Wednesday, December 21, 2011

But WHY?

Commenter increasingmu writes on my post about Peter Boettke, Keynesianism, and public debt that: "[L]ike the 19th century, we need to be continually running surpluses when we aren't under extreme duress."

Why? You can't just say something like this, you have to have a reason. Why do people think this? If this is really something we "need" then why have so many countries been doing exactly the opposite and doing fine?

It seems to me the only thing that's obvious is that our debt burden can't grow faster than GDP on a permanent basis (if social welfare is growing even faster than GDP we actually probably could grow the debt burden faster than GDP without suffering welfare losses, but let's keep this simple). So the question is, what is required for that to happen. "Continually running surpluses when we aren't under extreme duress"? Nope. That's not required. The only thing that's required is that the growth of the debt is slower than the growth of GDP - not that it's negative (i.e. - a budget surplus).

So if your goal is a stable or even a decreasing debt burden there is exactly zero justification for the claim that this is something that "we need".

So why? Why are these claims made? I don't understand and I still don't feel like I have answers. Another commenter says that taxes may increase. It doesn't seem like they need to. Borrow money to pay the interest, and shave that amount off the top of the non-debt-burden-increasing deficit threshhold. A doctrine that we must run surpluses is just as likely to raise your tax burden as continual deficits - probably more. I like some aspects of Bowles-Simpson, but imagine if you had them running everything with the budget (that's what this demand for balanced budgets would entail). You don't think you'd get higher taxes out of that??? Come on - be serious.


  1. While increasingmu may not be a Keynesian, I'd like to offer a response.

    Like Michael Emmett Brady, I notice an uncanny parallel between Keynes and Joseph and the Pharoah. Yes - the seven fat years and the seven thin years! The following book by a Czech economist supports Brady's position.

    If you're still not sure about understanding Keynes's stance or Brady's stance, why not simply ask the man about it? He seems to know what he's talking about.

    Perhaps having a capital budget surplus for the fat years would enable a balanced budget multiplier effect, avoiding or mitigating the issues of deficits...

  2. First, in every traditional presentation of textbook Keynesian economics, you *want* to run a surplus in boom years. The Public Choice point is that you don't end up running one because of the incentives of politicians. And it is very broadly empirically correct. You don't like saying "need"? Fine- you are "supposed to" be running tight fiscal policy during expansions and loose fiscal policy during recessions. In the 19th century you got both. In most of the twentieth, you got nothing but loose fiscal policy except (debatably) during the Clinton years.

    Regarding the growth of GDP versus growth of debt distinction... okay? I mean, I don't dispute that if some government is actually able to grow their debt such that it always remains lower than some fixed percentage of GDP, ESPECIALLY when you are inclusive of significant downturns in the economy like this one. The "growing our way out of it" is historically (point out a specific counterexample if you want to argue otherwise) is a codeword for "inflating our way out of it" historically speaking.

    Also, you know increasingmu = increasing marginal utility and you can use my real name in reference to my comments. I only sign in as that here so people click the name and go to my blog :)

  3. Tighter fiscal policy, yes. Surpluses? That's news to me. If GDP is booming and we want to really nail the debt burden, by all means run a surplus. I applaud Gingrich and Clinton on that one. But I wouldn't present it as some rule that you have to do.

    Certainly inflation plays a role in reducing the debt burden as well as growth. The problem, for me, is that Peter Boettke gets up and acts like it's common sense that we must run balanced budgets or even surpluses. This is nonsense. We can run a deficit every year from now until eternity, and if we're smart about it, everything will be fine. In actuality - aside from a few punctuated surpluses - this is probably exactly what human civilization will do for the next several centuries. I'm guessing there will be no one in December, 2511, asserting that we have to stop this nonsense and run balanced public budgets and surpluses if possible. No one. Because no one will have behaved that way since the early 1900s.

    I know it's you - some people are more sensitive about using names, so I was just being safe. Duly noted.

  4. I agree. If you are going to make an argument, then have some reason why you are making it. This is a difference between ideology and reasoned conclusions; a problem in much of the discourse right now.

    I'm not sure why you say that "our debt burden can't grow faster than GDP on a permanent basis". I took a look at the numbers from FRED on NGDP and Federal Total Public Debt. There are only 7 years since 1980 in which NGDP grew faster than the public debt, most of this was in the dot-com boom which was, by any standards, an outlier in our economic history.

    In the short run, I agree, deficits are, at times, necessary. Basically, if you say deficits are bad, you are saying credit is bad and therefore consumption smoothing is not as easy to achieve. Balanced budget amendments are about the dumbest thing ever (why shrink the policy toolbox?). But I do have a problem with persistent deficits, especially the kind we have now. This is for several reasons.

    1. The kick-the-can-down-the-road mentality is bad policy. See where it got Greece? It also creates bad incentives for policymakers who see a sale of 10 year bonds as not relevant to their accountability since they will likely not be in office by the time they come due, let alone a 30 year issuance. This is one ingredient in a set of many that can lead to poor borrowing decisions.

    2. Let's assume that we have a 1 period stock of debt. Each year we pay the previous period and accrue 1 period of debt. Effectively we are consumption smoothing over 2 periods. Also assume that each period, the amount we borrow gets larger. This is not unreasonable since government grows every year (yes, I am looking at you Reaganites). When you learn to operate on a larger budget, it becomes harder and harder to adjust to a smaller budget. We know this is true for us as individuals and is probably more difficult for government. At a certain point, our growth will not be able to keep up and we will not be able to pay 1 period's debt in full. This is due to interest rates, debt growth, and the historical growth of our economy. Add to this a stock of debt that also grows because our spending is outpacing our growth for so long and you have even more problems.

    3. For future generations. Thomas Schelling said in a speech I attended that environmentalism was irrational since each generation was better off than the previous throughout history and that to refrain from consumption for the good of people who would be better off than us was an irrational act. I'm not convinced that this trend will continue for Americans. The political and economic hegemony that we have enjoyed for quite a long time is eroding. I look at my son and I think to myself that if I can reduce the possibility that he will be worse off than me, I will do that in an instant. You can certainly argue that austerity today can drag down the growth of tomorrow, but you can't ignore that we continue to increase our kids' debt burden and that cannot be a good thing for them.

  5. Professor Mitchell (MMT) presents arguments (interview w. Harvard International Review) that reinforce Daniel's point about the necessity of an argument:

    "There are some rare instances where governments have run down their overall stock of debt, like in Australia between 1996 and 2007. The conservative government of the period was enamored of this neoliberal idea that it would get rid of all its holdings of outstanding debt, and so it started running very large surpluses and paying back its debt. After about five years, the public bond markets became so thin—that is, there was such a small amount of debt left in the system—that the big investment banks started to protest [...]"

    Also, that:
    [Q] "Put simply, when should governments begin to run budget surpluses?

    [A] Particular budget outcomes should never be a policy target. What the government should be targeting is real goals, by which I mean a sustainable growth rate buoyed by full employment.

    Why do we want governments? We want them because they can do things that improve our welfare that we can’t do individually. In that context, it becomes clear that public policy should be devoted wholly to making sure that there are enough jobs, that poverty is eliminated, that the public health and public education systems are first class, that people who are less well off are able to become better off, etc."

    Furthermore, that:

    [Q] "How does this differ from the dominant New Keynesian paradigm?"

    "Well, the New Keynesian paradigm is built upon a series of false premises that affect policy prescriptions. False premise number 1: government has to borrow to fund spending. False premise number 2: there’s a fixed supply of savings available at any point in time. False premise number 3: the government, by borrowing from that fixed supply of savings, denies private sector borrowers those funds, and competition for those funds drives up interest rates."

    On that last point, Prof. Mitchell also argues it is false that:

    "When a nation is enjoying a strong terms of trade with an external surplus, the government can create more space for non-inflationary spending in the future by running budget surpluses and accumulating them in a sovereign fund." His further account of that is here. Following from an earlier quote, we can also see that using the "savings now allows future non-inflationary spending" assumption is wrong for any group of market participants, since MMTers do not deny that too much spending (from any source) can be inflationary.

    He says one further thing that I want to quote here:

    "So we have a situation where the elected national government prefers to buy financial assets instead of buying all the labour that is left idle by the private market. They prefer to hold bits of paper than putting all this labour to work to develop communities and restore our natural environment."

    This preference can be described as the result of the preferences of market powers (I forget who originally came up with this analysis, so I cannot attribute it, alas). The argument goes that if government buys up unused workers, or otherwise alters market condition or perception of time preference and the role of markets in driving demand, that market players see this as unwanted competition.

    So much for "anarcho-capitalism" - which in fact relies upon scrubbing out a form of order (governments) as a precondition for the "natural" or "emergent" order of anarcho-capitalism, so in truth it cannot lay claim to a natural, anarchic order at all. The simple name of the theory belies its true mode of operation, and that is enough for us to question the soundness of its assumptions.

  6. You seem to be arguing that the debt burden shouldn't grow faster than GDP but that its okay to borrow to pay the interest on existing debt so that the debt can be maintained without increasing taxation. What happens when interest rates are higher than GDP growth ? In any case once you've ramped up government debt to (what you consider to be) a reasonable level then if you're borrowing to pay the interest there will not be much scope to increase it much more for other kinds of spending.

  7. "Tighter fiscal policy, yes. Surpluses? That's news to me. If GDP is booming and we want to really nail the debt burden, by all means run a surplus. I applaud Gingrich and Clinton on that one. But I wouldn't present it as some rule that you have to do."

    TEXTBOOK... meaning the textbook I taught out of this semester (Parkin), says you want budget deficit = budget surplus = 0 when real GDP = actual GDP. What model are you working off of? I don't understand the motivation for not increasing taxes/cutting spending if we are at full employment.

    To consciously oversimplify,

    Not at full employment + more aggregate demand = more employment
    At full employment + more aggregate demand = more inflation
    Given that expansionary policy is defined as running a deficit (in every textbook I've ever read), what is the rationale for a deficit when we are at full employment?
    More to the point then, won't not running a surplus when we overshot full employment only lead to inflation and over-investment (in the neoclassical story)?

  8. rob: MMTers will agree that inflation should be targeted. Professor Mitchell again:

    "None of this is to say that budget deficits don’t matter at all. The fundamental point that the original developers of MMT would make—myself or Randall Wray or Warren Mosler— is that the risk of budget deficits is not insolvency but inflation. In saying that, however, we would also stress that inflation is the risk of any kind of overspending, whether investment, consumption, export, or government spending. Any component of aggregate demand could push the economy to that point where we get inflation. Excessive government spending is not always to blame."


    "I don't understand the motivation for not increasing taxes/cutting spending if we are at full employment."

    What is the motivation for cutting spending, if interest rates (which drive how expensive the debt is to maintain) are close to zero and investors are effectively paying the government to invest their money, and especially when there is call for an employer of last resort? Paying down the debt can't be it, because we're in no position to do so, collectively. Targeting spending, as a policy goal in of itself, ignores the point of having a government.

  9. Ryan (increasingmu) -
    So if the economy is below full employment, and then the government spends and runs deficits at a level consistent with full employment, as long as the economy doesn't start to overheat, why would maintaining a certain deficit level add to the problem?

    It doesn't make sense to pay for everything with taxes if revenues are going to be higher in the future. Families and businesses don't do that, after all. The difference with government is that it is not mortal, it can print money, and the nation is practically guaranteed to continue growing in a way that companies and families aren't.

  10. I would say, because the textbook model says that running the deficit at full employment will CAUSE it to overheat. Maybe MMT or whatever says this is unimportant, but I don't believe that's your model. This is basic Old Keynesianism. What model are you using that says running a deficit when you are at full employment will not cause it to overheat?


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