LK, who is obviously a very intelligent person, to start diggin more into the biophysical economics (thermoeconomics), which along with postkeynesian schools (for macro) and behavioural (for micro) may find the holy grail of economics synthesis.
I know it's important to waste time refuting 'neoclassicals' (or even the irrelevant 'austrians'), but it's not very productive for the future of the discipline and the humanity (with solid alternatives and work to replace these failed ideologies they may as well be rolled-over by reality).
Neil, the burden of the foreign debt is that foreigners can use it to buy your real stuff. The implicit obligation to any saver, domestic or foreign, is that domestic inflation will be controlled, that a dollar will buy about the same amount of real stuff in the future as the past. Domestic inflation - not exchange rate fluctuation - is the only real loss imposed on any saver, foreign or domestic.
ReplyDeleteIf you have been stupid enough to run your economy below capacity, below full employment, then the foreign redemption of their debt can be a win-win : the foreign savers get something real shipped to them, while you get a demand boost toward full employment, multipliers etc.
If you're at full employment already, then you have a real loss in the goods shipped overseas restricting current consumption. But that's the kind of problem you want to have.
Debt is debt. The burden of foreign-denominated debt is that exchange rates may change adversely to domestic currency/debt, so in domestic terms, can become unbounded. The domestic measuring-stick of debt can shrink to zero compared to the foreign measuring-stick. The amount of real stuff needed to be shipped abroad can go to infinity. But if you had a crystal ball, and knew that yen would plunge against the dollar or whatever, then it would be sensible & MMT- advisable for anyone, for any country to go short yen, to take out yen-loans. Problem is - finding crystal balls. With domestic-denominated debt, you have one - one dollar is worth one dollar.
"The implicit obligation to any saver, domestic or foreign, is that domestic inflation will be controlled, that a dollar will buy about the same amount of real stuff in the future as the past."
ReplyDeleteThere is no such obligation. There is a belief that will be the case, but that is completely different.
If the economy is at capacity when the savers decide to cash in their chips then it is entirely correct and proper that those savings are either confiscated or reduced in their spending power. The saver can always defer to a better time and place.
Belief, obligation, promise, whatever. Money is debt is a promise is an obligation is futurity. It's a promise that nobody, no state can ensure, except nominally, that one dollar will pay off one dollar in debt or taxes. The value of money is that it is pretty much the best real-world promise there is, the promise the belief in which is most rational. The measuring-stick of all other promises in an economy. So it wouldn't be of much use if this implicit promise were not generally kept in nominal/real interactions, not just nominal/nominal ones. Governments do try to keep inflation low, and they generally succeed, remarkably well considering how backward economics is.
ReplyDeleteThere'll always be a real burden of government debt or money on an economy, because that is what money is. In the under capacity economy, the foreign debt can be the same kind of burden as the errands your bearded foreign psychologist has you do for him as the only way to get you out of your self-imposed imprisonment.
Demand driven inflation is a rare animal, the kind of problem you want to have. MMT's JG and other inflation controls would automatically kick in at such a time. Not arguing at all against increasing taxation, or incentivizing saving at such super-rare times.
My point, from Lerner, was in opposing the kind of thing that Ramanan was going on about at heteconomist, and which you were rightly arguing against. The promise or what have you of non-inflation is reasonable and achievable, and there will not be much saving, foreign or domestic, if it is not kept reasonably well. But he was posting stuff about how there is some promise of exchange rate rigidity to keep foreigners from a "capital loss". Suggesting raising interest rates (wrecking your economy & increasing inflation, breaking the truer promise in the long run) to keep your currency strong.
Like most mainstream ideas in economics, it's breathtaking how crazy it is. It's exactly the same as saying that if someone strikes oil in their backyard, or wins the lottery, that they have a right to go to the bank & complain about the loss they suffered and demand higher interest, when the dollars in their account depreciated in value compared to their lottery ticket or land title.
You wrote:
ReplyDelete'My explanations do not "boil down to one thing: we will inflate away the debt."
Real outgrowth growth and a much larger amount of such wealth in the future does not involve inflation.'
How can economic growth help you, when you are indebted in money? With economic growth (more or better goods and services), the value of money grows too.
It would help you, if you were indebted in say "CPU processing power". But then, the "investors" would be stupid not to ask a really high interest on your debt.
So you have to inflate money (not necessarily prices) if you do not want to pay the debt back as a mere mortal. But then inflating money is a hidden tax - no matter whether it increases prices or not.
(1) The interviewer's hysterical reference to the explosion of debt ("50,000 every second" -- which I am not sure is correct or not) is misleading: government debt might be rising, but so is GDP, and it is net government debt as a percentage of GDP that is a better measure of its burden.
ReplyDeleteI had it calculated at 47,ooo dollars a minute or so. Using four billion a day as the starting point. Government debt is rising at a faster rate than GDP. The fact that government activity is included in GDP should also be of some concern, just as not counting food or energy costs in inflation estimates. Just as workforce participation rate calculation should be seen with a critical eye.
(2) The notion of present generations "living at the expense of future generations" is utter nonsense.
How is it utter nonsense? This generation could never pay off the current debt. No way no how. Our spending now has little to do with what we are producing. Manipulating money and creating wealth from fiat money definitely pushes the expense into the future.
Any future generation cannot send real goods and services back in time, and our wealth today is dependent on the real goods and services produced, owned and consumed today, not in the future.
Wealth today is dependant on what? Our manufacturing, although resurging somewhat is nothing compared to what it used to be. The wealth of the banks, the market, etc etc is created by expansionary monetary supply. It's disconnected from our real production. How could the market jump up from 10,000 to 14,000 (back some now) when GDP was stagnant and now just increasing at 2 percent or so?
The repayment of future government debt comes from three sources:
(i) Central bank open market operations. This does not even involve taxpayers' money at all: money used to pay back debt in this way is simply created by central banks.
This doesn't involve tax payer money? You can't pay back debt with money that's just printed. It is just created now. . .by a printing press. . .not by a factory or a bunch of service industry jobs. This is like injecting water into a ham. You don't get more ham.
(ii) The government has the power to roll over much of its debt. As long as people keep purchasing the debt, there's no problem.
There's no problem? What happens when no one wants to purchase our debt?
(iii) The government's repayment might be from current tax revenues. But, with expanding GDP, the government has access to tax receipts which grow over time,
The tax receipts are based on real production from the private sector.
If it could be established that tax revenues are actually increasing as fast the growth of the government size and debt you wouldn't have all these Paul Revere types running around ringing the warning bells.
which effectively means that the burden of interest servicing and paying back debt falls as the population rises, GDP grows and tax revenues rise. Since the US has a progressive tax system the "individual" burden of government debt repayment differs markedly depending on income anyway.
ReplyDeleteNot enough rich people to cover it. The service on the debt is 300 billion now. Not chump change.
The future "individual" burden of government debt is simply a redistribution of money at a future time point or period, and, if the money is spent, a redistribution of real goods, services or assets within the society at some future point in time: it cannot be a robbery by present generations of future wealth, because there is no way that future, real goods and services can be magically transported back in time to today.
It's a what? It's a redistribution of produced wealth to Banks and the government. The money spent by government goes to government first and then it's pals, then trickles out to the public. The government is NOT the economy. Your time machine reference makes no sense to the huge amount of unemployed in the private sector. It makes perfect sense to banks and government institutions.
(3) The only really serious burden associated with government debt is that part of the debt owed to foreigners (as Abba Lerner argued). But even here the US is in a unique position: the US dollar is the world's reserve currency and US dollars can just as easily be used to buy other nation's goods and services, rather than just US goods and assets.
The only serious burden associated with government debt? The debt service is 10 percent of the budget. Just imagine if you could give individuals 300 billion dollars and what that would do to the economy. Giving these colossal sums to the Fed or foreign lenders directly removes the capital from private enterprise, which is where all the real wealth is coming from. Debt and inflationary policy is directly TAXING the private individual to the benefit of those who get the gov. money in the first place.
(4) Underlying this obsession with government debt is the completely mistaken and fallacious analogy with private debt. In reality, government debt is different from private debt for these reasons:
(i) the government is the monopoly issuer of its own currency; no private individual can print money;
If a private individual printed their own currency they would be tossed in jail. If they inflated it like the central bank does they would be strung up from the nearest tree.
(ii) the government has the power to roll over much of its debt, unlike private individuals;
That power is insane. That government debt is ultimately assumed by the individual. The government isn't attempting to earn anything. They are just grabbing it and making their own decisions for the individuals who have to do the work required to earn it.
(iii) the government's central bank has the power to control interest rates and bond yields, if necessary.
ReplyDeleteTo who's benefit? Large banks who leveraged themselves out 30 to 1? What homeowner could have done that?
(iv) the government has access to tax receipts which grow over time, which can effectively mean that the cost of interest servicing on government debt falls as the population rises.
What happens when the population rises but job prospects do not?
(5) If anything, it is the present generation and its incompetent unwillingness to restore strong GDP growth and high employment that robs future generations of a stronger economy and greater wealth, by permanent loss of the higher level of output and real assets we would enjoy if GDP was hitting its potential.
In summary, the tax burden on most individuals from repayment of future US government debt is likely to be small, given that the US has a progressive tax system, and most debt is rolled over. Other debt is bought back by the central bank -- which does not even involve taxes at all.
It's the present generations making these decisions about debt and government allocations of resources? Who in the heck is lobbying for the individual?
Above all, the burden of taxes for future generations to repay debt or interest on debt would be much reduced if the right macroeconomic policies were restored.
Macroeconomics? That's not it all. It's crony capitalism that's clobbering us. It's commerce with government protection and "helpfulness".
In fact, the truth is that vicious deflationary policies and budget balancing is what will really rob future generations of wealth: it will rob them of the larger economy they would have had in the future from a larger base of GDP and capital stock today.
Budget balancing and deflationary policies? If you really gave a shit about demand side economics you'd push money directly into the private sector, not through the strainer of government and banks. This is what the Keynes' lapdog Hydalski has stated.
Above all, destroying present employment, income and leaving millions unemployed will probably prevent potential parents from having children that they might wish to have, because of present poor job prospects, low income, reduced growth and economic stagnation: thus the wages of austerity and budget balancing will prevent some members of future generations from even being born. That is the real crime against future generations.
I have to laugh every time I hear this "robbing future generations" balderdash. The extreme proponents of free market economics would rob potential members of future generations of their very existence.
Laugh all you want. If the largest government in the history of the world, the largest debts we have seen since WW2, the largest amount of working age people not in the workforce in 30 years are not examples of Keynesian "balderdash" then just print up another couple trillion and think everything will just be fine.