My article in the 2024Q2 "Milken Review"; yes, I know Jim Fallows hates the "frog in a pot" trope as simply wrong—a real frog would hop out of the pot long before danger time. But a country's...
My fear is that Trump (aka King of Debt) becomes President and decides to "renegotiate" repayment of Treasury debt with foreign owners, in particular with China. Then nations who have run trade surpluses no longer want US debt and their exports wither. The value of the US Dollar plummets, inflation rises, and interest rates soar far above GDP growth. All because a weak man wanted to look strong.
An excellent piece. I've been working (slowly, I'm retired!) on trying to write something along the same lines. And yes, the “wise people” have been bemoaning debts and deficits since I started in this business in 1977. The sky should have fallen many times by now. In 2004 , Peter G. Peterson published “Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It.” Here we are 20 years later and there is still no obvious crisis—but we keep hearing that a crisis is imminent and we are robbing the next generations.
The g>r phenomenon, though, is not just for the US. See Phillip Barrett: Interest-Growth Differentials and Debt Limits in Advanced Economies, IMF Working Paper, April 2018 WP/18/82, tables 2 and 3. For data from 1880-2015, he estimates g-r for US, UK, France and Germany. All point estimates are for averages between a low of 1.63% (UK) and a high of 2.16% (US).
For the US, we also have estimates from Ball, Laurence, Douglas W Elmendorf, and N Gregory Mankiw. 1998. "The Deficit Gamble." Journal of Money, Credit and Banking: 699—720. With data from 1871 to 1992 their estimates are of g-r between 1 and 2 %.
Larry Ball has a new paper that is less sanguine: DID THE U.S. REALLY GROW OUT OF ITS WORLD WAR II DEBT? Julien Acalin Laurence M. Ball Working Paper 31577 http://www.nber.org/papers/w31577. He points to financial repression as a key factor (something likely true for Japan).
Nonetheless, simply look at the 30-year CBO predictions, and it is hard to see why one would think a crisis is at hand: they predict g>r = .5% (on average) over this period.
But for me, what I think should puzzle the fiscal fearmongers is: why are we not having a bond crisis right now, if fiscal policy is not sustainable?
I think the question of what the level of the debt should be is not the right question. It is neither a outcome (argument into anyone but K Rogoff’s utility function) or an instrument that affects any outcome variable. Debt is just the arithmetic sum of deficits going back to the Big Bang. It does affect the interest rate at which the government can borrow and thereby indirectly the discount rate of the NPV of any given expenditure which implies that fewer expenditures may pass that test when debt is high.
But if lenders are persuaded that all expenditures DO pass the test then the debt to repayment capacity will fall so the borrowing rates will too. Conclusion there is an equilibrium rate of increase in the Debt.
However, that equilibrium is not necessarily the rate of increase in income that is optimum. Higher taxes to establish a lower equilibrium D/Y ration might be better.
Conclusion: it is better to focus directly on trying to optimize revenues and expenditures that to worry about debt.
Since the deficit is an issue that concerns me, let me add one more comment. Dick Cheney once said "Deficits don't matter." What he really meant though is that deficits don't matter when it comes to winning an election.. In contrast, China's leader, Xi Jinping, has said he doesn't think democracy is sustainable in the 21st century. Unfortunately, both men might be right.
s their job to To take my demurral up one level, before thinking about what will avoid catastrophe (fiscal or climate) let try to get all right-thinking people to know what OUGHT to be done. I want our politicians to know that near zero deficits are best and that net emissions of CO2 should be taxed. It's their job to figure out how and when to move toward those goals.
Totally correct analysis of why the status quo is sub-optimal is useful, but only half the job.
Ok, so the chicken littles think the sky is falling. They are almost always wrong. But just as some paranoids really do have enemies, if the REASON the chicken littles think the sky is falling keeps increasing in degree of severity, then someday the chicken littles might be right. Just ask the dinosaurs. Sometimes the sky really does fall.
IIRC, the end of the call for fiscal austerity was in 1995 and the budget impasse, championed by House Republicans. I remember VA employees not getting paid for 2 months due to not raising the federal debt limit. Ultimately the debt limit was raised and responsibility in government spending was damaged, for better or worse.
Economists should spend more time analyzing the US War Dept budget because it is a strange bubble apart from all normal understanding of time and space where the rules of budgets, accounting, and spending that we are told are immutable when the topic is e.g. poverty relief do not apply.
I should also add I was watching CNN the morning of the first shutdown in 1995 so I didn't think I had to go to work. Later that morning my boss called me at home wanting to know why the hell I wasn't at work. I told him there was a government shutdown. He made if clear I didn't work for Congress, I worked for him. So I went in to work. Around 2pm word came down through the chain of command that there was a shutdown, and we were all told to go home.
Excellent explanation.
My fear is that Trump (aka King of Debt) becomes President and decides to "renegotiate" repayment of Treasury debt with foreign owners, in particular with China. Then nations who have run trade surpluses no longer want US debt and their exports wither. The value of the US Dollar plummets, inflation rises, and interest rates soar far above GDP growth. All because a weak man wanted to look strong.
An excellent piece. I've been working (slowly, I'm retired!) on trying to write something along the same lines. And yes, the “wise people” have been bemoaning debts and deficits since I started in this business in 1977. The sky should have fallen many times by now. In 2004 , Peter G. Peterson published “Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It.” Here we are 20 years later and there is still no obvious crisis—but we keep hearing that a crisis is imminent and we are robbing the next generations.
The g>r phenomenon, though, is not just for the US. See Phillip Barrett: Interest-Growth Differentials and Debt Limits in Advanced Economies, IMF Working Paper, April 2018 WP/18/82, tables 2 and 3. For data from 1880-2015, he estimates g-r for US, UK, France and Germany. All point estimates are for averages between a low of 1.63% (UK) and a high of 2.16% (US).
For the US, we also have estimates from Ball, Laurence, Douglas W Elmendorf, and N Gregory Mankiw. 1998. "The Deficit Gamble." Journal of Money, Credit and Banking: 699—720. With data from 1871 to 1992 their estimates are of g-r between 1 and 2 %.
Larry Ball has a new paper that is less sanguine: DID THE U.S. REALLY GROW OUT OF ITS WORLD WAR II DEBT? Julien Acalin Laurence M. Ball Working Paper 31577 http://www.nber.org/papers/w31577. He points to financial repression as a key factor (something likely true for Japan).
Nonetheless, simply look at the 30-year CBO predictions, and it is hard to see why one would think a crisis is at hand: they predict g>r = .5% (on average) over this period.
But for me, what I think should puzzle the fiscal fearmongers is: why are we not having a bond crisis right now, if fiscal policy is not sustainable?
An if the Left Wing of the Democratic party had spent less effort feeling alienated by Bill Clinton, they might have elected Gore.
I think the question of what the level of the debt should be is not the right question. It is neither a outcome (argument into anyone but K Rogoff’s utility function) or an instrument that affects any outcome variable. Debt is just the arithmetic sum of deficits going back to the Big Bang. It does affect the interest rate at which the government can borrow and thereby indirectly the discount rate of the NPV of any given expenditure which implies that fewer expenditures may pass that test when debt is high.
But if lenders are persuaded that all expenditures DO pass the test then the debt to repayment capacity will fall so the borrowing rates will too. Conclusion there is an equilibrium rate of increase in the Debt.
However, that equilibrium is not necessarily the rate of increase in income that is optimum. Higher taxes to establish a lower equilibrium D/Y ration might be better.
Conclusion: it is better to focus directly on trying to optimize revenues and expenditures that to worry about debt.
Sorry Ken
Since the deficit is an issue that concerns me, let me add one more comment. Dick Cheney once said "Deficits don't matter." What he really meant though is that deficits don't matter when it comes to winning an election.. In contrast, China's leader, Xi Jinping, has said he doesn't think democracy is sustainable in the 21st century. Unfortunately, both men might be right.
Go see Stephanie Kelton’s ‘Finding the Money’ May 22 at the New Parkway Theater, Oakland. It’s time for a new paradigm for your old vintage DSGE.
s their job to To take my demurral up one level, before thinking about what will avoid catastrophe (fiscal or climate) let try to get all right-thinking people to know what OUGHT to be done. I want our politicians to know that near zero deficits are best and that net emissions of CO2 should be taxed. It's their job to figure out how and when to move toward those goals.
Totally correct analysis of why the status quo is sub-optimal is useful, but only half the job.
Ok, so the chicken littles think the sky is falling. They are almost always wrong. But just as some paranoids really do have enemies, if the REASON the chicken littles think the sky is falling keeps increasing in degree of severity, then someday the chicken littles might be right. Just ask the dinosaurs. Sometimes the sky really does fall.
IIRC, the end of the call for fiscal austerity was in 1995 and the budget impasse, championed by House Republicans. I remember VA employees not getting paid for 2 months due to not raising the federal debt limit. Ultimately the debt limit was raised and responsibility in government spending was damaged, for better or worse.
That's interesting. I was a DOD civilian at the time and I got paid with no interruption.
Economists should spend more time analyzing the US War Dept budget because it is a strange bubble apart from all normal understanding of time and space where the rules of budgets, accounting, and spending that we are told are immutable when the topic is e.g. poverty relief do not apply.
I should also add I was watching CNN the morning of the first shutdown in 1995 so I didn't think I had to go to work. Later that morning my boss called me at home wanting to know why the hell I wasn't at work. I told him there was a government shutdown. He made if clear I didn't work for Congress, I worked for him. So I went in to work. Around 2pm word came down through the chain of command that there was a shutdown, and we were all told to go home.