Felicia Sonmez notes that various deficit idealists are asking (demanding?) that one of the presidential debates be set aside for their pet issue, and asks whether we should do what they want.
Obvious answer: no.
We get three presidential debates. Generally one is given to foreign affairs and national security, which seams reasonable. So half of the other two debates should go to one peripheral issue?
Oh, yes: some people claim to believe that the national debt is overwhelmingly important. But no one actually acts as if it is, and with good reason. Of course, there are lots of issues for which the claim is made that they are overwhelmingly important, but we don't have one of the three debates over, say, climate change.
Granted: pushing for presidential debate questions about one's pet issue is a perfectly understandable strategy for interest groups to do if their goal is to raise their issue's profile. So I can't really blame anyone for trying. But personally, I'd rather see Mitt Romney and Barack Obama spend 90 minutes talking about how to keep Bud Selig from implementing his awful playoff scheme and realignment that forces constant interleague play than to watch them waste 90 minutes spouting cliches about how awful terrible the big bad deficit is.
Tuesday, May 1, 2012
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Maybe a full debate about the deficit, per se, is a bad idea, but a debate about the federal government's budget and Obama and Romney's priorities within it would be highly illuminating.
ReplyDeleteProfessor Bernstein,
ReplyDeleteIs there some US debt/GDP ratio that you would find high enough to be relevant or are you more in the Galbraith camp?
http://voices.washingtonpost.com/ezra-klein/2010/05/galbraith_the_danger_posed_by.html
Reasonable question!
DeleteI find Galbraith interesting, but I'm not persuaded...I guess my general feeling is that I consider deficits/debt a current, not a future problem -- so that interest on the debt is an issue, as is any crowding out effect that could raise interest rates. So: if the markets signal (through rising interest rates or otherwise) that deficits are a problem, I'm for cutting them, and during good economic times I'm generally for deficit reduction (which IIRC Galbraith isn't).
It's fair to say that the debt/GDP ratio is important, but the issue has to be considered in the context of ongoing economic trends. While the ratio may be in a bad place, if you try to improve it during an economic slump, you're likely to make the situation worse. If you wait to address it, the ratio will be worse, but your ability to improve will be better. No one would choose the current debt/GDP ratio as an ideal policy goal, but a sustainable economy--not an abstract debt/GDP ratio determined a priori--needs to be the focus.
DeleteFollowing on that, I'm reminded of an earlier discussion we had here. A Republican senator/congressman (I'm afraid I don't remember who it was) had pressed the head of the CBO to repeat that if we borrow more money now and pay it off later, then it will depress economic growth in the outyears. The problem is that if you want to pay down debt, then you have to run surpluses, which is going to suck more money out of the real economy than if you don't run surpluses. The result of that will be less economic growth than you would otherwise expect to have. To that extent the congressman was correct. The hidden deceit (in my opinion) contained in the question was in ignoring the consequences of running those surpluses now instead of later. In that case, you have the reduced economic growth now instead of later, and we can't afford it now because the economy is barely moving as it is. It's not a question of absolutes (do we want debt? do we not want debt?), it's a question of timing and predictable consequences.
DeleteScott Monje,
DeleteI think that what depresses economic growth is government spending, so I doubt that we can have a real discussion about government-planned surpluses now vs. later. Our basic disagreement is akin to a religious difference, as I'm an "Austerian."
I'm more interested in hearing from liberals if there are any hard rules limiting government debt that they find reasonable and it seems that Professor Bernstein takes the Delongian view about this. No surprise. At least he's not gone off the edge with Galbraith.
My feeling is that because of certain features, like how people feel about government services in the abstract/particular and the public's general misunderstanding of the budget breakdown, this is an issue extremely ripe for misleading demagoguery. Paul Ryan is one example that comes to mind.
ReplyDeleteI think there is a real gap between what a typical medium information voter believes will fix the deficit (and why it needs fixing in the first place) and the reality of the situation. I'm not sure that a debate would do anything other than reinforce those misguided beliefs.
Then again, this analysis could probably be broadened to include just about any issue, but I think it's especially true for debt/deficits.
Following backyardfoundry's post, IMHO there's a potentially fatal error in the reasoning of those like Galbraith who infer that low interest rates means the world still likes our t-bills. T-bills are an investment of last resort, they are a safe haven for money that one doesn't wish to expose to the risky markets. In a time of great global uncertainty, demand for safety should keep interest rates on t-bills low, which will be just as true whether the debt is $16 T or $160 T.
ReplyDeleteSomeday, though, the world's economies will find their footing, the 'risk on' trade will return, and demand for treasuries will drop sharply. Again, this will have nothing to do with how investors feel about the full faith and credit of the US - it will rather be a reflection of an improved view of everything else.
When that day comes, as it almost certainly will, interest rates will rise, perhaps very rapidly, in accord with demand for treasuries falling. On that day, the difference between a $16 T or $160 T will be monumental, as the $16 T debt will be a problem, but the $160 T debt may collapse the country.
In summary, I think Galbraith's view about deficit irrelevance is entirely true if the world's economy stays in the shitter forever. If the global economy ever recovers - look out below, America.
The flaw in this logic, CSH, is that when that day comes, and the world economies have found their footing and everything seems to be on the rise, so will the US economy. Hence, tax receipts will be up, unemployment payments down, you'll have fewer people on Medicaid and S-CHIP, banks and pension funds will not be failing and requiring federal bailouts, states and localities will be hiring again, etc. etc. etc. This won't instantly wipe out whatever debt there is at that point, but it will increase confidence that the debt is manageable, thus pushing back against a sudden rise in rates in T-bills.
DeleteNice, another comment of mine got eaten. Trying again: The problem with this analysis is that if everything were improving, the US economy would be too. That would raise tax receipts, reduce transfer payments and otherwise put the federal government's finances on a sounder footing -- not enough so to suddenly eliminate the debt, but enough to raise confidence that the debt could be managed. This in turn would be a factor pushing back against lower demand and higher rates for T-bills.
Delete.....and then it got uneaten! (Or -- well, I'll leave out that image.)
DeleteHeh.
DeleteYeah, I rescued it. The ways of the spam filter are ever-mysterious...
I take the point that a roaring economy mitigates somewhat against the negative impact of deficits. Two thoughts:
Delete1) The deficit question is a threshhold one. I grant that the need to borrow from the Chinese drops with a healthier economy (ceteris paribus), but that nets against lower Chinese demand for our treasuries. Which effect is greater will depend on the particulars.
2) However #1 plays out, there will inevitably remain the issue of financing the debt that's already accumulated. So, in the unrealistic case that we built up a $160 T debt pile, it wouldn't matter that a roaring economy was mitigating the (current) deficit problem; servicing that debt would probably kill us.
Oh, and one other thing, an aside for Matt Jarvis: I don't know if I'd let the timing predictions of experts influence your belief in these scenarios. Bill Gross runs the PIMCO Fixed Income fund, which I believe is the world's largest; correspondingly Bill Gross is widely believed to be the world's most knowledgeable fixed income guru.
Last year, Gross' PIMCO fund trailed 95% of its peers after Gross made a particularly awful bet about the inevitability of inflation last spring. If you've ever seen Gross on his many CNBC guest spots, you know that he's an extremely knowledgeable chap. Its just that predicting the timing of these things is next to impossible.
But that shouldn't be a reason to doubt their very existence.
And just to clarify - regardless of how the effects play out in the roaring economy of the future, it seems to me to be a dangerous assumption that appetite for treasuries at current low rates + high US debt says much of anything at all about treasuries. It likely says a whole lot more about everything else, which is a much shakier story than the one told by deficit optimists.
DeleteSome massive stimulus plan should very well be questionable. But with such low interest rates currently, it really does make sense to spend more money on investments we're going to have to make regardless of whether years from now the economy is booming or is only still weakly recovering. That is, I fail to see the basis for so many conservatives not even wanting to contemplate borrowing in treasuries to spend more funds infastructure.
DeleteI've never quite known where to fall on the long-term debt question.
ReplyDeleteOn the one hand, I'm pretty firmly convinced of the basic approach of Keynes, so I'm firmly with our host on the question of now.
On the other hand, the logic posited by those who see it as a massive inflation risk is also fairly persuasive.
My problem, though, is that I know that there are a bunch of theories that seem logical, but data don't bear them out. In this respect, I tend to doubt the deficit/inflation-hawks. It seems like the constant refrain is "look out! It's just around the corner! No, not this corner, now it's the next corner!" There's more than a little doomsday-predictionism to the theory, it seems. Honestly, the argument seemed more compelling to me 3-4 years ago, but every month that goes by without the sky falling makes me doubt the argument more.
Oh, and as an aside, the more-often-used-than-not refrain of "borrowing money from China" doesn't lend credence to the adherents of the argument. China is the single largest holder, yes. Doesn't make them really even close to the majority, and I don't seem to recall this complaint when the biggest holder of US debt wasn't them, so it smacks more than a little of racism/fear of Chinese growth.
DeleteAs to the general question here, I agree it's a dumb idea to schedule a single-issue debate, but I also don't think it really makes any difference. Even if the candidates genuinely tried to stick to the deficit, they would necessarily have to address it in the context of the budget, which includes everything the government does, plus the whole economy, which includes potentially everything else -- even issues of foreign policy to some degree. So the debate would inevitably range over lots of other things too. I mean, we're talking about professional politicians here, people who come in with talking points and heavy preparation; they're going to use the opportunity to say what they want to say no matter how the debate is advertised.
ReplyDelete"No-one acts as if... the national debt is overwhelmingly important."
ReplyDeleteThis statement could be equally applied to foreign affairs and national security.