Debt is Debt

If Mr. Stiglitz is ready to take my share of increased taxes for the debt, and cover say, 20 poor people in Africa because the falling dollar hurt their purchasing power even more, I'm with him.

Failing that...

It was good for this author to send his view on what is happening up in the hill. For it is up for us people to let those who govern us know what we want done. The only trouble is that without the stimulus package, the whole government will grind to a halt. There will be lawlessness and all those things. What do we do then?

Evelyn Guzman
http://www.debtchallenges.com (If you want to visit, just click but if it doesn’t work, copy and paste it onto your browser.)

Uh oh, we have an example of fallacy of composition. I wouldn't have said anything if you hadn't used the "if-then" sentence structure. :D

In either case, I agree.

What I strikes me when conservative and libertarian commentators rail against the stimulus package that was supposed to stimulate the economy, and that government, was once again spending beyond this country's means, why they never address the very reason why Obama Admin and the dems and some repubs passed it, which was what other way was there to stimulate the economy? Tax cuts? The Bush tax cut helped to explode the national debt. And it's extremely hard for me to believe that the trickle down theory would apply to the degree that it would make the economy grow. Rich people don't have the capacity to spend the level of money that is needed effect the economy if they were allowed to keep most of it. On the other hand, the amount of money that tax on the wealthy would give the government billions to help towards meeting program needs. It's hard for me to believe that a wealthy person earning $18 million and was allowed to keep $17 million, would spend all of the $5 to $7 million that the tax credit allowed him to keep. He might spend another one or two million, but would tuck the rest in who knows where. The savings pattern of the wealthy looks more and more like off-shore accounts. Yes, tax credit to the wealthy might work if their numbers were near the level of half of the country's population, and not 1 percent.

And increasing tax credits to the middle class is maybe okay to help ease money woes for those who do not have jobs. But these tax credits aren't going to help to build the economy, because they are just one time in a year, and do not produce ongoing stimulus to the economy. Plus, many households will use the credit to pay bills. Tax credits are fine during a boom and the government has good revenue flow. But I don't see how they stimulate the economy.

How do you propose to stimulate the economy when no other sector is moving the money? The banks have stopped borrowing except to those who can afford loans, people who have jobs have decided to tighten their belts because they see companies are tightening their belts and that one by one companies are laying off workers, and the millions who are out of a job certainly aren't spending. So, HOW DO YOU PROPOSE THAT MONEY START MOVING IN A COLLAPSED ECONOMY IF THE GOVERNMENT DOES NOT INFUSE MONEY INTO IT, WHEN NO OTHER SECTOR, BUSINESS, BANKS, CONSUMERS, IS MOVING THE MONEY?

I heard many free market advocates say let the market take care of itself, let it adjust on its own to ride out the recession. That's incredibly shocking, when a very large majority of the world economists said that if the government let that happen, then we would not be in a recession, but a depression the magnitude of the 1930s. And I wholeheartedly believe that, because all the countries that were able to do so passed stimulus packets, including China.

Now, I can understand if maybe half of the countries passed the packets that we did. But it wasn't half of the developed countries. It was the governments of the ENTIRE world that infused billions of dollars into their economy. So, for those very few free-market, balanced budget government economists, do you know something that the entire world does not?

And your yelling at the government for spending beyond its means makes sense on the surface, that the government will pay for it in the long run. Of course it will. But, didn't this government spend way beyond its means numerous times, and they were tremendous gambles that paid off. Didn't FDR spend beyond his means with the SSA and government spending to get out of the Depression. Didn't he spend beyond means when entering WWI. Didn't JFK spend beyond means when he set up the space program? Didn't California spend beyond its means when it set up the university system?

And look where we are. Or, where we were? The space program resulted in so many innovations in technology that benefited the consumers and help to create a robust economy. California university system produced so many educated citizens that many experts say that one of the primary result was Silicon Valley. And the economy grew so that Clinton left the country with a surplus when he left office. It's hard for me to believe that that was all due to the tax cutting measures that the balanced-budget advocates were foaming about.

As greedy as the banks are, my question to you regarding their bailout is the same: HOW ELSE COULD THE GOVERNMENT HAVE PREVENTED AN OUTRIGHT COLLAPSE OF THE WORLD FINANCES? What would have happened had the government not guaranteed the banks? Now, I don't know much about the investors of the banks. But I known there are major, major investors from foreign countries, such as China and Saudi Arabia, who would not have wanted to see their investments be wiped out. Wouldn't there have been a spinning devolution of the dollar value if the banks were not propped up? And remember, China holds how much of our treasury, and so have the power to call in the IOUs at any time. How would they have responded if the value of what they were holding plummeted even more? What would these investors have done if the US. government did not stand behind our banks. And how would other foreign investors, even domestic investors reacted if they saw the US not backing the banks in which they have a great deal of money?

As you can see, I'm no longer talking about market and economic behavior. I'm talking about human behavior. Specifically, basic human, out and out, stark fear that results in pandemic panic. Convince me that had not the U.S. government supported the banks, that there would not have been a complete implosion of our economy with investors all over the world fleeing American banks. And I'm not at all susceptible to doomsday scenarios.

Now, you might say that the scenario would not have been that drastic had the government not bailed the banks out. I would give that to you, in a healthy economy. But even if you were right, there would still be at least one major bank that failed, and that takes me back to human behavior. The customers would have panicked, and would have been rushing to the bank to get their money out, as they did with one bank I think in 2008 that collapsed. Again, human behavior, because in that panic, people and investors who were not customers at the failed bank might start panicking about their banks, especially if there is leaked out any whiff of weakness.

"The Bush tax cut helped to explode the national debt."

Maybe, but not by all that much. The ridiculous out-of-control spending under Bush that helped explode the debt.

Plenty of people make the claim you repeat, but I'm not sure the data really backs them up. From ~30 seconds of searching: http://www.heritage.org/Research/Taxes/images/c...
referenced in http://www.heritage.org/research/taxes/bg2001.cfm

Of course it wouldn't surprise me if many reject the analysis just because of who did it without even considering the information presented.

>> HOW ELSE COULD THE GOVERNMENT HAVE PREVENTED AN OUTRIGHT COLLAPSE OF THE WORLD FINANCES?

I didn't read this whole post, but the above capitalized text jumped out at me. Despite what Messrs. Paulson, Geithner, and Bernanke proclaim, I can't believe that any one (or several) financial institutions are so important that their failure would cause the "collapse of world finances." If any given big bank collapses, the productive assets of that bank (i.e., the people) don't disappear. They just look around for new employment. Some of them would join existing banks, some would start new banks, some would leave the industry and work elsewhere. And a lot of money invested in the failed bank would go "poof!"

That creates a significant TEMPORARY disruption, but left to its own devices the market would rebound surprisingly quickly. This country and the world economy existed quite well before we had an entity called Goldman Sachs or Bank of America or Citigroup. I fail to believe that we can't exist quite well after such entities.

I wholeheartedly concur with the thrust of your post.

But I can not resist this:

"Only by unthinkingly presuming government to be some kind of transcendental entity, exempt from many laws of reality,"

But, many people unthinkingly presume government to some kind of transcendental entity, a deity to be exact, and they show it in their firm conviction that government can create persons out of things, and their creations can have natural rights like human persons.

Appears that Mr. Stiglitz may share some confusion and inconsistency with other folks, eh?

But, many people unthinkingly presume government to some kind of transcendental entity, a deity to be exact, and they show it in their firm conviction that government can create persons out of things,

And create value out of paper.

Oh yes, and that too.

This is one of my favorite tools for understanding economics: change the setting and see if the actions still make sense.

If the government is claiming something that would be unsustainable when shrunk down to the household level, then the government's claim is bunk. Period. Since national economics is fundamentally just an aggregate of all the relevant individuals, there's no magic that changes the rules for the government. Government just has a much longer leash before it all comes crashing down.

Exactly, if it doesn't work at the individual level it will fail at the collective level.

When I take on debt it is not sufficient for me to only pay interest, I must also pay down the principal.

My understanding is that the federal government only maintains debt, as in it only pays interest. So wouldn't it cost a lot more over time to have the federal government borrow money instead of myself?

Either the government deficit spends or the private sector does. The private sector shows little enthusiasm for such. Don is proposing Hooverism but I'm not sure where he thinks the demand will come from with the effective unemployment rate around 18%. I guess now that corporations have been freed to speak we can expect rapid growth in the lobby industry to fuel the recovery.

It absolutely makes sense to me that we need to stabilize the states budgets to prevent further snow balling of unemployment. Demand side sure makes sense to me. If the private sector shows signs of investing let them do it but if not the government needs to bail them out of their mess. It just makes me laugh when all the free marketeers blame the lack of investment on uncertainty all of which they assume is government created and has nothing to do with market created complex financial toxic assets still floating around out in the economic ether.

"If the private sector shows signs of investing let them do it but if not the government needs to bail them out of their mess."

Something about this sentence sounds like bad parenting. It seems to be the general recipe for creating co-dependent relationships, and being sure that Junior never leaves the basement.

"It absolutely makes sense to me that we need to stabilize the states budgets to prevent further snow balling of unemployment."

Not if that means creating a long term structural problem resulting from of massive amounts of debt (see Greece), which could lead to permanently high unemployment. Have you ever asked yourself if we may have to accept some contraction in the economy? That you may not be able to progress at some stable target growth rate indefinitely? That you may really not be able to do anything about it?

Remember we are issuing debt approaching 20% of the entire GDP of Japan each year. That is a lot of debt to be soaked up.

Ouch - don't mention Hoover. That's just going to lead to a tangent.

Remember - there's no middle ground on here. Either Hoover is a libertarian or he's a raving Keynesian. You know Hoover had a half-hearted, lame response, and I know Hoover had a half-hearted, lame response, but since he clearly wasn't a libertarian either he might as well be a card-carrying Keynesian that brings the whole deficit-spending edifice to it's knees.

If you take away Hoover, you have taken away 90% of muirbots comments. His ability to hurl inanities and false attributions will be seriously impaired by such a restriction.

So you should thank me for advising him against the reference, right!

He obviously derives some sort of masochistic pleasure from people's responses to him. Despite all the abuses he has received from people here, he is back saying "Hoover, Hoover, Hoover...". Why do you want to deny him his pleasure?

Thanks anyways. Whatever makes you happy!

Hoover:FDR::W:Obama

Haha - I suppose that's closer to being accurate than what you usually hear (namely - that Hoover is either do nothing or that he's a card carrying Keynesian).

He maybe much more of a Keynesian than you assume. Keynes thought very highly of Hoover.

Harry Truman also thought highly of Hoover, and thought he got a bum rap.

Well, at least he got the "bum" part right.

Coolidge didn't like Hoover at all.

Another reason to like Coolidge.

Compared to what Keynes was dealing with in the person of MacDonald, it's not surprising that he was impressed with Hoover. Again, there's a considerable difference between being impressed that a politician is doing better than any other politicians out there and thinking that a politician is doing an ideal job.

Shocking considering that most politicians do an ideal job.

Always so naive and trusting, methinks

It even works with campaign rhetoric- Obama and FDR both ran campaigns cirticizing their predecessors' out-of-control spending, and then proceeded to take spending (and control) to unprecendented new levels. Both blamed their predecessor for having to do it.

Hmmm... I'd say that's where the similarities stop. FDR's critiques of Hoover were mostly unjustified politicking. Obama made a much more legitimate case that the deficit shouldn't have been that big in a period of decent GDP growth, and that Bush's pro-cyclical approach to fiscal policy might have tied our hands in the present.

I think this is all pretty clear to most people, though, so I agree he should stop talking about it. Not because he's wrong so much as because the world is what it is and it's time to do something about it.

I'll admit to not knowing too much about FDR on the campaign trail, but I do know he criticized Hoover for not balancing the budget.

Remember - there's no middle ground on here. Either Hoover is a libertarian or he's a raving Keynesian. You know Hoover had a half-hearted, lame response, and I know Hoover had a half-hearted, lame response, but since he clearly wasn't a libertarian either he might as well be a card-carrying Keynesian that brings the whole deficit-spending edifice to it's knees.

Beautiful strawman. You're better than that.

Other posters recognize that Hoover was hardly a champion of free markets. Whatever else you read into that is on you; don't attribute it to "libertarians".

It was a sarcastic "if the shoe fits" caution to muirgeo. One of the hosts of this blog wrote just a couple months ago that Hoover was "not very different" from Obama. I never attributed it to libertarians - I attributed it to this blog, and history shows that I don't have to "read into" anything. Some on here simply acknowledge that Hoover is not a libertarian and do leave it at that. I'm one of them. It's also common on here to consider him some sort of typical interventionist. That's ridiculous, and I think it's best for muirgeo to avoid the whole argument.

In that case, we agree.

I'm pretty ambivalent on the issue of fiscal policy because, well, we know a lot less about fiscal policy than we know about monetary policy. And so, in the absence of extensive evidence, I'm not sure if we need fiscal stimulus. But we'll study this episode, and begin to study fiscal policy again because it has received far less research attention.

Now with that said, I think that Don is making an argument against expansionary fiscal policy (without much evidence) by committing a fallacy of composition. Stiglitz is making an argument in favor of expansionary fiscal policy (again, without much evidence) by using grand textbook examples in the hopes of pushing aggregate demand back toward potential output.

It might indeed be the case that fiscal policy works better in a severe recession, particularly one in which monetary policy is stretched to the limit, and where credit is not being allocated as it otherwise be.

Indeed, we have evidence that while the short-run Phillips Curve might be fairly weak in a 'typical' recession, it may demonstrate a rather stronger relationship in the midst of a steep downturn like ours.

So, I think that it is alright to compare the individual to the aggregate sometimes, but when it comes to other things, Don puts himself in a position of committing a fallacy of composition.

--Pingry

How Stiglitz can not see the contradiction in his statements is a mystery to me.

The economy isn't static, Don - it's dynamic. Unsustainable trends that persisted for years under certain macroeconomic conditions are very different from temporary actions taken in response to extremely different macroeconomic conditions.

And what laws of reality do you think Stiglitz is attributing to households that he's not attributing to governments? And are the differences he cites reasonable? Once again, you wrap your pronouncements in a characteristic vagueness. What, precisely, are you talking about?

A couple laws of reality that apply to households and governments:
1. Spending recklessly has bad consequences.
2. Borrowing to spend recklessly has even worse consequences.

Hoping a dynamic economy will hide the consequences of reckless spending and borrowing is poor judgment. A dynamic economy might hide those consequences, but those consequences still occur.

Definitely. Who said this doesn't apply to governments?

Krugman. Now, don't go off wasting your time trying to split Krugman's hair.

And what laws of reality do you think Stiglitz is attributing to households that he's not attributing to governments? And are the differences he cites reasonable?

I should think that is a question for Stiglitz to answer, not Boudreaux. As it turns out, these issues are nowhere addressed in the linked article, implying that Stiglitz doesn't address them in his talk. Since they would seem to be highly relevant issues, I would say this means Don's point is right on.

Don made the claim, not Stiglitz. He obviously had something in mind. If he's going to make the claim the way he did, he should provide more details if people are curious.

It's common on here. If you disagree with them they accuse you of "thinking the government can do anything", and then they cite Buchanan as if they're the only ones that give him the time of day.

Certainly you are correct in saying that differences matter. But is there anyone out there that reasonably thinks we are simply going to have "a couple years of high government deficits"? Debts are different but they are all very rarely a good thing for a government, or a person, to indulge in over the long-term especially when they are as large as they are now and will be for the foreseeable future.

Of course there's nobody that thinks that - but the solution isn't to pretend that there is no difference between short and long-term deficits; between stimulative spending and entitlement spending; between revenues temporarily hit by a major recession and long-term revenue levels that are 2% of GDP short of long-term spending levels.

In other words, you're right - nobody thinks we are simply going to have a couple years of high deficits, but that's no reason to pretend it's all the same thing.

danielkuehn,
It seems quite simple. Consumers are not spending and need to increase savings and reduce debt. So reduce taxes to accelerate the process.

Increase the Social Security age and reduce future Medicare benefits to offset the reduced taxes.

This will increase current spending as you support and show a clear path to future balanced budgets.

I'm not sure that's adequate, but it sounds like a great start to me. And that's entirely the point. Don pretends there's no difference between different kinds of debt. Of course there's a difference. There's a difference between years of excessive household debt and a couple years of high government deficits. AND, as you allude to, there's a big difference between a couple years of high government deficits and a longer-term unsustainable spending trajectory on the entitlement programs. There's a difference between all three of these things.

To quote Don, it's sad to see "stumble into such confusion and inconsistency" of pretending that there is no difference in this debt.

"A couple of years"?

I don't have that great of a memory. Can you remind me when was the last year the Federal government did not grow the national debt?

I'm not sure why that's relevant. Of course the debt grows in almost every year. It doesn't mean the debt burden always grows.

Again, this is a major difference between how we think about private debt and public debt, between the debt of a living human being and a non-living institution or collective.

Has it not occurred to you that the two are related? That households are forced to borrow more when the government takes more of what they earn?

Without suggesting that they are unrelated, I would say that has next to nothing to do with the recent run-up in private debt - and I've never heard anyone claim that it does.

The biggest thing that you'd have to explain is how that would really make a difference, since federal tax receipts as a percent of output has consistently hovered around 18% for the entire post-war period. An even tougher thing for you to justify (if you really believe in the relevance of this relationship), is the fact that federal tax receipts as a percent of output actually fell during the most recent run-up in private debt. Doesn't really fit your story.

The example that leaps to mind is my own mortgage. If I weren't paying taxes I would have paid the house off a decade or two ago. Or maybe I'd have a bigger house. You're thinking maybe that this isn't an example worth considering? That everyone has to pay taxes because what the government does has infinite value? If so, I'd say that we've just become so accustomed to it that it seems "normal". And, of course, we are taught not to consider the cost - to just focus on the "benefits".

All I'm saying is that the tax burden hasn't changed substantially in the post-war period (and it has actually decreased in the period we're talking about), so it doesn't make sense that a stable tax burden could cause a large run-up in private debt. If your story was true, then you would need an increasing tax burden to cause the increasing level of debt, right? Where is that? If you look at the data you see a big jump in debt and a drop in the tax burden. That doesn't fit with your theory.

Plus, while I could see increased taxes forcing people to rely more on debt, I see no good reason to assume it would make them take on excessive debt (which is really the problem we're talking about). So yes - if you didn't pay taxes you might have paid off your house earlier or had a bigger house. But taxes didn't encourage you to take out a mortgage you couldn't afford.

That's my point - as I said initially, I'm not suggesting it's not related at all to credit market choices. What I'm suggesting is that it's doubtful it's a cause of the sharp increase in excessive private debt levels in the late 90s. That just doesn't make sense.

since federal tax receipts as a percent of output has consistently hovered around 18% for the entire post-war period. An even tougher thing for you to justify (if you really believe in the relevance of this relationship)

I think it would be more fiscally pertinent to discuss Government spending rather that tax receipts.

I agree completely, but I was responding to Randy who suggested that taxes may impact private borrowing behavior (namely, that high taxes encourage unsustainable private borrowing).

Taxes do affect consumers, how, likely varies, but I tend to think that taxes inhibit savings, among other things.

Definitely. The question was whether taxes cause people to borrow beyond their means. That seems pretty tenuous to me.

Well, if they have foregone savings because of the tax burden, then they must borrow more for things like replacing a car or putting mom in a retirement home.

but governments are going into debt to facilitate consumers going deeper into debt (TARP, tax credits for automobiles and housing, etc)

Consumers wouldn't be so inclined to go into debt if interest rates meshed with the reality of people's consumption:savings preference.

So it's an unsustainable trend if I borrow $10,000 per year for the next 10 years, but ok if I just borrow $100,000 right away as a temporary action?

It's a different borrower doing the borrowing in each case (that Stiglitz mentions). Again - there are differences. It's silly to pretend there aren't. There are differences in your borrowing constraints and the government's borrowing constraints. There are differences in the purpose and use of corporate, household, and government borrowing. There are differences.

Right. The difference is my borrowing constraints are limited by my propensity to pay and the government's borrowing constraints are limited by their taxable constituents propensity to pay. If the government borrows, they are borrowing on my behalf (with or without my approval). The differences in purpose for my borrowing is I borrow to spend/invest on things I want. Governments spend/invest on things that government wants. What governments want is to maintain and expand it's power & influence (welfare, warfare, reelection, etc).

But the money comes from the same place (the pool of credit available, whether that be savings or new money) and must be paid back by the same people (the people who borrowed the money).

There are differences. The difference is someone else spending someone else's money to achieve someone else's ends.

bravo

I'll second that. Well said.