From Nick Schultz via Greg Mankiw.
Uncharted territory
Previous post: On the Importance of the Extent of the Market
Next post: The deficit
where orders emerge
EconTalk Podcast
Recent Episodes-
where orders emerge
Previous post: On the Importance of the Extent of the Market
Next post: The deficit
Recent Episodes
Podcast RSS Feed
Full EconTalk Text
{ 50 comments }
Yes… "uncharted" because your graph starts in 1969.
Come on!
Debt/GDP was over 100% in the mid-to-late 1940s, no?
So not exactly uncharted.
The current state of the debt is obviously not a happy tale, but as long as it is under the upper limit of what the government can service (and I haven't heard ANYONE seriously claim the government can't service this debt) the important questions are:
1. Are we running deficits for the right reasons?
and
2. Are these deficits going to be maintained or are they temporary?
I can anticipate the Cafe Hayek response to both those questions, but let's be clear – fearmongering with a graph that starts only 30 years ago is not the right way to engage these questions.
Only in Government Land can you spend your way to prosperity and borrow your way out of debt.
If I followed Congress' example I should be paying my mortgage with a credit card and using my retirement to buy groceries.
John -
Explain who thinks you can borrow your way out of debt?
The way I understand it, the administration and Congress think they can:
1. BORROW (not spend… spending on a balanced budget won't do it) their way to prosperity (ie – out of recession), and
2. TAX (not borrow) their way out of the resulting debt (it's about cost smoothing, not ponzi schemes).
If you're going to be snarky, at least get the arguments of your opponents right.
3. And I should add for all my Austrian friends – inflate their way out of debt to some extent as well… although I'd part with my Austrian friends in that I don't think this is a deliberate or primary solution to the debt.
DK,
There's no way this debt will be payed off without massive inflation.
Why do you think there's a worldwide drive to drop the dollar?
They know that the printing presses are primed and ready, and that soon a million dollars might buy you a doughnut.
I'll concede half of your correction
1. Borrow to prosperity
2. Spend money that doesn't exist to inflate our way out of debt.
As far as ponzi schemes go, how 'bout that Social Security?
Posted at the same time.
John -
Re: "Why do you think there's a worldwide drive to drop the dollar?
They know that the printing presses are primed and ready, and that soon a million dollars might buy you a doughnut."
Ummm… I think there's a worldwide drive to move past the dollar because people don't like the perverse incentives that our Fed faces as the central banker for the US and the de facto central banker for the world, but I don't think it's because they're especially concerned about the dollar now or this particular Fed chair. A single currency would remove the threat of inflation… but I'm not sure it's the US that people are worried will be irresponsible with inflation.
RE: "As far as ponzi schemes go, how 'bout that Social Security?
Umm… how about Social Security? It's not a ponzi scheme, if that's what you're insinuating. You do understand what a ponzi scheme is, right? That the returns earned by early subscribers are paid entirely by the subscription of later subscribers, so that there are no real returns.
You're not one of those people that was duped into thinking that because there isn't an ACTUAL lockbox, Social Security is somehow unfair, unstable, or insolvent, are you?
Let's not get this into a monetary policy debate as so often happens in this blog. I want to make sure this stays trained on Russ's initial point about the debt. And the fact is:
1. His post is HUGELY misleading, and
2. We can handle this level of debt
In the mid-to-late 1940s, much of the rest of the developed world was in ruins. The U.S. was practically untouched by two world wars, except for the destruction of much productive labor, and the U.S. population was rapidly growing younger. The situation today is radically different.
"That the returns earned by early subscribers are paid entirely by the subscription of later subscribers, so that there are no real returns."
Hmmmm. Currently early subscribers to Social Security are paid entirely by current subscribers, and the difference turn into intergovernmental debt in the form of bonds.
That's how Clinton "balanced" the budget, by borrowing from SSI instead of China during the payroll tax rich days of the dot-com boom.
I'm 35 years old. I have zero expectation of receiving a dime back from anything I pay to the government.
If anyone else did what our government is doing they'd go to prison for life.
Not that I'm bitter or anything
I believe the "uncharted" in the title refers to the reality that these are projections coming from the CBO.
If those are the CBO projections, I think we all understand how bad this really will get.
The danger of a spreadsheet: you can drag your formulas to take your assumptions out to infinity.
Anyone concerned that there is a Black Swan lurking off the CBO projections?
I trust companies to manage their capital structure of debt and equity mix.
I do not trust the government to be restrained by any such capital management concerns.
Corporations exist as perpetuities in theory. But enterprise risk ensures they have some understanding of their own mortality.
The government think it will live forever.
Human beings do not.
So who has properly aligned interests?
RE: "I'm 35 years old. I have zero expectation of receiving a dime back from anything I pay to the government."
Hahahahahaha
My GOD this group is jaded.
Outside of Cafe Hayek I'm actually quite the deficit hawk/centrist Democrat. I know that surprises a lot of people here, but I'm pretty skeptical of a lot that the government does.
This whole "the sky is falling" attitude, though, is completely foreign to me.
You'll get your SS check – don't worry buddy.
I honestly don't know what Medicare will look like in a couple decades… that could look different. But either way it won't be GONE. You'll be getting that too. Enjoy the fruits of our fascist state!
And btw – with respect to whether SS is a ponzi scheme, the point is it's a pension plan. By your definition ANY pension plan or insurance plan is a ponzi scheme because the recipients get money from current subscribers. All pension plans and insurance plans invest in bonds, including government bonds. Why would you expect SS to perform any differently?
DK,
If the excess SSI intake went to money markets or something I might feel safer (though the choice of markets would be determined by politics and likely be crap), but it is intergovernmental debt.
That's like putting money into your savings, then rushing out and spending it replacing it with an IOU.
I will not get an SSI check. At the rate things are going I'm not so sure we'll have a government in twenty years.
Jaded? Call it realism.
You're the one with the rose colored glasses stapled to your head. I took mine off a long time ago.
John -
RE: "At the rate things are going I'm not so sure we'll have a government in twenty years."
This is realism?!?!?!?!?!
Sometimes I seriously wonder why I even come to Cafe Hayek anymore.
John -
You're an idealistic nihilist, not a realist.
Daniel: "Umm… how about Social Security? It's not a ponzi scheme, if that's what you're insinuating."
Now, think carefully about what you say next.
Daniel: "You do understand what a ponzi scheme is, right? That the returns earned by early subscribers are paid entirely by the subscription of later subscribers, so that there are no real returns."
That's exactly how Social Security operates. Ignoring the "trust fund", current contributions provide all benefits. Current contributions finance no productive means to provide later benefits.
Daniel: "You're not one of those people that was duped into thinking that because there isn't an ACTUAL lockbox, …"
Yeah, I am, because the "trust fund" is literally a promise to raise more taxes in the future and nothing more.
Daniel: "Social Security is somehow unfair, unstable, or insolvent, are you?"
Unfair? What does that mean? The system is inequitable. By "inequitable", I mean that the real resources providing the benefits are neither related to nor proportionate with the contributions entitling participants to benefits.
Unstable? Yes. It's demographically unstable. This fact is not remotely controversial.
Insolvent? Not yet, but everyone agrees that its insolvency is inevitable in only a few decades, and the trustees recently revised the projected date of insolvency back a few years.
John "rejects all theories of morality or religious belief"?
Who's being unfair now? John is certainly not the only reasonable person who thinks the chances of the next generation getting a social security check are slim.
Further clarification: "Inequitable" is about "equity" in the financial sense (as in "I have equity in my house") not about "equity" (or "equality") in the political sense.
Nihilist? I don't think John said that nothing had value…maybe I missed something.
;o)
How does a nihilist have ideals?
DK-
Your ignorance is showing:
"And btw – with respect to whether SS is a ponzi scheme, the point is it's a pension plan. By your definition ANY pension plan or insurance plan is a ponzi scheme because the recipients get money from current subscribers. All pension plans and insurance plans invest in bonds, including government bonds."
In the US, privately sponsored plans are required to prefund the benefits promised, over the employee's working career. This is in contrast with SS, which is largely a pay-as-you-go scheme. It would be illegal for a qualified US plan to operate like the SS system.
DK writes:
A single currency would remove the threat of inflation…
No, it does not necessarily remove that threat.
Social Security is a Ponzi scheme, except that contributors have no choice but to "invest", and any insolvency can be papered over with newly created money from the Federal Reserve.
The system is unstable and wealth-destroying. Demography will have the last word, but until then real resources are being squandered under the pretence of saving for retirement. Unlike real saving, which frees resources for investment uses, resources are instead confiscated and squandered by government. There is no ultimate return to support later spending, so the purchasing power of Social Security cheques must be less than it would otherwise be–the difference was stolen by politicians.
Re: Single currency removing threat of inflation.
Mcwop, I agree, but might go further. How would a single currency ever remove the threat of inflation?
Martin -
RE: "Current contributions finance no productive means to provide later benefits."
Yes they do – intergovernmental debt pays interest.
RE: "Unfair? What does that mean? The system is inequitable."
Retracted – unfair is probably too squishy of a word, you're right.
RE: "Insolvent? Not yet, but everyone agrees that its insolvency is inevitable in only a few decades, and the trustees recently revised the projected date of insolvency back a few years."
And I should have clarified – sure the trust fund will run out… that doesn't mean the program is insolvent or unsustainable (well… obviously unsustainable if it isn't adjusted, but you know what I mean).
As for nihilism – clearly people are taking advantage of the fact that the word has many definitions in the dictionary! I was using it in the fairly colloquial understanding of "unnecessarily extreme pessimist". I'm not trying to mince Nietzsche
Rich Berger -
I'm sorry, did I say that SS operated exactly like private pension plans? I wasn't aware that I did.
DK: "Clearly," people were confused by your uncommon use of the word nihilist.
Daniel: "Yes they do – intergovernmental debt pays interest."
That's irrelevant. The "interest" exists only on the government's own books. Ignoring the fact that government may create money, this "interest" only increases the government's obligation to obtain more money from contributors to supply future benefits. A Ponzi scheme has exactly the same characteristic.
Daniel: "… obviously unsustainable if it isn't adjusted, but you know what I mean)."
If we adjust the system, it's not the same system anymore. The current system !is! inevitably insolvent.
Evan,
Oh, I wasn't confused. Nihilism has something like six or seven definitions.
I was, rather shamelessly, picking on him.
Daniel,
Here's a system like Social Security that is not a Ponzi scheme and is not fundamentally insolvent.
Danoel Kuehn: If the money I doubt I will get from SS doesn't come from taxes, where does it come from? What actual assets is the governemnt holding that it can sell to pay for my SS benefits 20-30 years from now? Treasury bonds? Those only get paid back out of taxes. To pay back the bonds, the government will have to increase taxes. No matter how you look at it, present and future beneficiaries have to be paid by people who are paying into it now, but aren't getting the benefits yet. Ponzi scheme.
"2. We can handle this level of debt"
Famous last words. Isn't that what everybody thought from 2001-2007?
We can handle the debt until we have a currency crisis. The trouble is, you won't see it coming.
"inflate their way out of debt to some extent as well… although I'd part with my Austrian friends in that I don't think this is a deliberate or primary solution to the debt."
Apart from the fact that Bernanke has already said that he's trying to create inflation (just, you know, not too much). Inflation is a beautiful thing for government. As a debtor, it receives a huge benefit at the expense of the people from whom it extracts this tax. There is little government loves more than inflation and if you think it's not deliberate then you are naive.
EvanM writes:
<<
How would a single currency ever remove the threat of inflation?
>>
The only way I see (and it is impossible to remove, only mitigate) is if certain practices are adopted, such as limiting government debt issuance and money printing. In the end inflation, or currency devaluation is always a threat. The Euro experiment is still ongoing, so time will tell. These things can work fine for extended periods, until all the little things add up, then the chickens come home to roost.
RE: "Current contributions finance no productive means to provide later benefits."
Yes they do – intergovernmental debt pays interest.
Is this how mainstream economics works?
Economic fundamentals are irrelevant?
The government pays interest. hmmmm So it is assumed that because there is interest that there must have been some productive activity generated from the borrowed funds?
Daniel, what does "productive" mean?
SaulOhio: "What actual assets is the governemnt holding that it can sell to pay for my SS benefits 20-30 years from now?"
My children's labor.
Daniel Keuhn writes: "And btw – with respect to whether SS is a ponzi scheme, the point is it's a pension plan."
There is a fundamental difference between a typical private pension plan, on the one hand, and social security qua pension plan, on the other.
Currently, the social security trust has no cash or assets other than agency debt (e.g., T-bills). Now, private plans too hold T-bills, but here is the difference. In the hands of a private plan, the T-bill constitutes an asset. For the social security account, it is both an asset and a liability on the government's balance sheet. It is as if Ponzi or Madoff, or the principal of the pension fund, put its IOUs (i.e., a liability) in the fund, removes the cash, and still claimed to have assets in that amount. If any private person nmanaging a pension fund did what the government does with SS, we would definitely call it a Ponzi scheme. I smell a collectivist, applying different moral and ethical standards to individuals and government.
ponzi-madoff: "In the hands of a private plan, the T-bill constitutes an asset. For the social security account, it is both an asset and a liability on the government's balance sheet."
It's a promise to raise taxes in either case. Filling "private accounts" with T-notes (even notes with an inflation adjusted yield) is basically what the Bushniks ended up proposing, but this "reform" doesn't solve any problem. It makes the problem worse.
The real productive means providing Social Security benefits is labor, because the payroll tax is a direct tax on labor. The system's looming insolvency is entirely a matter of declining investment in labor, and by "investment in labor", I don't mean expenditures on education and the like. I mean declining fertility. Denying this reality can't change it.
Daniel,
I appreciate having your perspective here at the Cafe but you might want to think of starting your own blog.
The graph shows that the amount we're borrowing is rising dramatically as a proportion of GDP. Yes, I gave it a dramatic title. But it's not "my" graph, my post is not "HUGELY misleading." If you want to make grandiose claims about what you think are my grandiose claims, do it on your own space instead of hijacking every thread with a "gotcha" response.
"…but as long as it is under the upper limit of what the government can service (and I haven't heard ANYONE seriously claim the government can't service this debt…"-DK
First, who's servicing the debt? I thought taxpayers did that.
Second, I'm sure some thought that about California. It'll be interesting to put the Laffer Curve to the test and see if it's true or not.
'Because we can' isn't a good reason to be irresponsible.
"All pension plans and insurance plans invest in bonds, including government bonds. Why would you expect SS to perform any differently?" -DK
Great. Maybe SS should package up its IOUs and sell on the open market at market interest rate to bring more accountability into the process and government finance.
Seth: "Maybe SS should package up its IOUs and sell on the open market at market interest rate to bring more accountability into the process and government finance."
Sell? How much would I pay for your obligation to pay someone else? You would need to pay me for to accept the obligation. To "privatize" the "trust fund", Congress much buy bonds, not sell them.
Ponzi schemes offer interest also, but no one would argue that any productive activity was involved.
At least D. Kuehn was definitely right on one count – any retirement plan IS a Ponzi scheme. If you're not working then you're claiming entitlements to other peoples' labour to support yourself (the newcomers are the support those before them). And, yes, M. Brock, making babies in the hope enough of them will grow up healthy and productive enough to support you into old age is a Ponzi scheme too.
I also have a problem with the graph in the way it's guessing what the next ten years are going to be like. It's as though someone else has come up with a 'hockey stick graph' and because it plays into the fears of a lot of certain people, these 'certain people' will take the graph as being 'true'.
Most private retirement plans depend on investment in productive assetts. My 401-K is invested in stocks, mutual funds, and commodities. These are real assets, whose value grows in part because of my investment. The money I pay into the plan is used to put real resources to productive use. Distributions from my account when I retire will come from the sale of these assets. Not a ponzi scheme. SS "invests" in treasury bonds, and the money is spent on consumption spending determined by politicians. The money for to repay the bonds has to come from new tax revenues. Any money that is paid out by the system has to come in from new "contributions" to the plan, or these new tax revenues, rather than any return on investments. Ponzi scheme.
DK "You'll get your SS check – don't worry buddy"
I'm 35 years old as well and I'm sure I will get a check but checks really don't cost that much to print. A decent printer can do it. What I am more concerned about is the value of the dollar when I use the money to buy goods and services.
I agree with DK that the graph and title of the post are misleading, though perhaps humorously so. Debt/GDP was a good deal higher post WWII.
I'm afraid, however, that it isn't so clear that "we can handle this level of debt". You can only "handle" debt if your revenues are greater than your spending. And whereas in 1948 government spending was less than 20% of GDP, today it is more than 45%.
If we cut government spending to 18% of GDP, then yes, we could easily handle the debt. Otherwise, I'm not so sure.
Gil: "And, yes, M. Brock, making babies in the hope enough of them will grow up healthy and productive enough to support you into old age is a Ponzi scheme too."
Raising babies is not a Ponzi scheme, because a human being is a real productive resource, the most productive resource in fact.
Creatures don't make babies hoping that enough of them will grow up to support them. That's not the natural pattern at all. The opposite is more nearly true. Elephants literally wander off to die when they're no longer productive, because they're then a burden on their offspring.
That's why I can trust my parents not to enslave me, and my children can also trust me, but they can't trust you, and your children can't trust me either.
I'm in my 30's and consider my opportunity to get a SS check in the future a long gamma position in rents. Does anyone know if there's a bid for such things?