« "Hissing, Booing, And Chanting 'Resign. . . . Resign'" | Main | Last Imus Post Ever (I Hope) »

April 14, 2007

Comments

Well said, hilzoy. Unfortunately, the last time the leaders of the Republican party believed in not running deficits was under Eisenhower, under the weak catchphrase "Better dead than in the red." The Democrats have been slightly better, though hardly perfect (especially LBJ). And those who point this out (from Gore to Perot to Tsongas, and so on back in time) found that being the only candidate adult enough not to indulge in budgeting fantasies is a sure means of electoral defeat.

In general I think that the cut-taxes-and-keep-on-spending Republicans do more harm than the tax-and-spend Democrats. Democrats discuss the issue more honestly. The Republican line is we can afford tax cuts either because they grow the economy or because we can cut spending. Just plain not true. It isn't politically feasible to cut enough spending to offset the tax cuts advocated by Republicans, and voodoo economics is, well, voodoo economics.

Yes, that's right: had we simply paid our bills on time, more or less, we would not only not be running a deficit, we would have $157.9 billion dollars to either refund to taxpayers or spend on some new program.

You don't understand hilzoy, we have to provide the Japanese and Chinese central banks a place to invest their cash and provide them with economic leverage over us. This is part of the grown-ups being in charge.

This is a re-run, sort of. Back when Clinton balanced the budget -- remember that? seems so long ago -- the last deficit year would have shown a surplus except for the interest that had to be paid on *new* debt (not old World War II borrowings) incurred in the 12 years of Reagan and George I.

“we have to provide the Japanese and Chinese central banks a place to invest their cash and provide them with economic leverage over us”

This situation also enriches the “have mores”. Their taxes have been lowered, they can buy government debt then collect the interest paid with other peoples taxes.

They like it.

While I applaud your point, hilzoy, I need to point out that you did fall for a bit of budget manipulation. The "total" deficit includes both on-budget and off-budget items.

And the off budget items, most notably, include the trust fund for Social Security, which is in surplus right now as assets are accumulated for the retirement of the baby boomers.

Taking that out, the on-budget deficit for 2006 was $434 billion, which is slightly more than the interest on the debt for 2006. So while we would be in a much better financial position if we hadn't borrowed in the past, there really wouldn't be money for new programs (sadly).

"Back when Clinton balanced the budget"

Once he was stuck with a Republican Congress, anyway; There's nothing quite like partisan gridlock to keep spending down.

I too am a strong supporter of balanced budgets, but I think you're missing an important point here: the "investments" we make today can improve the lot of those in the future, and as such they should have to foot part of that bill. Of course, most of the "investments" we make today are really just pork for all manner of special interests, and do absolutely nothing for future generations. However, there is a THEORETICAL case of deficit spending.

A good example of a good clean investment would be building a hydroelectric dam. Assuming, of course, that there are no environmental injuries (I know, I know, that's a big assumption), then the dam costs lots of money now but generates almost free electricity for decades into the future. Why should today's taxpayers foot the bill for an investment that will better the lives of tomorrow's taxpayers? Shouldn't they have to pay part of that bill, too?

The same argument can be applied to other policies. We went deep into debt to pay for World War II, but the generations after WWII who didn't have to live under the Nazis enjoyed a big benefit, so they should have to help pay for World War II.

Then there are disasters like Vietnam or Iraq. Oops, there went a trillion bucks and it's not making future generations any better off. Perhaps we need a better investment adviser.

So there is a theoretical justification for deficit spending. In actuality, the great majority of current spending is simple wealth redistribution. Most of that redistribution nets out to the benefit of the upper classes, but the shell game is so complex, with so many shells moving all over the economy, that its almost impossible to figure out who really gets what.

Lastly, this raises a terribly important philosophical question that we never really consider in policy-making: what do we owe future generations? How much of our wealth should we direct from our own pleasure to the well-being of future generations? I myself am rather extremist in the direction of deferring gratification for the future, but we as a nation never really give this issue much of an airing.

Dantheman:

"Better dead than in the red."

They always threaten but never carry through on the suicide threats. And they think the Democrats are the party of Death..... hmpff!.

Although, I heard once that the "Live Free or Die" New Hampshire folks had a mass suicide the first time someone paved a road using a tax levy.

I suspect they (you know.. them, not you and you and you) chicken out on the suicide after weighing the effects of the Death Tax.

Which makes our tax system death neutral.

Lastly, this raises a terribly important philosophical question that we never really consider in policy-making: what do we owe future generations? How much of our wealth should we direct from our own pleasure to the well-being of future generations?


It seems that not only do we consider it, we model it mathematically and argue about its consequences. At the very least, economists do.


When the Stern report was released there was a blogospheric discussion about exactly what discount rate we should assume for future generations and how that parameter changed policy implications. For example, see Brad Delong being technical or watch Arnold King present an introduction for laymen or read what John Quiggin thinks.

Erasmussimo: yes, there is a case for deficit spending, in the abstract. The case is helped if there just isn't enough money to pay for investments that will pay off in future generations, and/or if the present generation is not reaping the dividends from the investments made by its predecessors. Neither is the case now.

I should say that I'm not a total deficit hawk. In what I persist in thinking are normal circumstances, I'm pretty flexible. We're just so far outside the zone of flexibility that what I say and what deficit hawks say will be indistinguishable, for a while.

I'd be a lot happier with deficit spending for things like infrastructure and education and public health than with deficit spending for bridges to nowhere and the Iraq war, however.

the last deficit year would have shown a surplus except for the interest that had to be paid on *new* debt (not old World War II borrowings) incurred in the 12 years of Reagan and George I.

The same argument can be applied to other policies. We went deep into debt to pay for World War II, but the generations after WWII who didn't have to live under the Nazis enjoyed a big benefit, so they should have to help pay for World War II.

I'd say it was worth it to bring freedom to Eastern Europe.

And this will make taxes lower, not higher, over time, since we won't be paying interest on an even bigger deficit.

This does assume that the Democrats don't find ways to spend that money, an assumption that seems...iffy, at best.

DaveC: Freedom for Eastern Europe is a good thing, but I think Gorbachev had a lot more to do with that than anything the US did. In the hands of a Soviet leader less committed to glasnost and peristroika, 1989 could have just resulted in a bunch of dead Eastern Europeans rather than the end of the cold war.

And yes, I'm aware that there are some ex-Soviets who say otherwise, but I'm not convinced that that is anything more than flattering the world view of those they deem most likely to help them.

Of course Democrats will find ways to spend money--that's what the voters, even the Republicans ones, want. The difference is that Democrtats won't talk a lot of twaddle about cutting taxes while spending the money. I also doubt that thhe Democrats while bleed the country dry on unnecessary wars.
Those are our choices in American politics: Democrats who tax and spend and Republicans who cut taxes and spend. Not spending isn't a politically viable option because no one wants substancial cuts that will affect them.

That was supposed to be "will", not "while".

G'Kar: it works just as well if the level of spending is independent of the level of taxes. Which seems to be true under Republicans.

;PPPPP

Having just sent in my “pound of flesh”, I have nothing nice to say here so I won’t.

Well, one thing – you should be able to claim a dog as a dependent…

Nothing to say, who am I kidding:

November 11, 2006:
Democratic leaders this week vowed to make the alternative minimum tax a centerpiece of next year's budget debate, saying the levy threatens to unfairly increase tax bills for millions of middle-class families by the end of the decade.

Today:
This year more than three million taxpayers will be hit by the Alternative Minimum Tax on their 2006 income. But next year that number could rise to 23 million unless Democrats in Congress come up with a way to halt the juggernaut that is the AMT.

Come on Democrats – don’t let me down. I’ll trade you the estate tax, because it will never impact me. I’m against the estate tax on principal, but when the rubber hits the road I am as selfish as the next guy.

OCSteve: as someone who may well be hit by the estate tax, allow me to try to change your mind.

Oops: I should have said: I want to change your mind about the Estate Tax being objectionable on principle, not about your being willing to swap it. That I'm completely fine with. ;)

Did Congress not know about inflation when implementing the AMT and Estate Tax? Wankers.

I am against the estate tax being set for only a small segment of the population. If we are to have an estate tax, it should effect all estates, not simply a very small minority.

If we are to have an estate tax, it should effect all estates, not simply a very small minority.

I could there, though there should be some sort of initial exemption as the fees charged for estates under, say, $500,000 or so would eat up a good deal of the estate. I would also favor a step-down in basis of all assets passed on in the estate to zero, rather than a step-up to FMV, which serves no purpose other than to avoid the administration problems with trying to track the deceased's basis in his/her assets (though in 2010 this problem occurs for that single year).

I heard a man on CSpan one day ranting about how unfair the 'Death Tax' was. How, he asked, can we tax dead people? Honest to God, I have tried and tried but I cannot understand how one can tax a dead person. The only way that can happen in my mind, is if you take some of the money away from them before you put the rest of it in the coffin with them.

I must beg to differ with our usually incisive host.

She notes the extent of net interest that might be better used for other purposes, "if we had paid our bills on time." If we had balanced the budget every year ('paid our bills on time'), the economy would have grown much less over the past 60 years.

Put aside any possible adverse effects on employment and she's still wrong. If we pay an extra billion this year to reduce the deficit, we avoid paying about six cents on the dollar in all ensuing years. Having a smaller deficit now and less interest cost later is doing nothing more than shifting spending over time. You can have less now and more later, or vice versa, but you can't have more or less in present value terms by raising or reducing the deficit.

Actually the present value of that six cents over the infinite horizon equals the dollar borrowed today. If time is not infinite, borrowing is a better deal. That aside, six cents in the future, with higher GDP and income, is less of a burden than six cents today. Advantage: borrowing.

Naturally there are prudent limits to borrowing. Federal debt at present compares well (is lower relative to GDP) than that of most other industrialized nations. Debt is not the real obstacle to new spending initiatives. Anti-tax sentiment is the problem. "Paying our bills on time," or paying more in the past to avoid incurring debt and subsequent interest payments, would have meant more taxes.

If you love public services and benefits, ya gotta love taxes.

Miracle Max: if your unconventional view that deficit spending is on balance good for the economy over time were true, why not just eliminate taxes altogether? I know you say that there are "prudent limits", but if your argument were true, wouldn't this just be ill-informed prejudice?

Hilzoy, I'd like to take a stab at supporting Miracle Max's case. Let's imagine 3 scenarios:

1.borrowing zero, i.e., a balanced budget with all debt retired.
2. borrowing an enormous amount.
3. borrowing "just the right amount" (whatever that is; all we know is that it falls between options 1 and 2.)

In scenario #1, we leave no debt to our posterity but we also leave fewer assets. The hydroelectric dam provides an example here; would our posterity be better off with the dam and some debt or no dam and no debt? In this case, we can easily determine that posterity is better off with the debt. Thus, leaving no debt means that we fail to invest in long-term public assets whose long-term benefit exceeds their capital costs. That's bad.

2. In scenario #2, we borrow like mad, live the good life, invade countries just for fun, and end up with a huge debt. Now our posterity gets saddled with huge debts and all it has to show for it are a lot bad investments: spent bullet cartridges, bridges to nowhere, etc.

3. Ah, the "just right" scenario. In this scenario, we borrow ONLY for those assets whose net benefit to society exceeds their net cost. Yes, we pass on debt to our posterity, but we also pass on assets that are greater in value than the debt.

The trick, of course, is to hit the nail on the head in terms of our investments in the future. We don't want to invest in centibillion dollar mistakes like Iraq; we do want to invest in... in... well, some roads are worth their while. Education is certainly a great investment in the future. It's a matter of picking our investments carefully. In this sense, our government can be thought of as an investment fund manager handling our tax money. Unfortunately, these guys make Mr. Ponzi look like Warren Buffett.

Obviously we would like any money spent to be of use, whether in the present or the future. Bridges to somewhere are better than bridges to nowhere.

The amount that can be borrowed is not so arbitrary. If debt grows at the same rate as GDP, that is sustainable indefinitely. The reason is in that scenario interest will grow at roughly that rate as well, so if interest is affordable now it is affordable in the future if you scale interest, debt, and GDP all by the same factor. This notion is not controversial among economists. It's just that the public debate is so goofy because we've been fed some kind of fundamentalist bullfeathers about debt (really aimed at stifling public spending).

This past year's deficit is actually a little lower than it needed to be.

Hilzoy: Oops: I should have said: I want to change your mind about the Estate Tax being objectionable on principle, not about your being willing to swap it.

Thanks for clarifying. When I read your first response I was like, what? I know we have had this conversation before :)

How come I don't hear alot of whining for repeal of the gift tax?

They should repeal it. Why should any income be excluded from taxation? I think the 10k untaxed portion of gifts should be repealed, and all gifts should be taxed.

Erasmissiomo: I agree with you. But I don't think that's what Miracle Max was arguing. As best I can tell, Miracle Max's case not only omits the difference between investment that does something useful later and spending that doesn't (or, for that matter, just burning money up for fun), but relies on this: "Actually the present value of that six cents over the infinite horizon equals the dollar borrowed today."

Leaving aside the fact that we're not spending six cents for every tax dollar but one in every six tax dollars on debt service, I wonder: why is that true? Is the (average) interest rate on the debt magically equal to the inflation rate over an infinite time span? If so why? Don't the lenders take any sort of premium for making their money available? If not, why not?

Naturally there are prudent limits to borrowing. Federal debt at present compares well (is lower relative to GDP) than that of most other industrialized nations. Debt is not the real obstacle to new spending initiatives.

I just hope you did clear that up with the PBOC. You know, the People Republic´s Bank of China. The same bank that right now got more than a trillion dollar in its coffers.

The difference to most other industrialized countries is that they have household savings. Meaning, that in a pitch, they could finance current account deficits (for a time at least) from their own citizens.

It seems like mutually assured destruction.
You try to f*ck them, they destroy your currency and economy. Which will of course destroy a large part of their economy too.

Or in other words, without tax raises, right now China (,Japan and some oil producing countries) are paying for your military.

"The difference to most other industrialized countries is that they have household savings. Meaning, that in a pitch, they could finance current account deficits (for a time at least) from their own citizens."

Which countries do you think have sufficient household savings to do this?

The amount that can be borrowed is not so arbitrary. If debt grows at the same rate as GDP, that is sustainable indefinitely. The reason is in that scenario interest will grow at roughly that rate as well, so if interest is affordable now it is affordable in the future if you scale interest, debt, and GDP all by the same factor.

That´s only true if you can borrow in US dollars and only if foreigners will lend you US dollars at your own low US interest rates indefinitely. Which is totally true right now I hasten to add.

Not to mention the fact that you totally disregard the net lender/loaner position. In the past, the USA was fortunate that its foreign investments seemingly brought a higher return than foreign investments in the USA. Simply put, despite being the main lender of money, somehow the much smaller US foreign investments gave a higher return. Sooner or later though, the sheer weight of interest and loan payments will change the balance sheet.

Given the currency exchange rates in the last few years a prudent investor could have made a lot more money outside the USA investing his dollars...

The simple fact is that lots of Asian Central Banks own lots of US dollars. They bought them to keep their own currencies low/stable to the US dollar. Helping their own exports to the USA. Which is one of the main reasons for the US huge trade deficit.

Without them the US dollar should already devalued somewhat. And probably raised interest rates in the USA too. Encouraged savings and making imported goods more expensive.

I'm not sure if we can define this as sufficient (or China as an exemplar industrialized country), but Japan and China save a lot. link

Which countries do you think have sufficient household savings to do this?

The federal deficit in Germany right now is around Euro 18-20 billions. With a household savings rate of 10+% (according to the OECD 10.5% in 2006 compared to -0.2% in the USA) I suspect we could finance that.

Simply said, saving deposits in Germany in 2005 got more than 611 billion Euros in them. I suspect with a 3% interest rate we could finance "our deficits indefinitely".

Simply put, despite being the main lender of money, somehow the much smaller US foreign investments gave a higher return. Sooner or later though, the sheer weight of interest and loan payments will change the balance sheet.

It´s late in the night for me...

So let me correct:
"...despite being the main loaner of money..."

Given the currency exchange rates in the last few years a prudent investor could have made a lot more money outside the USA investing his dollars...
I'm one of those prudent investors. Our retirement accounts have been fattening quite impressively since we moved most of our money into overseas (mostly Asian) investment funds. Not only are we voting with our dollars, but we're getting rich doing so!

Public investment is just financing public services in the future. There is no big difference in what is ultimately provided. It may or may not be useful. The difference is that investment is a kind of saving, but it doesn't make sense to eliminate some service or benefit today so you can have it later.

Net interest in FY2006 was actually $227 billion (Table 3.1, p. 54, http://www.whitehouse.gov/omb/budget/fy2008/pdf/hist.pdf). H, your number for receipts is correct. Any similarity between net int/rev and the interest rate is coincidental. Net interest/debt held by public is the basis for my average interest rate (rough) estimate (six cents on the dollar).

Lenders factor in expected inflation in the interest rate they demand, along with some risk premium.

The PBOC lends the U.S. money because it is in their interest. It helps finance their exports to us, without which they would face serious domestic political conniptions. It also gives them leverage over the U.S. politically, which I count as a security threat to the U.S. All the household savings in the world wouldn't matter if we still ran our huge trade deficit on top of it. We had that deficit even when the budget was in surplus.

It's true we would be better off without such an imbalance. Running a smaller deficit would not make much difference under present circumstances. The trade deficit is much bigger.

I claim moderate deficits are sustainable regardless of who is doing the lending. You can get sideways with any lender if your finances look shaky. A difference is that a change in PBOC policy would be for the political goals of the state.

If there were zero deficits now, foreigners still hold a lot of dollars and somebody could make trouble for us if they wanted to (albeit potentially at huge cost to themselves).

It's true rates of return for foreign assets are higher than for the U.S. Nevertheless capital continues to "flow uphill," as the saying goes. Maybe it's because the U.S. has more bombs than anyone else.

GWB proves Thomas Paine wrong.

The comments to this entry are closed.

Blog powered by Typepad