Brad DeLong: If We Rule Out Any Alternatives, My Solution Is the Only One
I don’t understand why the debt ceiling issue is so mysterious. DeLong approvingly quotes Glenn Hubbard and then elaborates:
Glenn Hubbard in the Financial Times:
Forget the debt ceiling and focus on debt: On May 15, the US hit its “debt ceiling” of $14,300bn, covering publicly owned debt held by the Federal Reserve and government trust funds, and Washington is in a furor…. [T]he problem is not the debt ceiling per se. My wife and I don’t vote on whether we will pay our bills. Rather, we discuss whether our spending or income needs adjustment. So too must it be for our national “family”….
A good beginning. It should have been followed by a couple of paragraphs talking about how ludicrous it would be for a household to decide to spend in excess of its income and not to borrow. But Glenn then drops his opening paragraph theme and goes in a different direction…
So let me make sure DeLong, Hubbard, and everyone else recognize the non-ludicrous position a lot of us have been consistently taking on this: The Congress should not raise the debt ceiling, and it should slash spending.
Yes, there are odd rules governing the operation of Congress, but there’s nothing particularly crazy about having a separate vote on the overall debt, versus the individual spending items. In the same way, a husband and wife can decide, “We’re not spending more than $1000 on groceries this month,” and then separately decide whether to buy hamburgers when they’re on sale next Tuesday. There’s nothing ludicrous about such a procedure.
Sure, the rhetoric of many Republican politicians is inconsistent and tries to be all things to all people. But that doesn’t mean the “adult” thing to do is raise the debt ceiling, as DeLong and others suggest.
In other words, Tea Party-type voters and the politicians catering to them are demanding the simultaneously impossible (a) no debt ceiling increase, (b) no tax hikes, and (c) no cutting of old-age programs. But DeLong et al. assume the only way to resolve this contradiction involves denying all three. Why? I can consistently say yes to (a) and (b), and no to (c).
Last way of making my point. After quoting Hubbard favorably, I could just as easily have written:
“A good beginning. It should have been followed by a couple of paragraphs talking about how ludicrous it would be for a household to decide not to borrow, and to spend in excess of its income.”
In other words, given that Congress may decide not to raise the debt ceiling, then it has to slash spending (and/or sell of assets to raise revenue).
So framing the options before Congress doesn’t somehow make raising the debt ceiling pop out as the only logical thing to do. Yet DeLong, Krugman, and many others are writing as if the true austerians are defying the laws of arithmetic.
It seems as if DeLong really missed the point of the paragraph he quoted. It looks as if Glenn Hubbard was always going the same direction.
I think you should support raising the debt ceiling. Seriously. And while you’re at it, why stop at say $15tr or $16tr or whatever? Go for broke, raise it to $1,000,000 trillion. Better still, abolish the silly thing altogether.
Afterall, the Keynesians claim to be miracle workes, turning stone into bread. Stand back and let them try. If they succeed, well and good. If not, then the Keynesian zombie may finally be laid to result, though unfortunately not before the US economy collapses altogether.
How many people have already died at the hands of socialism? Yet still the seductive idea attracts the weak minded with promise of something for nothing. When the Keynesians win they claim it was all their own work, when they lose they just blame someone else.
Agreed. Abolish the silly debt-ceiling altogether.
However, it’s Murphy and not Keynesians who believes in miracles.
Tea Party-type voters and the politicians catering to them are demanding the simultaneously impossible (a) no debt ceiling increase, (b) no tax hikes, and (c) no cutting of old-age programs.
I presume that by “old-age programs” you mean social security? Don’t I remember hearing that the social security system was completely self-contained and self funded? People paid into it, and then after paying in for many years they get a defined benefit back out… that’s how it is supposed to work, fully isolated from the main part of government funding, nothing to do with the debt ceiling.
When did social security all of a sudden stop being funded by the taxpayers who put money into it, and start being funded by a debt ceiling? Eeeek! You don’t think someone raided it do you… no, tell me it ain’t possible.
Social Security was always operated on the basis that any surplus income that comes into the funds over outlays, then those surpluses are spent by the government, with non-negotiable securities taking their place. While there have been many accounting changes made, this is the way that I have always understood Social Security. While they did build up a small surplus after changes in the early 80s (which were supposed to take care of the baby boomers), this did not last very long.
I believe that it was last year (or, early this year) when Social Security’s outflows began to exceed revenues.
That’s not my understanding. Those surplus funds from previous years were lent to the government, and the mechanism for the lending was that the “social security trust fund” purchased government securities. Or putting that a different way: social security made a promise to the workers, and government made a promise to social security.
If the government breaks its promise by not redeeming those securities, then social security will be forced to also break its promise by not paying pensions.
http://en.wikipedia.org/wiki/Social_Security_Trust_Fund
And yes I’m well aware that the SSTF is regarded by some as nothing more than accounting trickery, and regarded by others as outright fraud. However, promises were made, and it is morally right that people should keep their promises.
One of the people who thinks the system is outright fraud is Edward Ketz:
http://accounting.smartpros.com/x46596.xml
The MMTers should read and study that very carefully because it explains exactly why trusting government to provide a vehicle for private savings not only doesn’t work in theory, but as the SS system collapses we can all watch it not work in practice.
SSTF is just an interest bearing deposit account at the Fed. It is an accounting trick as much as any bank deposit is. Money is debt and debt is an accounting trick after all.
Edward Ketz is clueless. The problem is he is not the only one. One could only hope at some point people will start thinking straight instead of backward, and realize the government does not need to borrow from anyone and that US dollars can only come from the US government as a point of logic.
Hopefully at some point you will realize that we all know the government doesnt need to borrow and that they are the sole issuer of dollars. I don’t understand why you have trouble with that. It is obvious to everyone. We just disagree on that being a good thing.
Obviously Tel and Edward Ketz don’t understand it, or don’t apply that understanding to their understanding of the SSTF.
The government does not borrow from the SSTF, which is just an interest bearing account at the Fed in the form of Tsy bonds, in order to spend.
I can’t speak for them but I’m sure they realize that the government could just print all the money they need. Again, we just think that is a horrible idea.
So the MMT is all based around one accounting identity that tracks sectoral imbalance. If you say anything about MMT you get back, “It’s an accounting identity, it cannot be denied!”
In comparison, Dr J. Edward Ketz has spent his life doing accounting, he lives and breathes accounting identities and has done for years, he has written a four volume set on Accounting Ethics and various books on financial risk analysis… and yet his experience is waved away as “clueless”.
I think that’s a shade disrespectful coming from someone who thinks one trivial sectoral imbalance equation is the u l t i m a t e s o u r c e o f P O W E R.
No, MMT is about the operational reality of a modern monetary economy.
Edward Ketz might be a very good accountant, but he certainly cannot see the operational reality behind the obfuscation of accounting techniques.
And the operational reality is that the SSTF is just an interest bearing account at the Fed and that the government does not borrow from it in order to spend.
MMT is an “operational reality” that ignores all labour, all physical goods, and has no concept of price.
In other words, useless.
Show me how the MMT equation can be used to identify signs of regulatory capture.
Sorry, MamMo, but you need to study some institutional details. SSTF is NOT an interest bearing account at the Fed; these loans carry no interest at all. Just another datum showing how Washington is screwing ordinary folks.
You should also read an author’s works before criticizing it. If you are going to criticize my work, at least know what I actually said.
De Long is completely wrong like you are when comparing a monetarily sovereign government with a household. It’s nonsense. We already agreed the government does not need to tax or borrow in order to spend.
Treasury bonds are an interest bearing account at the Fed, which serve no other purpose than as part of the interest rate maintenance operation of the Fed. There is no debt, only savings of the private sector. There is no ticking bomb, other than the misguided spending cuts you propose that will only tank the economy even further.
I wish when that happens all those responsible for advocating spending cuts – even when it’s out of ignorance – will be hold accountable and prosecuted.
Ah, what a cootsie, cuddly little dictator you are… Oh, yess you are a little dictator, oh yes you are!!!
little?
I should have expected as much. LOL
But, there are economic (and political) consequences of spending through inflation, which is why the government is ultimately constrained in its spending.
Yes, inflation is the only constraint one should worry about, not silly self-imposed constraints like the debt-ceiling which can only harm economic activity in a non inflationary environment.
Government Spending is Bad Economics.
Ignoring the sectoral balances is bad economics.
The level of government spending should be whatever people want it to be.
However, running a budget deficit not large enough to compensate for the trade deficit will push the private domestic sector into further debt.
That is bad economics.
This seems absurd, given that different people want different levels of government spending.
Why is that?
Why is that? Because of the sectoral balances:
Net Domestic Private Savings = Government Deficit + Trade Surplus
The government and the domestic private sector cannot deleverage at the same time, unless the trade surplus is large enough.
That doesn’t help in clarifying why you equate a trade deficit with debt.
The trade deficit is a leakage for the private domestic sector:. Income < Spending
The same applies to a government surplus.
So when the budget deficit is not large enough to offset the trade deficit, then the private sector's income is lower than its spending.
Ever wondered why the saying doesn’t go “quid pro bond” or “tit for fiat”?
Austerians, heh!