The true shape of America’s debt & deficit problems: a teaser. I am writing a piece for the Milken Review on the true shape of America's debt & deficit problem... or maybe opportunity—it depends...
I have always been fascinated by the issue of government borrowing ever since I made my first really big purchase and took out a mortgage on a house. When buying a home, one is considered prudent if one spends only 1/3 of one's income to cover the necessary borrowing. One is expected to pay the debt down, slowly at first, then more quickly until the debt is completely retired. Then, one is expected to die after some years of being debt free.
In contrast, the government is not expected to die. We do not expect the trumpets to sound and Uncle Sam to be called before the great presence, who looks suspiciously like Milton Friedman, and be judged for his outstanding debt before facing his final moments.
So, is spending 1/3 of one's income on debt service an example of prudence or profligacy? Are governments just like households in their ability to manage debt or are they something different?
I think the best argument for the government spending less on debt than a 25 year old college graduate moving into a modest ranch house with his 26 year old girlfriend is that Uncle Sam cannot lock in an interest rate for the remainder of his expected life span as he does not have an expected life span. Mortality, I'll argue, does have some advantages.
Another good argument is that governments need to maintain a buffer of credit bearing capacity, so borrowing less than a reasonable 1/3 during less challenging times leaves room for borrowing more during more challenging times. This is a weaker argument since governments can increase their incomes during challenging times by raising taxes.
I think that "debt" is not the right variable to wish to manage. "Deficits" are closer to it, but even that is not right. The proper decisions are made at the level of taxing and spending. If we spend on things with present costs and future benefits such that NPV>0 the resulting deficit and whatever debt those deficits accumulate to can't be a problem. [There is a corresponding rule for taxing, but it's more complicated, involving whether the tax reduces consumption or investment and the NPV of the investments foregone, but I do not know how to state it.]
I AM sure that "debt" is not an argument in either the taxation or expenditure optimization functions, although it could indirectly enter by affecting the discount rate applied to the NPV.
Of course this does not mean that YOU should not try to disabuse the Milken audience of notions that are even more wrong than failing to make the NPV of expenditures >0. In particular you should try to direct their attention to revenue raising rather than expenditure reduction as a response for whatever worries about debt or deficits they have.
Do you think there is a realistic threat that the possibility of a default on US government debt — because of a political fight over the debt limit rather than any genuine fiscal problem — will affect the government’s ability to borrow on favorable terms enough to cause the chances of tears to go up? Or is that a paper tiger?
I agree that with regard to managing the money supply, between fiscal and monetary tools, I don’t see why this cannot be managed with precision. Additionally with such power between Congress and the Federal Reserve, that they would allow a mathematical debt crisis with something as fungible as the Dollar.
I have always been fascinated by the issue of government borrowing ever since I made my first really big purchase and took out a mortgage on a house. When buying a home, one is considered prudent if one spends only 1/3 of one's income to cover the necessary borrowing. One is expected to pay the debt down, slowly at first, then more quickly until the debt is completely retired. Then, one is expected to die after some years of being debt free.
In contrast, the government is not expected to die. We do not expect the trumpets to sound and Uncle Sam to be called before the great presence, who looks suspiciously like Milton Friedman, and be judged for his outstanding debt before facing his final moments.
So, is spending 1/3 of one's income on debt service an example of prudence or profligacy? Are governments just like households in their ability to manage debt or are they something different?
I think the best argument for the government spending less on debt than a 25 year old college graduate moving into a modest ranch house with his 26 year old girlfriend is that Uncle Sam cannot lock in an interest rate for the remainder of his expected life span as he does not have an expected life span. Mortality, I'll argue, does have some advantages.
Another good argument is that governments need to maintain a buffer of credit bearing capacity, so borrowing less than a reasonable 1/3 during less challenging times leaves room for borrowing more during more challenging times. This is a weaker argument since governments can increase their incomes during challenging times by raising taxes.
I think that "debt" is not the right variable to wish to manage. "Deficits" are closer to it, but even that is not right. The proper decisions are made at the level of taxing and spending. If we spend on things with present costs and future benefits such that NPV>0 the resulting deficit and whatever debt those deficits accumulate to can't be a problem. [There is a corresponding rule for taxing, but it's more complicated, involving whether the tax reduces consumption or investment and the NPV of the investments foregone, but I do not know how to state it.]
I AM sure that "debt" is not an argument in either the taxation or expenditure optimization functions, although it could indirectly enter by affecting the discount rate applied to the NPV.
Of course this does not mean that YOU should not try to disabuse the Milken audience of notions that are even more wrong than failing to make the NPV of expenditures >0. In particular you should try to direct their attention to revenue raising rather than expenditure reduction as a response for whatever worries about debt or deficits they have.
Do you think there is a realistic threat that the possibility of a default on US government debt — because of a political fight over the debt limit rather than any genuine fiscal problem — will affect the government’s ability to borrow on favorable terms enough to cause the chances of tears to go up? Or is that a paper tiger?
I agree that with regard to managing the money supply, between fiscal and monetary tools, I don’t see why this cannot be managed with precision. Additionally with such power between Congress and the Federal Reserve, that they would allow a mathematical debt crisis with something as fungible as the Dollar.