Debt ceiling politics

The decision to raise the debt ceiling will be the first test of whether the Republicans can move from tree shaking to jelly making.

Some, like Rep. Mike Kelly (R-PA), don’t seem particularly keen on making jelly just yet, declaring

Raising the debt ceiling to me is absolutely irresponsible.

Rep. Michele Bachmann (R-MN) has an online petition in which people are asked to agree that:

With national debt $13.8 trillion and counting, Congress’ spending frenzy cannot continue. It’s time to force our elected officials to stop spending cold turkey, and we can start by making sure they do not raise the debt ceiling.

That’s why I’m asking you to personally tell Congress not to increase the amount of money the government can borrow by adding your name to the “Don’t Raise the Debt Ceiling” petition.

Which inspires me to reproduce a statement I made four years ago:

There is of course an accounting identity that relates the government budget deficit (the excess of spending over receipts) to the government debt (the total amount that the government has borrowed). A deficit necessarily implies an increase in the debt by the same magnitude.

One of the peculiar embarrassments of the American political process is the fact that Congress votes separately on the deficit and debt, as if they were two different decisions. This bizarre arrangement allows Congress the luxury of instructing the Treasury to spend more than it takes in as revenue while at the same time voting to deny the authority to borrow the funds that would be necessary to implement the plan.

If the government is (a) required by the deficit legislation to spend, and (b) precluded by the debt legislation from borrowing, the Treasury would be forced into default. The greater the likelihood markets attach to such an event, the higher will be the interest rate the government has to pay on Treasury debt. A politician who votes for the spending and tax measures that produced the deficit but against a debt ceiling consistent with these is deliberately wasting taxpayer dollars for no purpose other than to grandstand before voters as a “fiscal conservative”. Anyone playing such a game has complete contempt for the intelligence of their constituents.

When I first wrote those words, many readers responded with passionate objections. And I expect the same this time, only with the partisans trading hats.

But I stand by my statement in both cases. If you have a concrete proposal to raise tax revenue or cut spending, then put it on the table. But if you simply want to grandstand on the debt ceiling as if it were a stand-alone issue, it is clear that you have nothing but contempt for the voters.

And if so, then you deserve the same in return.

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66 thoughts on “Debt ceiling politics

  1. Steven Kopits

    As you point out, debt is the dependent variable. It would make greater sense to vote on the budget and the debt ceiling at the same time.

  2. Ricardo

    The debt ceiling is the limit on the amount the Treasury can borrow to pay for appropriations. Without talking numbers this discussion is meaningless.
    Currently the debt is at $13.9 trillion with a debt ceiling of $14.3. That means that the Treasury can borrow another $400 billion without exceeding the current debt limit.
    Would there actually be a world wide disaster if the Treasury stopped borrowing, as predicted by White House economist Austan Goolsbee? Absolutely not!! Some of the agencies would have to send people home. Some agencies might shut down. But the Treasury can service their debt now. That means if they do not increase their borrowing they will not default on any of their debt payments.
    The problem is spending commitments. It has been estimated that the lame duck session pushed congress closer to exceeding the debt limit, and congress has other spending in the pipeline that could increase the need for spending. If the Treasury can’t pay the bill, well, guess what? The government doesn’t spend the money, and that spending restrain might actually encourage markets rather than create another crisis. It might even encourage recovery increasing revenue and reducing the need for increasing the debt ceiling.
    The Republicans have said they would vote for an increase to the debt ceiling if there is a plan in place to reduce spending back to 2008 levels. So the answer is not all or nothing as the Democrats frame the argument. This does not at all sound unreasonable. I would even like to see the debt ceiling treated as a continuing resolution. Rather than a permanent increase let it be temporary and short term. That would mean that congress would have to address the problem over and over and that would keep their feet to the fire on spending reductions.
    Finally, I doubt that either Mike Kelly or Michelle Bachmann voted for the 2010 Democrat spending bills that pushed us to a debt of $13.9 trillion since almost not Republicans did vote for it, so the professor’s point should be directed to the Democrats who did vote for the increases… But then a lot of those folks are no longer in congress.
    The Professor’s statement about the debt ceiling is like a son away at college who pushes his credit card up to the limit and then calls dad to say that he can’t pay the bill. Is it irresponsible for dad to say “no?” Perhaps, it is actually irresponsible for dad to say “yes.”

  3. JDH

    W.C. Varones: There are different ways people choose to report the deficit (e.g., include Social Security surplus or not) and different ways to report the debt (e.g., include debt held by the Social Security Trust Fund or not). If you adopt the same conventions for measuring both the deficit and the debt, then it is, as I asserted, an accounting identity that the deficit is equal to the change in the debt.

  4. W.C. Varones

    JDH,
    I’m aware of that but the Treasury’s $14 trillion debt number includes intragovernmental holdings (trust funds), and it’s up $1.7 trillion year-over-year. That is much higher than the reported $1.3 trillion FY 10 deficit, and it doesn’t look like it can be explained by trust fund ouflows or the fiscal/calendar year difference.
    If anyone can work through the numbers, I would be most grateful.

  5. endorendil

    Ricardo, the entire point is that deficits increase the debt, so if don’t raise the debt ceiling, you can only have a 400 billion dollar deficit before you need to balance the books completely – i.e. not just go back to the huge deficits of 2008, but back to the balance of the late Clinton years.
    No one believes that balancing the federal budget can be done today. Yes, within a year or two, Bush turned a small budget surplus into a budget deficit of a half trillion or so, but that was with the aid of Osama and the popping of the internet bubble. Things aren’t that easy now, and we’re not talking about balancing a 400 billion a year hole, we’re talking about a yearly drain of more than a trillion dollars. With the best will of the world it would take years to get there.
    One must hope that these Republican numbnuts are actually just frauds, cynically calculating that if they pretend to be absolute idiots, they might actually get their way. If that is not the case, and they actually would do something this dumb, the US would default on its debt within weeks or months, no matter what anyone in government does (tax revenue and outlays are not balanced throughout the year).

  6. Matt

    One addition to “Anyone playing such a game has complete contempt for the intelligence of their constituents.” – the phrase “or knows that their constituents are deliberately and purposefully stupid beyond redemption.” The rise of the Tea Party and their idiotic ideas (“keep government outta my Medicare”, etc) shows that some of the people actually *want* to be fooled all the time.

  7. sherparick

    Ricardo, when the Honorable Michelle Bachman and hte Honorable Mike Pence, and all those other Honorables with “R” at the end of their name vote for withholding from the Government revenue, e.g. tax cuts, without at the same time withdawing from the Government previous authority it has given the Government to spend, they create a bigger “deficit” that requires more “debt” to spend. Since the interest rates paid on Treasuries for the last 3 years have been the lowest in the historical record, lower even then durin the Great Depression until this boogy has been raised, I am not very sure how markets will be further reassured by the exercise of extreem austerity, which will raise the unemployment rate, and as a result of inducing a second recession, increase the very deficit that they claim to hate so much.
    Further, although no one seems to mention it, we are still fighting two wars, with two Armies in the field, who I don’t think will be very happy when their pay is cut off and we can no longer pay for the food, guns, fuel, and bullets needed to sustain this force.
    This is all evidence that one of America’s leading political parties and a good part of its electorate and governing elite have simply gone gone mad.

  8. beezer

    The SS fund is in surplus. It’s other aspects of government that are in deficit. The idea that SS funds have been “spent” somewhere else is moronic.
    All one needs to do is to diligently set SS contributions (they are not taxes) based on actuarial projections and keep politics out of it. And it wouldn’t take any dramatic increases to insure its surpluses for the foreseeable future.
    Anyone citing SS as a problem is trying to shift the debt blame from other government spending areas which are truly a problem to SS. It’s just another political scam.

  9. pgl

    “If the government is (a) required by the deficit legislation to spend, and (b) precluded by the debt legislation from borrowing, the Treasury would be forced into default.” Then again – there is another option which is to raise taxes. But the Republican Party under the iron fist of Grovery Norquist has precluded this option as well. Which of course makes your point!

  10. Robert Bell

    JDH: Just for yucks, I decided to look in David Romer’s “Advanced Macroeconomics” to see how far one could get without somehow acknowledging the accounting identity in question. As it turns out, it is contained in the first equation (11.1) in the chapter on deficits, the intertemporal budget constraint.
    I find it a little unsettling that given the complexity of the macro economy and the thought that you, Menzie, and others put into understanding the same, policy makers are arguing about something that is supposed to be self-evident on the first page of the discussion. Presumably there are important substantive policy points to be considered, strategies for controlling the debt, etc that we are not getting to. Nor is it clear to me that all of the policymakers *do* understand the identity and are just insulting the electorate.

  11. Ricardo

    endorendil,
    No, the debt is what the government owes on what it has borrowed. Essentially that is what the Treasury has borrowed.
    It is just like a family. They borrow for a home, a car, furniture, credit cards, and other things. Their debt is what they owe. They either have enough income to make their payments or they don’t. If the family sets a budget for what they will borrow (or pay) that is a debt ceiling. The payments are usually below total income because a portion is put into savings of some kind. If they over-spend they may owe more than their debt ceiling. If so they can increase their debt ceiling, but they must reduce their savings or other payments such as leisure, or lawn care, or maid service, etc.
    The same is true for the government. There is tax revenue and other revenue that the government brings in to service their spending and their debt. They can service this spending and debt by borrowing, by increasing tax revenue, or by cutting current expenses just like a family would have to do.
    The request for an increase in the debt ceiling is to authorize the Treasury to borrow more to service the spending, but their borrowing is like a cash withdrawal from a credit card to pay the mortgage. It will help you make your current payments, but it increases your debt load and makes future payments even more difficult.
    But never forget the government does have a tool that the family doesn’t have and that is a “printing press.” If a family goes into the basement and prints cash to pay their bills it is called counterfieting they will go to jail. If a government goes into the basement and prints money to pay its bills it is called quantitative easing and they all get jobs with the Federal Reserve.
    (This is a little flippant, it is more complex that just this, but in truth by creating inflation governments “default” on their payments by paying their bills with currency of less value. This kind of default is exactly what the governments did in the 1930s when they went off of gold and economists praised their “wisdom.”)

  12. Six Ounces

    “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure…It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our government’s reckless fiscal policies.” – Senator Barack Obama, 2006, just before voting against raising the debt limit.
    Announced today: HUD has created a demonstration program for three to five grants of $150,000 to $500,000 to be awarded through the Sustainable Communities Research Grant Program.
    Welfare for left-wing university professors and “non-profits.”
    Just another drop in the bucket of wasteful, useless programs.

  13. Kevin

    JDH,
    Your analysis on seems to take the level of spending as exogenous, but it is clearly a function of the debt ceiling. Presumably nobody wants to force the Treasury into bankruptcy, so legislators have an incentive to cut spending when the debt ceiling is low.
    The issue is not that people who voted for the budget now are against raising the debt ceiling, but that the people who are now in power are against the budget. I don’t think many Republicans agree with the current level of spending, especially the newbies. The debt ceiling is a “second chance” for them to roll back spending they don’t like (or didn’t have a chance to vote for).
    The exact cuts are a matter of bargaining power. Maybe Republicans favor the current deficit, just not its composition (spending vs. tax cuts). This is a chance to move the composition of the deficit in their favor, and I don’t see anything inconsistent with using the debt ceiling as a bargaining chip to enact favorable legislation.
    All this said, it is difficult to imagine a world where not raising the debt ceiling is subgame optimal.

  14. Phil Rothman

    Jim: I wholeheartedly agree that the non-jelly-making tree-shakers are contemptible. The following link shows that, in 2006, a Senate vote to increase the federal debt limit passed with only Republican ‘Yeas’: http://www.govtrack.us/congress/vote.xpd?vote=s2006-54 . How would you characterize the then ‘Nay’ voters? Only tree-shakers? But since they stressed the connection between the ‘Bush tax cuts’ and subsequent deficits, perhaps both tree-shakers and jelly-makers (arguing that these tax cuts should be repealed)? But this anti-Bush-tax-cut stance later morphed into only repealing the tax cuts for ‘the wealthy,’ so perhaps tree-shakers and partial jelly-makers?

  15. 2slugbaits

    And the first (albeit futile) vote in the House will be to repeal Obama’s healthcare legislation; however, doing so increases the deficit so Boehner had to issue a special exemption to his pledge to lower the deficit. So if the clueless Tea Party gang refuses to raise the debt ceiling but they vote to repeal Obama’s healthcare, I’d like to hear how they reconcile those two votes. Oh wait…silly me. Teabaggers don’t even make an effort at intellectual consistency.

  16. W.C. Varones

    Robert Bell,
    If it’s such a simple accounting identity, would you please reconcile the $1.9 trillion and $1.65 trillion debt increases in FY 09 and FY 10 with the alleged deficits of $1.4 trillion and $1.3 trillion for the same fiscal years?
    And before you answer that it’s the Social Security Trust Fund, intragovernmental holdings increased by just $320 billion over the two years.
    So where’s the other $530 billion?
    If the answer is that that money went to bail out Fannie and Freddie and GMAC, were those appropriations passed by Congress?
    And now it appears that we are entering our third consecutive year of deficits greater than 10% of GDP if we look at the actual debt rather than the massaged accounting deficit.

  17. Phil Rothman

    Jim: I wholeheartedly agree that the non-jelly-making tree-shakers are contemptible. The following link shows that, in 2006, a Senate vote to increase the federal debt limit passed with only Republican ‘Yeas’: http://www.govtrack.us/congress/vote.xpd?vote=s2006-54 . How would you characterize the then ‘Nay’ voters? Only tree-shakers? But since they stressed the connection between the ‘Bush tax cuts’ and subsequent deficits, perhaps both tree-shakers and jelly-makers (arguing that these tax cuts should be repealed)? But this anti-Bush-tax-cut stance later morphed into only repealing the tax cuts for ‘the wealthy,’ so perhaps tree-shakers and partial jelly-makers?

  18. 2slugbaits

    W.C. Varones Strictly speaking the budget deficit and the debt are identities, but only over the medium to long run. Over the short run the deficit can grow faster than the debt, or vice versa. Why? Because the Treasury debt captures the actual cash flow, which does not have to exactly match the budget obligations…at least not over the short run. For example, suppose the FY10 budget authorizes an agency to spend $1B on roads, which increases the deficit by $1B for FY10. But the agency has to let contracts, which takes time. And the road project will take time to complete, so there might easily be a one or two year lag before the Treasury actually disburses cash. Another example is the way DoD manages procurement of spares and repair parts. The services manage working capital funds that are based on anticipated operations and maintenance dollars budgeted by Congress. The O&M dollars drive working capital fund budgets, which obligate the government through acquisition contracts. But the actual disbursements (part of DoD cash management) doesn’t happen until much later. So there’s a timing issue between the budget and cash disbursement. The Treasury numbers reflect cash disbursements. An example of what I’m talking about can be found in this GAO report:
    http://www.gao.gov/new.items/d10480.pdf
    You get a similar lag between tax receipts and Treasury disbursements. There are lags, but over the not-so-long run JDH’s identity is correct.

  19. Walter Sobchak

    At this point anything that throws sand in the gears of the Federal machine is good.
    The problem is excessive spending and it cannot be solved with out the shut down of several Federal government departments. It is time to start.
    P.S. the canard that the US Government has never defaulted on its debt is often repeated. It is just not true. The biggest default of all time occurred when FDR voided the gold clauses in existing contracts.

  20. cl-Oregon girl

    Bravo Jim! I am tired of ranting (R)idiots. They never cared about the deficit or debt. Medicare part D, War in Iraq unfunded, War in Afghanistan unfunded all pushed and passed by those with Rs after their names.
    Now their paygo rules allow them to open up even bigger deficits by not having to account for tax giveback bribes to the wealthy. Frauds and charlatans!

  21. W.C. Varones

    2slugbaits,
    A 31% discrepancy over two years seems a little large to attribute to the timing of contracts vs. disbursements.
    And in this case, the actual debt is much worse than the paper budget deficit. Your examples of budgets preceding outlays would result in the opposite: paper deficits exceeding actual debt increases.
    I still think there have to be off-budget giveaways to Fannie, Freddie, GMAC-Ally, etc. to explain the vast difference.

  22. Ed Hanson

    As some have tried to explain, the US debt is a simple matter, with difficult solutions. Debt is a matter of spending more than income. For two years now, the US government has authorized spending of more than a trillion dollars each year than it has income. That rate is can not be maintained for much longer. The question becomes when, not if, that rate of spending stops.
    The last Congress left us without a current budget for this fiscal year. They simply were like a family that still had checks in their checkbook, so assumed that they still had money in the bank and did not need to do any planning. The just continued what they had been doing. In fact, they honestly called it a “Continuation Resolution” until March this year. It does not surprise me that the debt ceiling and the end of the continuing resolution coincide. After all, they are politicians.
    The current Congress has until March to decide what spending to cut from the current budget and the soon to be on us, the nest year’s budget. It will not match the income. The difference is the new ceiling.
    What budget hawks, and welfare hawks refuse to learn, the only way to grow out of a long term debt problem is to increase the source of revenues. And that is not taxation, but the increase in the over all economy. and in a competitive world, that means increasing the private sectors ability to compete. Reduce the corporate income tax rate, 0 is a good number, end the pathetic attempt to regulate for all things good.
    The Congress can start simple. End the FCC, end the Dept. of Education, end the Dept. of Energy, end Public financed Radio and Television, and end Endowments for the Arts.
    Then with these simple step, the Congress can proceed with the tougher items.

  23. Steven Kopits

    Blue Shield of California rate increase prompts criticism
    Another one of California’s largest health insurers has stunned individual policyholders with news of huge rate increases — this time it’s Blue Shield of California seeking hikes of as much as 59% for tens of thousands of customers March 1.
    http://latimesblogs.latimes.com/money_co/2011/01/rate-increase-by-blue-shield-of-california-prompts-criticism.html
    This is not, I think, what most Americans expected from healthcare reform. I would anticipate such sizeable rate increases will not be limited to California. If so, I think the repeal of Obamacare is in the cards. Repeal will certainly pass the House; a handful of Democratic senators will have to consider whether they want to make a litmus test of the issue come re-election time.

  24. AxelDC

    It’s obvious that people have no idea what will happen when we hit the debt ceiling. They seem to think that it will force the government to spend within its means. No, it is the equivalent of stopping a speeding car by ramming into a tree. Think of it as someone freezing your bank account because you are overspending. That means: no rent, no food, no debt payments, no laundry, no gas and no taxes. How would being evicted, losing your car, not having clothes and starving help you to save money?
    If the government hits the debt ceiling, it ceases to function. Federal employees, including soldiers, are no longer paid. Forcing them to work without pay is called slavery. Social Security checks would bounce, and Medicare would no longer reimburse doctors, so the elderly will begin to starve and die from lack of medical care. Employee pensions will cease payment, including military pensions. VA hospitals will shut down. Airports will cease to operate. Federal highway funds will not be paid, so road construction will freeze. Food inspections will stop, as will imports and exports as the port authorities will be laid off.
    All bond payments will stop, so the Treasuries will default. The vast majority of Treasuries are held by US banks, so banks will go under. They will not be able to pay their depositors or make new loans, and the FDIC Insurance payments will not come to bail out depositors. This will cause a run on the banks just like we see in Depression era movies. It will be the start of a New Great Depression, only this one is wholly manufactured by the US Congress.
    The US dollar will plummet in value, driving up the price of imports dramatically even as the US enters the 2nd Great Depression, driving up prices on cars, electronics, clothes and important production inputs like oil, wood and metals. The dollar will cease to be the world’s currency and lose much of its purchasing power forever.
    In the long run, if we ever recover from this mess, trust in US government will be lost. Treasuries will be far more expensive since they will have a sullied credit rating. The US will become a much poorer country for several decades, all because Republicans don’t understand the economic forces they are toying with.

  25. Ned

    The difference between reported deficit and growth in debt could be attributed to the “Overseas Contingency Operations” (ie Iraq/Afganistan) funded through special supplemental appropriations not included in the normal budget and thus were probably not included in the reported deficit.

  26. tj

    Can someone direct me to the CBO discussion of the impact Obamacare will have on state budgets?
    It does little good to focus on the federal budget if accounting at the federal level simply passes costs on to the states.
    I have heard this applies to Obamacare and the claim that Obamacare does not add to the debt. I have not seen the calculations for the net effect when you combine actual obamacare annual cashflows at the federal level and state levels.
    Thanks.

  27. Hitchhiker

    “But if you simply want to grandstand on the debt ceiling as if it were a stand-alone issue, it is clear that you have nothing but contempt for the voters.”
    I agree. Here is a perfect example from a typical politician with nothing but contempt for the voters.
    “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that “the buck stops here.” Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.” Barack Obama March 2006 on the floor of the U.S. Senate.

  28. Ricardo

    Please be careful not to confuse national debt with the deficit. They are not the same thing.

  29. JDH

    Ricardo: The deficit is by definition the change in the debt, though as noted by W. C. Varones above, Congress and everybody else plays games with the definitions of one or the other. But properly defined, the deficit is exactly equal to the change in the debt. If you spend more than you take in this year, then the total amount you owe must increase by that amount.

  30. Ned

    WC,
    During the Bush years, it was off-budget. The increase in debt diverged from the reported budget deficit starting in 2006: http://www.zerohedge.com/sites/default/files/images/user5/imageroot/shirakawa/US%20Debt%20Deficit%20Differential.jpg
    I think that divergence (or least a significant portion of it) can be attributed to Iraq/Afghanistan. Here is some discussion of the issue:
    http://www.tompaine.com/print/fudging_the_numbers.php
    The Zero Hedge graph also shows big jump in the fall of 08 which is probably related to Freddie/Fannie/AIG etc.

  31. Ned

    More reading on the way the cost of Iraq leads to confusion between reported deficit and actual deficit:
    http://www.roanoke.com/editorials/wb/xp-25651
    ["Coincidentally, that approach has the side effect of making the federal budget deficit appear smaller than it actually is."
    http://www.boston.com/news/globe/editorial_opinion/oped/articles/2007/03/05/on_war_costs_bush_is_master_of_disguise/
    ["as an emergency measure, it doesn't count against the budget ceiling that Congress adopts to guide spending, and therefore isn't figured into government estimates of our annual budget deficit."]
    http://www.politico.com/news/stories/0108/8080.html
    http://www.wired.com/dangerroom/2009/02/weighing-the-ir/

  32. Menzie Chinn

    W.C. Varones: I have consulted with an expert. If you want to put down your conspiracy theories for a moment, you can take a look at the OMB Midsession Review, Table S-14:
    here. See also Chapter 6 of this for additional details.

  33. W.C. Varones

    OK, so Bush’s wars and TARP accounted for the difference in 2008. But Obama brought the war on-budget.
    And Obama’s Wall Street, Fannie, Freddie, AIG, GMAC, etc. bailouts presumably account for much of 2009.
    But if that’s the case, why is the gap persisting? And if we are in a recovery, why is the true deficit getting worse? Calendar Q4 2010 saw a debt increase of $463 billion, up 15% from $401 billion in Q4 2009. Annualized, that’s a $1.85 trillion deficit, more than 12% of GDP!
    Three conclusions:
    1) This is not sustainable.
    2) Our government is lying to us.
    3) Buy gold.

  34. Joseph

    A politician who votes for the spending and tax measures that produced the deficit but against a debt ceiling consistent with these is deliberately wasting taxpayer dollars for no purpose other than to grandstand before voters as a “fiscal conservative”. Anyone playing such a game has complete contempt for the intelligence of their constituents.
    The very idea that Republicans care anything about deficits is a joke. From 1945 to 1981 citizens dutifully paid down the debt from WWII. But it 1981 everything changed and for the first time in 35 years, the debt as a percentage of GDP started to grow. As Dick Cheney famously said “Reagan proved that deficits don’t matter.”
    Deficits continued to climb until Clinton raised taxes in 1993 without a single Republican vote. Clinton handed a budget surplus to G.W. Bush.
    Immediately the Republicans repealed PAYGO rules. The Republicans, with the help of Alan Greenspan actually argued that budget surpluses were a threat to the economy. They passed tax cuts that immediately turned the surplus back to deficit. For the first time in U.S. history, they passed tax cuts in time of war. They passed Medicare Part D with no funding mechanism.
    Once again the Republicans have repealed the PAYGO rules. The new rules say that spending must be revenue neutral but tax cuts do not. Republicans don’t care about deficits. They only care about reducing taxes for rich people.
    Now you have the headline “McConnell Blasts Deficit Spending, Urges Extension of Tax Cuts” which captures perfectly the cognitive dissonance of Republicans.
    Today, when confronted with the CBO score of health care repeal adding $230 billion to the debt, the new Republican Speaker Boehner says “the CBO is entitled to their opinion.” Seriously, we’ve now entered the realm of make-believe. We thought Karl Rove was joking when he said his opponents were “in what we call the reality-based community,” which he defined as people who “believe that solutions emerge from your judicious study of discernible reality.” … “That’s not the way the world really works anymore,” he continued. “We’re an empire now, and when we act, we create our own reality.”
    As an aside, but reflecting on their stubborn ignorance of reality, today the Republicans are making a big show of reading out loud the text of the U.S. Constitution on the floor of the House. Except they aren’t reading the parts that talk about Indians and slaves. That’s right, the Republicans, in their cynical show of constitutionality are censoring the Constitution.
    Is there anyone still who is not ashamed to call themselves a Republican.

  35. W.C. Varones

    Menzie,
    Thank you.
    It looks like most of the difference the past two years is made up of student loans and an “equity investment” in Fannie/Freddie (*snicker*).
    So the debt-deficit accounting identity only holds if your government doesn’t engage in banking or equity investing.

  36. Joe

    “The very idea that Republicans care anything about deficits is a joke.”
    True…modify to “The very idea that Republicans or Democrats care anything about deficits is a joke” and it’s more truthy.
    Listen folks, ideas currently being tossed around about taxes, spending, deficits, etc. are nothing more than politicians moving around little paper cut-outs of deck chairs on the deck of a ship. Of course the debt ceiling will go up in March. After that and some smoke about Obamacare being repealed, Congress will do nothing for two years, while the country will borrow more, and more, and more, and more, and more…
    It’s too late to address these things in a proactive manner, we’d be better served by figuring out how to cope with the inevitable economic implosion.

  37. marmico

    If it’s such a simple accounting identity, would you please reconcile the $1.9 trillion and $1.65 trillion debt increases in FY 09 and FY 10 with the alleged deficits of $1.4 trillion and $1.3 trillion for the same fiscal years?
    The government borrowed more from the public than it spent and banked the bulk of those additional borrowings in an Asset Account known as Net Activity, Direct Loan Financing.
    That account was $197 billion as of fiscal 2008 and $744 billion as of fiscal 2010 which explains most of the difference between the annual deficits (flows) and the increase in the outstanding debt (stocks).
    Click through here and view Table 6 for the September 2008, 2009 and 2010 monthly Treasury Statements.

  38. Joseph

    In the latest news …
    Today Rep. Paul Ryan, the so-called “reasonable” Republican and designated Republican “economic expert” introduced a bill to repeal the Federal Reserve’s dual mandate of managing inflation and employment to replace it with a mandate to only manage inflation.
    In other words: Unemployed? Scr*w you, suckers!
    If this is what we can expect in economics from the “reasonable” Republicans, its going to be a long couple of years.

  39. Jon

    You’re neglecting the role of Congressional Budget and Impoundment Control Act of 1974.
    Prior the ’74 budget act, it made sense to separate appropriations from the debt ceiling. They were two kinds of constraints. The first AUTHORIZED but did not REQUIRE the president to spend money on certain things. The second limited the debt that treasury could issue.
    In this way, many authorizations could be ‘preapproved’ by Congress and then the executive had the freedom to use the money in different ways subject to the constraints of tax revenue and the debt ceiling.
    This only became somewhat nonsensical with the ’74 budget act, which required that the execute spend the money appropriated–this is also what set the ground work for free earmarking–authorizations that the ’74 budget act made self-executing by default.
    The answer here is a repeal of the ’74 budget act. Obama has been hinting that he wants recession authority, so this may yet be proposed by him during the next state of the union address.

  40. jonathan

    Only one comment above hit at what is the key point: how world markets react to the growing potential that US default may occur. We are able to finance our deficit and debt at very low rates because the dollar is the de facto reserve currency. It is the reserve currency because our economy is very large and our ability to generate cash to pay debt is similarly very large – and mostly untapped because our tax rates are historically low. If our politics tells world markets that we aren’t reliable, then why should the dollar remain the reserve currency and thus why should be we get such favorable treatment?
    One irony is that a cornerstone of extreme conservatism is the dollar’s strength. This is the best possible way to weaken the dollar.

  41. Elli D.

    Absolutely jonathan, I could not agree more. The US is not in ordinary countries’ position. When it comes to monetary policy, special rules must be applied if we want to deal with problems effectively. Our politics needs to be very cautious and consistent to keep up our image.

  42. Ricardo

    Professor,
    My comment about the debt versus the deficit was not directed to you but since you responded let me reply.
    You are correct that there are different definitions of national debt and deficit.
    Here is a definition of the national debt from the University of Michigan that I like.
    •Although this term looks like it should mean the amount that a country owes to foreigners, in practice it is used instead to refer to the amount that a nation’s government owes to anybody, including its own citizens. Thus it is the total of a national government’s outstanding government bonds. Bonds should be understood as Treasury bills, notes, and bonds.
    They define the budget deficit as:
    the excess of expenditure over income.
    Note that a country can have a national debt but if income is greater than committed payments the country can service the debt and will not have a deficit.
    A country runs a deficit when its expenditures exceed its income. A country can have a deficit without having debt and it can run a deficit without having the resources to service the deficit. The deficit consists of its commitments to wages, transfer payments, and other commitments as well as its payments to service its debt.
    The two are often confused either intentionally or unintentionally when talking about the debt limit. A deficit can sometimes be dealt with by simply laying off government workers or shutting down offices for a period of time.
    Let me return to an analogy I used above. If you pay your bills with your income you do not have a deficit. But if you pay your bills to prevent a deficit by a cash withdrawal from a credit card you are actually simply compounding your deficit by increasing your debt. Without a clear plan for how the deficit will be reduced this is exactly what extending the debt limit does.
    If you look at the past year of the Obama administration you will see that the deficit and so the need to extend the debt limit has not been caused by reduced tax rates but has been significantly been significantly caused by reduced by decreased tax revenue and increased spending. These two causes are related because as the non-productive government increases its spending the money has to come from the productive private sector with the result being lower tax revenues.

  43. 2slugbaits

    Ricardo as the non-productive government increases its spending the money has to come from the productive private sector
    So in your world government goods and services add zero value to output. Government is purely parasitic. Hmmm. Do you wear a three cornered hat with little teabags hanging down from the brim?
    In principle the government could run a surplus and just decide to go out and borrow just because folks at Treasury feel like it. A deficit forces the government to borrow, but running a deficit is only a sufficient condition for increasing the national debt, not a necessary one. The Treasury can borrow simply for cash management purposes, just as a rich man can borrow from a bank.
    There is nothing wrong with running a deficit per se. A country should run a deficit in a recession, and especially if it’s a liquidity trap recession. Worrying about a short run deficit is just plain stupid….about as stupid as running large deficits during a recovery and not increasing taxes to fight a war. Were it not for the Bush tax cuts the national debt going into this recession would not have been nearly as large as it was, which means that were it not for the tax cuts we would not be bumping up against the $14.3T debt limit. So it’s simply not true that “the need to extend the debt limit has not been caused by reduced tax rates.” Eventually we will come out of this recession, and when we do it will be interesting to see how many of today’s deficit hawks write their congress critters demanding higher tax rates to reduce the deficit. About as likely as all those retired teabaggers demanding cuts in Medicare and Social Security. Not gonna happen. They think we can balance the budget by cutting foreign aid.

  44. Ed Hanson

    2slugbaits
    A static economy is a terrible thing, and so is a static brain. And your thoughts trend to the static. Economically, you believe that tax rates and tax revenues have a static 1 to 1 relationship, and your arguments have tended to a static technique of attempting to box other people thoughts into absolutes, such as, “So in your world government goods and services add zero value to output.” Which is an anarchist’s theory, and as far as I have read, Richardo is not an anarchist, but just an advocate of a much more limited government to allow for the greater practice of individual freedom and action, now and in the future.
    Is it your contention that no elements of government are parasitic? That every function and act of government add value. If so, I would certainly disagree. To expand on your analogy, I suspect that I have parasites in my body, but, I function, if not optimally, at least normal to me. If at some time, the parasitic level has grown to the point that my functionality has reduced to a sub par level, I must act on the problem. If I accept your therapy, I would borrow, blood and nutriments, from outside my body to feed the parasites so they might consume less of what I already have. If I took Richardo’s therapy, I would identify the parasites, remove them, and not just return to normal function, but approach optimal function.
    More specifically about about the relationships of tax cuts, deficits, and debt. After the 2003 tax cuts, revenues flowed into the treasury, at a rate higher than your static analysis could account. It was not the cause of the deficits and added debt, as you point, it was more spending than revenues. You were unhappy with that spending going to the wars, and I was unhappy with the spending going to unproductive things such as federally funded education programs and enhanced welfare programs. But, in any case, it was spending that caused the problem because the fact remain, that revenues went up after the 2003 tax cuts.
    Rather than attempt to box you into an absolute, I will simply ask a question. Do you think that there is some level of tax rate that would produce less revenue? After that question, perhaps a second question would come to mind, do you think their is a level of government regulation that would cause revenues to fall?

  45. 2slugbaits

    Jon
    You’re forgetting the historical context around the 1974 budget rules. Nixon was impounding monies that Congress had authorized and effectively choosing to defund agencies whose mission he didn’t like. It effectively gave the President a line item veto, which I think is a bad idea…especially in the hands of a paranoid nutjob like Nixon. In any event, the practical effect of the 1974 law is that it only constrains the Executive to spend all of the monies appropriated by Congress across rather broad categories; the Executive still retains broad powers to reallocate within those categories. For example, Congress might direct “X” amount of money be spent on budget point account number P2.x.y.z, but the Executive wants to shift that to point acount P7.a.b.c. The usual practice is to have the relevant Department submit to OMB a request to change the “color” of the money. OMB would then send the request over to Congress after COB Wednesday night. Why COB Wednesday night? Because the 1974 law says that Congress have five calendar days to positively deny the OMB request, otherwise Congressional concurrence is assumed. Since Congress leaves town on Friday and doesn’t get back until Monday night, that only leaves Thursday as the only working day for Congress to deny the OMB request. And if it comes over on Wednesday night, then the staffers have no effective chance to review the OMB request and act upon it. It’s an established procedure and it’s been going on for decades. It’s just how stuff gets done in Washington. Congress still retains broad powers to deny impoundment of funds and Congress still retains broad authority to direct how monies are spent, but it also gives the Executive the discretion to move monies between accounts as conditions dictate. And since positive action is required by Congress, it effectively frustrates any minority of Congress critters from filibustering an OMB request.

  46. Ricardo

    Slug,
    On course the government has a purpose, but having a purpose does no mean that it produces anything. The government is more like hiring a night watchman. You get no production from the night watchman but you do prevent losses so it is a legitimate cost of doing business.
    Government is a cost of doing business. That is a large part of what the Laffer curve is all about. When the cost of government exceeds its usefulness then it becomes detrimental to the economy. If you were to hire 1,000 night watchmen and a doctor to sit in a booth to be on call just in case someone chokes in a McDonalds would certainly be safer, but it would be an absurd business decision.
    With your attitude toward taxes you should propose a 100% tax rate. Now I know that is absurd but you need to think long and hard about why it is absurd. You know that a 100% tax rate would cause producers not to produce. I don’t know what work you are in but if your total salary was confiscated in taxes would you go to work every day? If you don’t understand taxes as a cost of doing business/work then you do not understand taxes. So if a 100% tax rate is absure what rate is optimal? Well it depends on the circumstances. During a war a higher tax rate would be appropriate, but during a time of peace a tax rate approaching 50% is almost as absurd as on at 100%. What do you think Canada is lowering its corporate tax rate to 15%?
    Your view toward governmental borrowing is also naïve. You definitely need to read a book like When Money Died by Adam Ferguson about the Weimar Inflation in 1923. A nation cannot borrow when it requires more to service its debt than the nation can take in through taxes. You are seriously naïve if you believe that the US can continue to borrow without limit.
    Look at two things that happened in the years following when the Bush tax reductions were implemented, tax revenue and the deficit. I will agree with you that the TARP passed under Bush began the massive budget deficits so I do blame Bush, but the only difference between the Obama policies and the Bush policies is that the Obama numbers are larger and so the deficit is larger.
    There has been no real tax reduction since 2003. Can you say the same thing about spending? That being the case you are disingenuous to blame tax cuts for our current massive deficit.
    To blame our nearly $14 trillion debt on the tax rate being too low is serious fantasyland. And besides the massive increase in spending, the most serious component of our deficit is the reduction in private sector production resulting in reduced tax revenues. Increased taxes will simply move more resources out of productive assets into non-productive consumption. Without production you have no tax revenue and the national debt will become all deficit.

  47. 2slugbaits

    Ed Hanson Do you think that there is some level of tax rate that would produce less revenue? Yes. Empirical estimates I’ve seen put that level at a top marginal rate of around 65%.
    do you think their is a level of government regulation that would cause revenues to fall? Sure. There is also a lower bound at which too little regulation causes revenues to fall.
    Which is an anarchist’s theory, and as far as I have read, Richardo is not an anarchist, Ricardo is not an anarchist, but if you follow his ideas he does appear to believe in something very much like the labor theory of value. He has an old-fashioned view of how value is generated, and it’s a wrongheaded view. The government almost always add value. That does not mean that the government always adds as much value as the private sector might, which is why we would not want to have a 100 percent tax rate. But Ricardo’s view is not all that different from David Ricardo…both of them appeal to their own versions of the labor theory of value. Ricardo sees government as living off the product of the private sector and he sees it as a necessary cost of doing business. I think he’s wrong; government actually creates value.
    advocate of a much more limited government to allow for the greater practice of individual freedom Perhaps, but individual freedom is not an economic output, it’s a political goal. Limiting government’s role to the nightwatchman state might align with Ricardo’s political ideology, but that does not mean it maximizes economic output.
    You were unhappy with that spending going to the wars Since I’m an operations research weenie with the Army I would say my opposition to defense spending is a bit more nuanced than you probably believe.
    In 2003 we should have been heading towards budget surpluses, and we would have been headed that way were it not for Bush’s tax cuts and his refusal to raise taxes to support what everyone knew by then was going to be a long war.
    As to dynamic analyses, you’re overstating the case. CBO actually did run dynamic scorings and the results were borderline trivial.

  48. 2slugbaits

    Ricardo Regarding tax rates, see my reply to Ed Hanson.
    You are seriously naïve if you believe that the US can continue to borrow without limit. I never said the US can continue to borrow without limit. Where did I ever say anything even remotely like that? I said that it was stupid to worry about a short-term cyclical deficit when the economy is stuck in a liquidity trap recession. In fact, I also said that we would need to significantly increase taxes to close the budget gap after the economy recovers. We will also have to cut stimulus spending after the economy recovers. Eventually we will have to run something like a small primary budget surplus. It’s the GOP that seems to believe that cutting taxes is a sane way to bring down the deficit.
    I will agree with you that the TARP passed under Bush began the massive budget deficits so I do blame Bush, but the only difference between the Obama policies and the Bush policies is that the Obama numbers are larger and so the deficit is larger. First, I don’t blame Bush for TARP…I give him credit. It was a tough pill to swallow, but he did the right thing. Second, the FY2009 deficit was the largest and that was largely Bush’s deficit, not Obama’s. Obama added about $300B in stimulus spending…the rest was already baked in the cake before Obama was even inaugurated. And the FY2010 deficit was smaller than the FY2009 deficit…which I don’t see as a good thing. It should have been larger.
    As to private sector production, I hate to burst your Laffer Land bubble, but the main problem today is weak aggregate demand, not high tax corporate tax rates. A company doesn’t pay taxes on zero income.

  49. Ed Hanson

    2slugbaits
    Lets get a few items off the docket first, since you responded to them. I did not criticize your unhappyness with war spending, many agree with you on that, just not me. But there is no denying that is true that war spending is an expense that Congress must account towards the budget and does add great difficulty to balance.
    Other interesting points you brought up. As to the “Labor Theory of Value;” at sometime it may be of interest to see if you and Ricardo could agree to its definition, and then proceed to dissect any agreement and disagreement with the theory. I take no truck in it.
    Again most interesting, that as you state, individual freedom is a political goal, not a naturally occurring right. Great topic, with lots of permutations.
    But, this is on the Econbrowser’s nickel, and I am uncomfortable to go to far afield in what may become just a personal debate. Fortunately, this site is wide ranging and I would bet at that time either Professors Menzie or James will broach a discussion more directly relative to these subjects. So I will limit my response to tax rates and deficits and debt.
    Some questions which came to mind. A 65% top marginal tax rate, is it just on wages, or does that include dividends and capital gains as well as saving’s interest, and I wonder where you think the level of effective tax rate should be for those in the high brackets( also about 65%)? As best as I know, no successful country has ever had a rate that high on dividends or capital gains. I think it would be devastating to an economy. Especially in a competitive world economy, where capital would flow out of the country.
    It is my contention, that income high tax rates besides being tyrannical, in many ways serve to protect the position of of the privilege few, the already hugely wealthy. It is the wealthy that have many avenues to structure their income, up to even removing their wealth and income outside the borders. The wealthy flight from Great Britain in the 60′s and 70′s come to mind. The high tax rate falls mostly on those whose abilities have allowed them to rise in society, but also effectively retard their ability, on the margin, to accumulate wealth and savings. An example of this is professional athletes, many who have come from modest means, but can not structure their income to avoid high tax rates.
    Now, as to empirical studies of tax rates. Your 65% figure is quite close to the Hoover rates, later codified by FDR and raised still, which were the main factor to prolonging the Great Depression and high unemployment of the times. And they were set with the stated purpose to balance the budget, and quite unsuccessfully. After WWII, high rates continued, and, I suspect you would point out factually, the US prospered. It must be also realized that the US was in a unique position, seldom experienced in history, of being the only economy with large means of production left standing. Other countries by necessity had to buy from the US to rebuild. It was a relatively easy time to make money, and with effective marginal tax rates were less onerous.

  50. Ricardo

    Slug,
    Let me address the question of a liquidity trap recession because that is a fallacy that is taught in almost every course on economics.
    The fact that there comes a point where interest rates cannot be lowered any more is true. Below zero interest rates you begin to pay someone to borrow and such payments are actually subsidies not negative interest rates. This is what the Federal Reserve is currently engaged in.
    So the Keynesian assumption is that by increasing liquidity an economy can be stimulated. The only problem is that in the real world this simply is fantasy, it has never happened. Making this assumption, though, Keynesians constantly call for more liquidity to fight “deflation.” More and more money is injected into the economy, but this is done through the loan market.
    Now those with common sense know that there is a point at which it is not possible to take on more debt. If you cannot service the debt that you have, borrowing more only compounds the problem. In an economy overwhelmed by debt no one will borrow. The Keynesian defines this debt problem as a “liquidity trap”.
    The Keynesian sees this reduction in demand for loans as not enough money rather than too much debt. The Keynesian attempts to solve the problem by injecting more money into the loan system, but the money flows not into loans and the economy but into bank reserves or hard assets, sometimes even price increases.
    Then the Keynesians, seeing that their increased currency is not stimulating “demand” (a misnomer for consumption), pull resources from the debt-ridden private sector and give it to the government so that the government can spend to make up for the lack of “demand”.
    But the Keynesians see spending as fungible. Because they think in aggregates they cannot distinguish between spending on food and factories from spending on pyramids and roads to nowhere. The result is massive malinvestment (just for the record injections of money into the economy also causes the productive economy to create malinvestment but that is another discussion).
    Once again, the Keynesians see the malinvestment but mistakenly assume it is over production caused by the free market, when it is actually the misallocation of resources because of government waste.
    At that point, because their “fixes” have not worked, the Keynesians simply start all over again in their efforts to “stimulate” demand. How many times is Paul Krugman going to demand more stimulus, demanding the same error assuming a different outcome, before he is determined to be legally insane?
    Son in a world controlled by Keynesians, the cycle is repeated over and over until the economy finaly declines to such a state that economic actors are forced stop the perpetual Keynesian “fixes” and rebuild a productive economy. This happened in John Law’s France. It happened in the French “assignat” economy that paved the way for Napoleon. It happened in the Weimar economy in Germany paving the way for Hitle. It happened throughout the world during the Great Depression. And it is happening now.
    To put it in simple terms because Keyneisans cannot distinguish between eating the seed corn and the corn for consumption, there is no future harvest.
    The fallacy of the liquidity trap recession leads to economic disaster.

  51. Ricardo

    Slug,
    To take a slightly different approach to Ed Hanson on your claim that an optimal tax rate is 65%, no country in the world has ever taken in 65% tax revenue from its people except perhaps a country using confiscation by active military force in the past.
    If you look at this chart and notice that regardless of the tax rate in the US tax revenue always falls betwee 25-30%.
    What is very interesting and very telling is that in 1990 with the bottom rate at 15% and the top rate at 28% total tax revenue was 27.3% of GDP. In 1975 with a top rate of 70% only 25.6 of GDP was collected.
    I don’t know where your 65% rate was dreamed up but it doesn’t seem to agree with the facts.
    What this does tell us is that, detremining total tax revenue, the tax rate is less important than the prosperity of the country, the GDP. And even more it implies that a higher GDP is a factor of a lower tax rate.

  52. 2slugbaits

    Ricardo Sorry, but your understanding of the Keynesian liquidity trap argument is so far off the mark that I hardly know where to begin. The Keynesian prescription is almost 180 degrees of what you seem to think it is. It’s precisely because a liquidity trap implies a flat LM curve that Keynesians recommend IS curve solutions. Okay, contemporary New Keynesians don’t talk in terms of old school Hicksian IS-LM curves, but as both Krugman and Mark Thoma have pointed out, in the current context the old IS-LM framework is probably a pretty good way to think about the matter.
    Ed Hanson You didn’t ask me what I thought taxes should be as a percent of GDP, you asked me what the top revenue maximizing rate was. The revenue maximizing rate for the government may be something like 65 percent, but that does not mean I am arguing for a top marginal rate of 65 percent. Returning to something a little north of the Clinton era tax rates is probably where we need to eventually get to. As to the US being the only robust economy standing after World War II, I think you’ve got this backwards. A broken Europe hurt US growth postwar. Having poor trading partners makes us poorer and having rich trading partners makes us richer.

  53. Ed Hanson

    2slugbaits
    From your last post directed at Ricardo. You wrote in part,
    “First, I don’t blame Bush for TARP…I give him credit. It was a tough pill to swallow, but he did the right thing. Second, the FY2009 deficit was the largest and that was largely Bush’s deficit, not Obama’s. Obama added about $300B in stimulus spending…the rest was already baked in the cake before Obama was even inaugurated.”
    A few questions.
    Do you not agree that it is Congress that appropriates? It is not the President, although powerful in our country, still is not a King or Dictator? The constant factor, from 2006 through 2010, was a democrat controlled House and Senate.
    The Stimulus package of discussion was passed in Feb, 2009, and was 787 billion. Did you remember that the democrat Congress purposely only funded the government for half fiscal 2009 because they anticipated a President forthcoming from their party? All spending in the second half of fiscal year 2009 was the complete responsibility of the Congress under Obama’s watch.
    As you noted elsewhere, the greatest increase of debt was in fiscal year 2009 of just under 1.9 trillion dollars. Fiscal year 2010 increased by just over 1.55 trillion dollars. It is my opinion that you are deluding yourself if you consider that any more stimulus beyond these staggering figures. Do I delude my self, and think the budget should have balanced in those years, no, but it is reasonable to see that Keynesian stimulus was a false solution. A better case for tax rate reductions, as demonstrated during the sharp recessions of the early 1920′s and early 1980′s, would be a better solution. Command economy and programs simply are poor substitutes for general and spontaneous creation by individuals.

  54. 2slugbaits

    Ricardo your claim that an optimal tax rate is 65%
    No, that is not what I said. Ed Hanson asked what was the top revenue maximizing marginal rate. Understand the difference?
    Ed Hanson The constant factor, from 2006 through 2010, was a democrat controlled House and Senate.
    Actually, it was 2007 through 2010 and the Democrats only had a nominal 51/49 Senate majority until 2009. But I will give credit to those in Congress who bit the bullet and voted for TARP. At the time Obama was a senator and he voted for it; McCain did not.
    It is my opinion that you are deluding yourself if you consider that any more stimulus beyond these staggering figures.
    Well, I actually read the Romer-Bernstein paper and it was clear from their analysis that the $787B package was not up to the job. Their analysis was written in early Dec 2008 and it was already obsolete by the time Congress voted on the stimulus. And about 10 percent of the stimulus was just an AMT extension, which had no additional stimulative effect. And 40 percent of the remaining stimulus was in the form of tax cuts, which according to Romer’s own calculations had a multiplier of less than 1.00. The economy was demanding a stimulus package roughly double what we got. That may not have been politically possible, but I can’t help it if congress critters are morons who can’t read economics papers that weren’t written by the clowns at Heritage.
    Command economy and programs simply are poor substitutes for general and spontaneous creation by individuals
    You’re confusing curves. The problem is weak aggregate demand and government spending has a stronger effect on aggregate demand than do tax cuts. The main reason is that some of that spontaeneity from tax cuts that you seem to admire takes the form of savings and import leakages, which dampens the fiscal punch.

  55. Ricardo

    Slug,
    You wrote:
    It’s precisely because a liquidity trap implies a flat LM curve that Keynesians recommend IS curve solutions.
    That is exactly what I wrote though I didn’t use econometric mumbo jumbo to obscure the theory. Keynesians come to a point where interest rates and money supply increases don’t “stimulate” the economy so they attempt to “stimulate” it through government spending. What Keynesians don’t understand is that interest rates and money supply never did stimulate the real economy. The illusion is because malinvestment and inflation mimic real economic improvement. When the LM fallacy finally becomes too real to ignore Keynesians shift to IS malinvestment through government spending.
    As you say when LM fails Keynesians try IS, but throughout history, even before Keynes, both LM and IS stimulation failed every time it was tried. Let me repeat study the hyper-inflations of the past and you will see Keynes throughout.

  56. Max

    The government doesn’t need to account for deficit spending as debt. It does under current law, but the law could be changed. Once that reality sinks in, you realize that the debt level doesn’t mean much. The maturity structure is just as important as the level, but politicians NEVER mention it!

  57. tmajor

    When I was a kid in the1970′s, I remember President Nixon putting the final nail in the coffin of our value backed currency, I kept asking adults why the gov’t was borrowing money when there was nothing to borrow. The dollar is a (faith valued) non-convertible fiat currency. In fact that is why the U.S. gov’t designed it, so they wouldn’t have to borrow from anyone!
    Please step outside of the box for a moment and view it like I did as a child. With an asset backed currency there must be physical gold in place to back currency. With a non-convertible fiat currency (which simply means the currency has nothing of physical value supporting it) the value consists of people (here and abroad) believing it has value. So if you compare the difference between the two it is easy to understand that the U.S. gov’t is not borrowing money from anyone because there’s nothing to borrow. It is ink and paper, that is it! It is what it is!
    The US government is a monopoly of its currency. If they don’t print it there is no money. They tax us to control population, spending power, and who gets the money. The gov’t must run a defecit in order to allow economy to run smoothly. When they don’t inject enough money into economy we end up with a lot of unemployment. Excessive gov’t spending contributes to the hyperinflation we have here now where Americans pay from 100-5000% more for products, service, and health care. The gov’t will never go broke, and they do not rely on tax revenues nor do they borrow money from the Fed, China or any other country to finance this country! In short, they offer bonds to anyone to drain excess reserves and to control the overnight loan interest rates. Technically, the only reason this is done is because it is mandated by law (that has absolutely no merit), and if china (or any investors) were to stop purchasing the securities the gov’t would simply abolish the law Very much like the fabricated debt ceiling that keeps getting raised despite tales of gloom. Or the idle threats of the federal gov’t closing it’s doors due to lack of funds. I personally wish they would close shop long enough to remove the circus that’s running it!
    The value of US currency is determined by what the gov’t demands private sector must do or sell to obtain it. The more unemployed (welfare, forced involuntary unemployment, etc.), the less value the dollar has. Unemployment equals less output. The true debt, we and future generations will have to pay, is the lost output and depreciated human capital!
    The reason America imports more than they export is because exports are real cost (output and labor) and imports are pure benefit for the system. Basically for the cost of the ink and paper to make dollars, America’s elite can purchase the rest of the worlds products (their output and labor). The down side to this is the taxpayer’s here obviously don’t receive products from all over the world just for the price of ink and paper, and the loss of millions of good paying manufacturing jobs. When the US gov’t started forcing outsourcing in the 1960′s they knew this and indicated other equally compensating jobs would definitely replace lost jobs! That has never happened!
    Since my childhood I have spoken to several economists who are 100% aware of how our U.S. monetary system works. I have asked them why they believe the gov’t continues with this charade. They seem to believe that the majority of the gov’t really believes the whole borrowing system to be fact. As for the thousands of economists who follow suit, I suppose they have so much schooling, money, and time invested in the borrowing fairy tale they’ve been fed that they have put on blinders and refuse to look at it as it actually is!
    I don’t see how one can’t see the truth when you simply understand that there is absolutely nothing to borrow!
    The only true constraints here are resource based, not monetary or financial at all!

  58. JDH

    tmajor: Where shall I begin? Perhaps by asserting that your questions are not matters that economists refuse to ponder nor puzzles for which we have no answers.

    Briefly, it is incredibly useful to have an asset that can function as a store of value and medium of exchange whose usefulness for purposes of subsequent transactions is immediately understood by buyer and seller. The advantages of such a system over barter or bilateral credit are truly enormous, such that if we did not use Federal Reserve notes for this purpose, we would surely come to rely on something else to fill the same function. Indeed, much of the value of gold, whose intrinsic worth you seem to accept without question, derives from exactly this feature.

    The real purchasing value of a pure fiat currency derives from the real value it provides for the above most necessary functions. To be sure, if the supply of the currency grows faster than its real usefulness for these purposes, the result will be inflation. But such an inflation is neither infinite nor arbitrary nor mysterious.

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