Off-balance-sheet federal liabilities

Here’s the abstract for a paper I recently completed on Off-Balance-Sheet Federal Liabilities:

Much attention has been given to the recent growth of the U.S. federal debt. This paper examines the growth of federal liabilities that are not included in the officially reported numbers. These take the form of implicit or explicit government guarantees and commitments. The five major categories surveyed include support for housing, other loan guarantees, deposit insurance, actions taken by the Federal Reserve, and government trust funds. The total dollar value of notional off-balance-sheet commitments came to $70 trillion as of 2012, or 6 times the size of the reported on-balance-sheet debt. The paper reviews the potential costs and benefits of these off-balance-sheet commitments and their role in precipitating or mitigating the financial crisis of 2008.

What follows is a brief summary of the paper.

One important category of federal off-balance-sheet commitments involves housing. The government’s commitments began in 1934 when Congress established the Federal Housing Administration to insure approved mortgages, an agency that’s still going strong today. Last year, the FHA issued $213 B in new guarantees, bringing its total portfolio of insured mortgages to $1.3 trillion.

In 1938, Congress created Fannie Mae as a separate entity to purchase mortgages, and in 1970 chartered Freddie Mac to compete with Fannie. Throughout their history, both entities had features of both public and private enterprises. They were able to issue their own debt at favorable interest rates and offer separate credible guarantees on massive volumes of mortgage-backed securities in part because of the common perception that the government would back them up if they ran into trouble. Any doubts about this were resolved when Fannie and Freddie were taken into conservatorship in 2008. With any profits that the GSEs make currently going to the Treasury, it is reasonable to assume that any losses they currently make would also come out of the Treasury.

As of the end of 2012, the outstanding debt and guarantees issued by Fannie and Freddie (along with those of the Federal Financing Bank, Federal Home Loan Banks, Farm Credit System, Federal Agricultural Mortgage Corporation, FICO, and REFCORP) came to $7.5 trillion, or 2/3 the size of the total Treasury debt held by the public. In my paper I discuss the role of the huge federal involvement in the housing boom and bust of the last decade.



Mortgage debt held by government-sponsored enterprises or in agency- or GSE-backed mortgage pools, 1952:Q1 – 2012:Q3, in billions of dollars, as a percent of GDP, and as a percent of all mortgages. Source: Hamilton (2013).
Cato_GSE.gif


Another category of federal commitments that we are likely to be hearing more about in the next few years is student loans. I was surprised to discover that most of this federal commitment has recently become an on-balance sheet liability, as the Department of Education has evidently been using funds borrowed by the U.S. Treasury to buy up some of the federally-guaranteed student loans that have now run into trouble. Borrowing by the U.S. Treasury on behalf of the Department of Education came to $714 B as of the end of fiscal year 2012, accounting by itself for 6% of the outstanding publicly-held U.S. debt. The contribution of remaining off-balance-sheet commitments for these and other non-housing federal loan guarantees appears to be relatively modest.



Treasury debt held by the public and combined federal off-balance sheet liabilities. Source: Hamilton (2013).
2006 2008 2010 2012
Treasury debt held by public 4,867 5,837 9,052 11,299
Housing-related commitments 6,386 8,036 7,594 7,520
Student and other loan guarantees 468 547 419 325
FDIC 4,154 4,975 6,575 7,406
Federal Reserve -773 360 -1,136 -1,128
Social security 16,500 18,700 21,400 26,500
Medicare 28,500 33,200 24,900 27,600
Other government trust funds 1,308 1,487 1,646 1,862
Total off-balance-sheet commitments 56,544 67,305 61,398 70,085


A separate category of off-balance-sheet commitments involves deposit insurance. The Federal Deposit Insurance Corporation had issued guarantees on bank deposits worth $7.4 trillion as of the end of 2012. However, this should decline by about $1.5 T with the expiration of some of the Dodd-Frank extensions on guarantees. Moreover, the FDIC ended up with a positive cash flow even through the stress of the financial crisis. In the most recent experience, I would say that deposit insurance worked as intended– bank runs were avoided at no loss to the taxpayers. On the other hand, Curry and Shibut (2000) estimated that the earlier FSLIC deposit guarantees ended up costing U.S. taxpayers $124 B as a result of problem saving and loans during the 1980s.

In arriving at the figures in the table above, I have added the reserves created by the Fed under its emergency-lending programs and QE1-3 as another off-balance-sheet liability of the federal government, regarding interest-bearing reserves as essentially an overnight loan from banks to the Fed. On the other hand, I also subtract off the Treasury securities and MBS held by the Fed, viewing QE as basically swapping one on- or off-balance-sheet federal liability (Treasury debt or GSE MBS) for another (interest-bearing reserves). Because I treat cash held by the public as imposing no further potential demands on the U.S. Treasury, my conclusion is that the Fed was on balance reducing the federal government’s net liabilities by $1.1 T as of the end of 2012.

The biggest category of off-balance-sheet liabilities comes from the additional funds that the trustees of the Social Security and Medicare trust funds believe would need to be found in order to fulfill commitments to current program participants (i.e., those currently aged 15 and older). These are reported to be $26.5 T for Social Security (see Table IV.B7 of the trustees report) and $27.6 T for Medicare (Table V.G2). As I write in my paper:

These numbers are so huge it is hard even to discuss them in a coherent way. As noted above, the calculations that go into them are easily challenged. But although one can quarrel with the specific numbers, there is an undeniable important reality that they reflect– the U.S. population is aging, and an aging population means fewer people paying in and more people expecting benefits. This reality is unambiguously going to be a key constraint on the sustainability of fiscal policy for the United States. One would think we should be saving as a nation today as preparation for retirement, and if in fact we are not, the current enormous on-balance-sheet federal debt is all the more of a concern.

Adding all these items together, I calculate total off-balance-sheet federal liabilities of around $70 T, or 6 times the size of reported on-balance-sheet liabilities. My paper concludes:

Some may argue that the current off-balance-sheet liabilities of the U.S. federal government are smaller than those tabulated here; others could arrive at larger numbers. These off-balance-sheet concerns may or may not translate into significant on-balance-sheet problems. But one thing seems undeniable– they are huge. And implicit or explicit commitments of such a huge size have the potential to have huge economic consequences, perhaps for the better, perhaps for the worse.

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52 thoughts on “Off-balance-sheet federal liabilities

  1. Joseph

    1. Loans are assets, not liabilities.
    2. JDH: “But one thing seems undeniable– they are huge.”
    Are they huge? Compared to what? If you are going to show liabilities over an infinite horizon, you need to show income ovewr the same infinite horizon. Otherwise they are just big numbers ginned up to scare the rubes.

  2. JDH

    Joseph: Take student loans as an example. (1) The $714 B that the Treasury borrowed from the public is a liability, not an asset, of the U.S. Treasury. This is in principle balanced by an asset of the federal government, which is money owed by students to the federal government. The true market value of this asset is likely substantially less than $714 B. Note the $714 B owed by the Treasury to the public as a result of this program is counted in the first row of the table provided. (2) The $285 B in additional loan guarantees that have been issued by the Department of Education is a liability, not an asset, of the U.S. federal government. This is included in line 3 of the table above. It is a contingent liability in the sense that, if the loans are repaid, it will cost the taxpayers nothing.

    The purpose of the exercise was to tabulate the main categories of contingent liabilities.

    You are correct if your point is that the table only counts liabilities and makes no effort to calculate the market value of offsetting assets or the likely cash loss to the Treasury under various scenarios.

  3. Tom

    This looks like a good overview. I agree very much with your point about the low national savings rate making the problem of an aging society much worse. This in my mind is Obama’s greatest error – to follow the Keynesian notion that a rising savings rate is unhealthy and should be countered. On the contrary, the low savings of the bubble era was unhealthy. The cost of this mistake will be rising retirement-age poverty.
    I saw only one point I’d qubble with – I believe the FDIC system effectively failed in 08 as Bush and Bernanke circumvented it and bailed out banks through alternate ad hoc means.

  4. Vangel

    “…$27.6 T for Medicare…”
    Isn’t this the best case scenario? I thought that the Medicare actuaries projected the unfunded obligation to be around $37 trillion.

  5. Christiaan

    It makes no sense to me to simply add up these liabilities, not in any way. Not all liabilities are created equal. Some liabilities could lead to losses in a short period. But others are always stretched over many years. In particular, Medicare, Medicaid and Social Security are not liabilities that can be needed in one year. Liabilities that can lead to losses in a single year could be compared to GDP. However, liabilities that necessarily stretch over more years can only be compared to cumulative GDP over those years. Apart from that, those latter liabilities can be more easily corrected for over time. And then there are liabilities that may not incur any cost, for instance because they can always be payed for by simply printing money (i.e. FED liabilities), in particular this can be true in times that are so bad that these liabilities have to be payed for, because then printing money may not incur any cost (as in the current small depression.) So, what is the meaning of these numbers? AFAICS nothing.

  6. GregL

    Let me quibble a bit with this post.
    What you refer to as “off balance sheet liabilities” are really “contingent/potential liabilities”. They will not all become on balance sheet expenses and those that do will not all occur at the same time.
    As for SS & Medicare:
    “These numbers are so huge it is hard even to discuss them in a coherent way.”
    Yet not trying “to discuss them in a coherent way” because the exercise appears difficult is no excuse for arriving at a conclusion with no support.

  7. Steven Kopits

    Let me for a change take the optimistic side. Many of these liabilities are backed by assets, so the value at risk is not as great as it seems.
    However, I think there is a central issue here which splits the fiscal conservatives from the egalitarians.
    The obligations related to SS and MC are not fixed. These can be changed by acts of Congress. Jims’ analysis suggests, however, that current promises will be difficult to fulfill without substantial tax increases and/or benefit cuts. I am personally of the view that tax increases will become harder, not easier, over time. The more wide spread means testing becomes, the smaller the share of the voting public will be willing to support these programs.
    That leaves benefit cuts. I think these are likely coming, in real if not in nominal terms. The welfare state as currently designed is probably not sustainable. Public sector workers had nice pensions in Detroit. Will they prove sustainable?
    In a significant way, Jim’s analysis suggests the US on a national level is sooner or later headed the same way–to a period of reckoning. Current spending and promises for the future are great, but at some point, those promises will have to be kept or broken. If I were an egalitarian, I would want to be sure they are kept. I would focus on sustainability.

  8. jason11

    Analyzing balance sheet liabilities without the rest of the balance sheet to provide context can be very misleading.
    Chevron’s liabilities look quite large and unsustainable compared to my liabilities and overall balance sheet. But the picture changes dramatically if you consider the rest of Chevron’s balance sheet.

  9. sherparick

    1. It is disconcerting when you talk about liabilities and not talk about the other side, assets. Currently, FANNIE and FREDDIE are paying the U.S. Treasury $50 billion a year in unanticiapted profits as the housing market bottom and most mortgage loans, even those underwater, continued to be paid. Student loans are not dischargeable in bankruptcy. And of course if we have modest inflation the nominal value of assets, and inomce flow on those assets will increase, while the real value of the liabilities decline. Like many of the hard money, deficit hawk types, I now think Professor Hamilton prefers high unemployment, declining nominal as well as real wages, and deflation as leading to the preferred political economy of a new feudalism.

  10. 2slugbaits

    JDH
    But although one can quarrel with the specific numbers, there is an undeniable important reality that they reflect– the U.S. population is aging, and an aging population means fewer people paying in and more people expecting benefits. This reality is unambiguously going to be a key constraint on the sustainability of fiscal policy for the United States. One would think we should be saving as a nation today as preparation for retirement
    Three comments and a question about savings. First the question. What do you mean by saving more as a nation? Do you mean less public debt? Do you mean less private debt? And how do people save if a counter-party isn’t willing to borrow? In the aggregate total savings cannot exceed total borrowing. Okay, that’s more than “a question” about savings, but I think you get the point. If people increased private savings today in order to fund retirement tomorrow, they would still have to find a home for that savings. That means they must either invest that savings in debt instruments (i.e., a counter-party else must increase their private debt) or invest in equity, which is much riskier than a public financing of retirement.
    Now the first comment. There are good reasons and bad reasons for the government taking on liabilities. Following Arrow, a good reason is if the policy requires a risk neutral approach to insuring the project. No private agent is willing to take a risk neutral approach to insuring their own retirement, so they have to compensate in ways that are socially wasteful. As you said, our society is aging, so as a society we will have to fund that old age one way or another. Removing the liability from the federal government’s balance sheet just shifts the liability to someone else’s balance sheet, and likely does so in a way that would result in an inefficiently high level of private saving.
    Second comment, not all of the programs you listed support the old. As the need for one type of program waxes (e.g., Medicare), it’s reasonable to expect the demand for other types of programs to wane (e.g., housing and student load guarantees).
    Final comment; the government should not surrender the one unique monopoly asset under its controls, and that is the power to tax. I’m not worried about successful, high income people dragging their feet on paying back student loans (I remember many years ago when Michelle Obama told me that she and her husband had just finished paying off their student loans) provided their successful careers and high incomes are taxed appropriately.

  11. c thomson

    Steve Kopits is right as usual and the economic commentators irrelevant. Many promises won’t be kept. That’s the political reality.
    We will ‘magic’ away liabilities we can’t manage through inflation or reneging or postponing them. Looking at human history who would expect anything else?
    A broader point. If we have the demographics of Brazil, why won’t we have the politics of Brazil? Expect bread and circuses.

  12. anon2

    Per capita medical costs are double anywhere else in developed world and outcomes are not better.
    Reduce these costs by half and the deficit/day of reckoning case disappears.

  13. Ryan

    Transfer payments and taxes shouldn’t be categorized as a debt, ever. The social security program and medicare programs take a portion of what is produced by the strong, healthy and working age and give it to the poor, sick, young and elderly. The amount that is given will be dictated by the productive capacity of the working group. It is that simple. No amount of debt, treasury bills, or dollar amount promised can change the productive capacity of any future generation of workers. If you ‘pay’ extra taxes today to save for your retirement and future social security payments, it doesn’t help. It won’t change a thing, your kids are still going to be producing a portion for what you consume regardless of you saving today or not. Saving more today for the future decreases current productive capacity and causes less investment which results in less future capacity.

  14. Johannes

    Jim, have a good 4th!
    BTW, your post is a bit weak, don’t be afraid of huge numbers, Janet will inflate them away. She will clean this up. And Bill McBride thinks “the future is so bright, he will have to wear shades.”
    Housing is leading, isn’t it.
    Good luck to all.

  15. benamery21

    From a consistency standpoint, why are the values you use for Social Security and Medicare net of revenue, but not the values for housing, student loans, and deposit insurance?
    I’m curious how the balance sheets of private insurers would look if all covered property were considered a liability?

  16. benamery21

    Using the lowest post-WWII level of ‘military & security’ spending to GDP (3.7% in 2000), and the economic assumptions on which your Social Security numbers are based, the unfunded liability for ‘defense’ is at least $63 trillion DOLLARS!!! which is more than 5x the reported debt. This unproductive sector of public spending doesn’t even produce revenue. Clearly, something must give. We’ll have to choose between giving more money to campaign contributors thru tax cuts or giving more money to campaign contributors thru directly awarded defense contracts.

  17. JDH

    benamery21 at July 4, 2013 12:54 PM: Quoting from page 25 of the paper:

    Note that the numbers reported in my earlier Tables 1 and 3 referred to gross off-balance-sheet liabilities with no effort made to subtract offsetting assets. By contrast, the $26.5 T in Table 4 already subtracts the off-balance-sheet asset of Social Security represented by future tax revenues targeted for the program. However, insofar as these tax revenues are indeed used for this purpose, they will not be available for servicing the costs of the $11.3 T on-balance-sheet debt. For this reason, a case could be made for using the gross Social Security liability of $52.0 T, rather than the net liability of $26.5 T reported in Table 4, in our tabulation of total off-balance-sheet federal liabilities.

  18. benamery21

    Thanks for your reply. Yes, the quote confirms you did what I thought I’d understood. It doesn’t seem to explain why?

  19. Johannes

    benamery21 at July 4, 2013 12:54 PM : “Defense spending : We’ll have to choose between giving more money to campaign contributors thru tax cuts or giving more money to campaign contributors thru directly awarded defense contracts.”
    JFK can tell you (from his grave): Do not mess with that guys from the DoD, NSA and CIA. A headshot in Dallas is not nice (BTW triangular sniper positions, the last shot came from the front).

  20. benamery21

    Given that the value of the contingent liabilities listed is likely negative, particularly after considering the second-order effects of not providing educational access, housing market stability, and depositor insurance, we are basically back to talking about Social Security and Medicare.
    Given that every other developed country in the world (and quite a few developing countries) have already figured out how to solve our healthcare problem, I’ll pass that over to focus on Social Security.
    If Social Security payroll taxes are not increased, under current law and using the projections from which your numbers are taken, Social Security payments to individuals will never be lower in real terms than they are today. If Social Security currently scheduled benefits were paid in perpetuity and Social Security taxes were increased only when required to maintain those payments, after-FICA income of the workforce would never be lower in real terms than it is today. I’m having trouble seeing a crisis. Given the option to index the proportion of wages which are covered, rather than allowing engineered inequality to persist in shrinking that base, the problem looks even smaller.

  21. Tom

    @slug – re “saving can’t exceed borrowing”
    This is a mistake and an increasingly popular one, so worth responding to.
    Globally, savings equals investment – the amount spent on producing capital plus net growth of inventories.
    The number that you are thinking of, which does globally sum to zero, is net lending, equal to savings minus investment. For example the savings of a country equals its investment plus its net lending, aka current account balance.
    The often stated claim that “we can’t all save at the same time” is as wrong as saying “we can’t all invest at the same time”.

  22. anon2

    More on medical costs from the NY Times: http://www.nytimes.com/2013/07/05/opinion/diagnosis-insufficient-outrage.html?ref=opinion
    And here’s Barry Ritholtz with a great chart:
    http://www.ritholtz.com/blog/2013/07/surgery-required/
    How you can wring your hands over America’s debt problem and not discuss or even mention one of its main causes amazes me.
    Your presentation of the debt problem implies the conclusion that SS and Medicare must be cut back and that we must re-balance America’s finances on the backs of the poor and middle class by cutting the two most successful American government programs ever.
    Who pays your bills?

  23. valuethinker

    It seems difficult to state an ‘off balance sheet liability’ without looking also at the underlying asset.
    This is particularly true of Mortgage Backed Securities, where there is a specific legal tie between asset and liability.
    Student loans is harder but I note there is no personal bankruptcy for student loans– the only release is death. Fairly strong protection for the guarantor.
    FDIC is a contingent liability and there are underlying bank assets that can be seized to make good.
    SS and Medicare are of course secured on the future economy of the USA- they are PAYGO programmes. Like all PAYGO, their benefits can (and will) be changed.
    I really think to make this analysis meaningful you have to split out things like MBS which are secured on something, legally, from PAYGO liabilities.

  24. jonathan

    I waited to comment until I had time to read the paper. It was enjoyable. IMHO, you could have put a lot more into the last section 4; rather than concentrate on some cautionary examples that are, on their face, stretches to fit, you could have discussed more the kinds of issues you brought up earlier. So for example, Section 2 considers reasons and these include subsidizing social good … and that leads to my comment.
    As I believe some comments have made clear, we see 2 reactions right away. Some people immediately jump to saying “we cut entitlements”, meaning we mostly reduce subsidies for the poor, the young and the old. That occasionally then extends to housing, but it’s mostly about reducing what that kind of person seems to see as “government handouts”.
    The second reaction is that we reorganize spending. Cut defense. Makes sense if you look at the spending breakdowns of today. Using FY2013, DoD gets $673B and Veterans Affairs gets $140B. Since we spend more than the next 13 countries combined – even if the # is wrong, it’s close – then it seems one of the very first areas for future consolidation would be this.
    My comment is these are the kinds of dilemmas that bespeak a lot of money. This has been a rich country for a while. The amount of money available for promises – including DoD and the VA – means we’ve rather naturally tried to accommodate “everyone”, meaning those who have enough political power to get $$$ allocated. That this ends up messy is a consequence of that wealth: so much money ends up accommodating very divergent world views. That divergence includes visceral hatreds – similar to what we see in other countries – which make agreement very difficult. So for example, those opposed to “government handouts” on an ideological basis resist cuts to DoD in part because they don’t want to free up money to pay for these “handouts”.
    Another example is the inclusion of massive new expenditures – $30-40B – to militarize the southern land border. That money needs to come from somewhere. The goal of many will be to subtract that from “handouts”, just as paying for disasters have been tied by many to reductions in aid to children or food stamps in states unaffected by the disasters. The point is not to say this is unjust (though I think it is) but to note that people believe this is the right thing to do.
    I understand the urge to focus attention on a problem. But in this context, I’d ask you to consider an example like GM. They had everything: tons of capital, talent, marketing power, market share. They wasted their advantages with bad decisions. The Vega – discussed in this year’s Mad Men – was run by DeLorean, a real “car guy”, and was designed to take the best of European sports cars and make that American … but it ended up a Vega because of bad corporate choices.
    My point is that focus often leads to horrendous decisions. We aren’t actually under the kind of threat that focuses us on a clear path. That means we are arguing over pathways and are pretty darned likely to choose badly. Perhaps we’ll believe that God will smile more on us if we do x. Motives are complicated but without a direct focus we are prone to error moving forward.
    As a numbers person, you know that fitting backwards is messy at best and that future guidance is lousy. That we focus on reducing debt may mean we make the worst decisions, not the best. We could for example eliminate the VA if we went to a true national health system. Who knows, maybe the elimination of the mess of insurers and their g&a and marketing, etc. would lead to higher overall US productivity? Or we could eliminate medicaid. Or …
    One last example. When we entered WWII, we did badly. Our response was relatively quick and ruthless: we fired the admirals and generals. Halsey took over from Ghormley at Guadalcanal after Ghormley left the Marines by themselves. First thing Halsey did was sit down to a meal on the island. My point? How many general officers were fired in Iraq and Afghanistan combined over a period of over a decade? I believe the answer may be 1, maybe 2 if you go down to the level of colonel. That says we never focused, that we were unable to focus on victory – that we never defined victory – and thus became a military in which you served and moved on with no consequences for failure. That is our problem now. Want to attack debt? How? Which priority? Which is the right decision? Odds are we will make bad decisions just to make decisions.

  25. fladem

    Three comments:
    1. To extend the discussion of assets versus liabilities – if increases in student loan debt are accompanied by a more productive work force, the number actually may, in fact probably is, a positive sign. This is why I find so much of this discussion unpersuasive – there is no attempt to distinguish between investment and expense.
    2. The increased costs of Medicare I believe amounts to about 1% in GDP. When put in those terms the increase looks nowhere close to daunting – particularly given the amount we spend on defense.
    3. Any discussion of Medical Costs without referencing the obvious solution – Single Payer Health Care – is intentionally misleading. You may not agree with the solution, but it cannot be disputed that such systems are significantly better at containing costs. Such savings are significantly greater when measured in % of GDP terms than the cost projections contained above.

  26. c thomson

    How do we ‘encourage births’ without adding down the road to the 47 million on food stamps?
    Please look at high school drop out rates and link those to the folks on food stamps – then see where the population is increasing.
    And please don’t say this is non-PC or racist unless you can demonstrate that it is also untrue.

  27. Jerry Brown

    I also have a question about “saving as a nation today as preparation for retirement”. I know this wasn’t the main point of your post but how do you suppose this could be done? Are you in favor of conserving resources such as oil today so that they would be available in the future? I imagine the “nation” could begin to stockpile and store large quantities of say oil and ore and grains and such for this future where we wont have the labor available to produce them. Is that your proposal? And, the nation could invest in infrastructure now so it wouldn’t have to do that when we are too old to work. Is that it? And we could invest more heavily in the young now to enable them to produce more in the future. That might help. Are any of these what you mean by saving now as a nation?
    What I am getting at is that in the future our economy will be able to produce a finite amount of goods and services using the resources available at that time. To save as a nation requires making sure that those resources are available and as good as possible. Real assets not financial assets are the only ones that can be “saved” as a nation.

  28. JDH

    2slugbaits at July 4, 2013 09:13 AM and Jerry Brown: By “saving more as a nation” I refer to increasing national saving. National saving is defined as gross domestic product minus the sum of private and government consumption spending.

  29. john

    Uh, I think there are such things as off-balance assets, too. Have you looked at those?

  30. Ben

    JDH
    “No good deed should go unpunished.” That is what Gen. Powell used to tell my partner back in their days in the 5-sided building. I think you are enjoying some of the feedback for your exertions in pointing out the unsustainability of our current trajectory.
    I’ve commented (elsewhere) on the integrity with which Prof. Hamilton has dealt with a range of important issues, to include the Reinhart-Rogoff dust-up; little more than a tempest in a teapot thanks in no small measure to some limelighters in Amherst.
    There are a number of monetary-related issues that I’d welcome some exploration of in this space. I remain intrigued with your analysis of the “buying effect” vis-à-vis “wealth effect” and its likely implications for growth. An associate of mine had an active exchange with Connie Mack, when he was a member of the Congressional JEC, about the wealth effect cited by Chairman Greenspan in the context of concerns about potential skewing of the monetary aggregates in light of (asset) leveraging techniques.
    My associate who carried on the exchange tends to agree with much of your analysis and with a particular emphasis on energy-related influences. He introduced me to R. Rapier and the merits of EROEI dynamics. There certainly is plenty of room (necessity)for important progress on the energy (efficiencies) front.
    Thanks for the blog and the professional integrity. Courage remains the virtue that makes all the others possible.
    Ben

  31. Jerry Brown

    Thank you for your reply to my comment/question. So we should increase gross domestic product now relative to consumption spending. I totally agree. I think. Actually, what does that mean? Consume less? Produce more? And who consumes less and who produces more? And how does that help us in 20 years from now?

  32. Tom

    Further on the point of savings and why I think Americans save too little, responding to Jerry and others.
    Your point, often made by Krugman, is a legitimate one, but be careful not to carry it to far.
    It’s true that not much of savings passes from one generation to another. Buildings are the most important form of inter-generational savings, unless you’re going by some non-standard definition such as counting unexploited resources. Inventory build isn’t that great, though gold is worth a bit, and if you want to stretch you could count such things as art and collectibles and the steel and copper in things that will be scrapped within a generation at its scrap value. Capital equipment tends to wear out sooner than a generation.
    So, for the most part, future generations will depend on what they themselves produce. So why should we worry about how much we save?
    For two big reasons.
    First, although in today’s world the two seem only distantly related through layers upon layers of financial intermediation, savings is investment. A country that doesn’t save doesn’t invest, and a country that doesn’t invest won’t increase its output over time. U.S. net investment is weak. That is an important reason why U.S. growth is slow. Hence today’s savings are a crucial determinant of the resources that future generations will be able to produce.
    Second, it’s important that the broad population has savings so that they will have resources when they retire. Theoretically investment can be financed without their savings, for example by relying on foreign investment, or by concentrating wealth in the hands of very few and relying on their savings. But then when those broad masses of ordinary people retire, they will have no savings. They will rely on the state to fund them.
    The current personal savings rate is around 2.5%-3.5%. But the composition of that savings is heavily tilted to the wealthy and especially the very wealthy. The better off side of the middle class will retire with private savings, but typically also with equal amounts of other debts such as mortgages. The less well off side of the middle class will rely entirely on Social Security and other benefits for the poor.
    As I’m sure you’re aware a battle is on to reduce Social Security and poverty benefits, and in fact that’s already been happening in real terms. Those too are the wages of low savings.

  33. Jerry Brown

    Tom, isnt it true that investment can occur without prior savings? I mean with the way our banking system works, a loan from a bank used for business investment is not really using previous savings. Most of that loan will have just been created from nothing.
    I do share your concern about the low savings of people approaching retirement though.

  34. anon2

    @c thomas: JDH worried about the workers/retiree ratio in an earlier post on SS.
    As to food stamps, my guess is if there were more jobs, there would be fewer recipients. Apparently, the ‘job creators’ have failed. But what’s worse is their failure to accept any responsibility for it. Unless, of course, it was all a con from the get go.
    Speaking of cons: Why is it that in all these hand wringing conversations about the American debt there is no discussion of legalized thievery?
    You know stuff like:
    Medical costs more than double the rest of the developed world.
    Banks getting trillions from the US government and US taxpayers.
    Bloated defense contractors.
    Welfare for rich and corporate farmers.
    Special deals for rich taxpayers. (too many to list)
    If we cleaned this stuff up and made a lot of these pigs squeal, we wouldn’t have a debt problem. In fact the ‘job creators’ might actually have to start creating jobs again which is, of course, something they do oh so well.
    We need to bring back Teddy Roosevelt to, with a little help from Jesus, clean out the money changers from the temple.
    My apologies for the rant.

  35. Tom

    @Jerry, re: “investment without prior savings”
    No, investment must always be financed by savings. In the case that you mention where a bank takes money from a depositor, lends that money on to someone for an investment purpose, and at the same time maintains a bank deposit balance in the name of the original depositor, the depositor’s savings finance the borrower’s investment, and the bank simultaneously creates an asset (loan repayable by borrower) and a liability (deposit payable to depositor). The creation of extra broad money supply does tend to create spending and income out of thin air as the depositor can spend his deposit while the borrower spends his credit. But the calculus that all investment must be funded by savings doesn’t change.
    Just to pre-emptively deal with a point often brought up by MMTers, it is to an extent true that bank loan officers generally make loans without knowing whether their bank has any money on hand to lend. However the bank is obligated to have the money by the end of the working day. If it’s short it typically borrows overnight from another bank.
    On a somewhat different topic, it is true that credit expansion by generating additional spending and income tends to fund additional savings and further credit expansion. This is a crucial point that separates “endogenous money” schools (post-Keynesian, Austrian), which espouse it, from the “exogenous money” schools (New Keynesian, neo-classical), which reject or ignore it. This explains why the latter failed to see the credit bubble.

  36. Gordon Landwirth

    The metric of “federal liabilities” that includes Social Security and Medicare commitments seems analytically quite flawed, because (politically) we would choose to expend at least a substantial part of the committed amounts even if there were no commitment (leaving aside the debate over the nature of this “commitment”).
    As an analogy, suppose a couple would choose to spend at least $5,000 next year on food for their children, even absent any commitment imposed on them to do so. Now suppose an obligation is placed on them to spend $6,000 on food for their children next year. For the purpose of assessing the adverse effects of that $6,000 commitment, is it equivalent to $6,000 owed on a credit card or to some other creditor? No, it isn’t. The latter would be $6,000 lost for no desired effect (no benefit to their children that they would freely choose), whereas the former (spending on their children) would be at most $1,000 more than they would freely choose to spend anyway, with at least $5,000 of that “commitment” being essentially moot, only “committing” them to something they would choose to do anyway.
    Similarly, Social Security and Medicare “commitments” as calculated either in terms of projected spending per current policy or (even more analytically problematically) net of associated “trust funds” and projected “dedicated” FICA revenues) are not comparable to the debt held by the public.

  37. c thomson

    If anyone actually cares about retirees, how about promoting individual savings accounts as a mandatory part of Soc. Sec.
    Don’t call it privatization because that is too exciting. Copy the superannuation funds of various countries. Top up those below a certain annual income – deduct from those above.
    That way the average person doesn’t wind up as a penniless dependent on Soc. Sec. Also individual accounts are harder for politician to steal from. Naturally most politicians will hate the idea.

  38. Jerry Brown

    Thank you for your response Tom. Im not sure I agree about how banks operate but I am still learning. Putting aside the mechanics of how private investment might occur in the absence of prior savings, I would think that the U.S. government could invest in productive capacity whenever it wanted to. Regardless of the amount of savings. As long as people were willing to accept dollars as payment, no? Pretty much what happenned in WW2.

  39. Ben

    The need to get Uncle Sam’s fiscal house in order has much less to do with “caring” or “neglecting” current retirees than with a necessity to recalibrate some unsustainable patterns of the past few decades.
    During my brief stay in London upon return from West Africa, I came across this interview with Sir Melvyn King in the UK press. It struck me as equally candid and cautionary. It could have easily been an interview with our Fed chairman.
    Though I doubt we could ever expect such candor from an American official until after their retirement.
    I’m curious as to how the principals of this blog
    view the opinions of UK’s former central bank chief. More to the point, do such views about the past few decade’s experience with cross-generational redistribution justify the financial repression we are witnessing in the wake of ongoing QE?
    Thanks for the insights and, yes, candor:)
    Ben
    Copley Plaza

  40. 2slugbaits

    JDH National saving is defined as gross domestic product minus the sum of private and government consumption spending.
    Thanks. That’s a sensible definition of national saving, but I don’t think it quite matches how it is reported. My quibble is with your phrase “government consumption spending.” I agree that this should be subtracted from GDP, the problem is that in most discussions all government spending is treated as “government consumption spending.” In other words, we rarely distinguish between capital budgets and consumption budgets. Government spending to pay for a 4th of July fireworks show is clearly consumption spending. Government spending to pay for infrastructure is best thought of as government investment. The tough cases are in the middle. Are government guarantees of student loans consumption spending or investment spending? Should we treat unemployment benefits as consumption spending or investment spending in the sense that it keeps workers alive and at least marginally attached to the labor force? And on the private sector side it also has to be recognized that increase private saving for retirement today implies increased private dissaving in the future during retirement, so the “burden” of an aging population is the same regardless of how that retirement is funded.

  41. Anonymous

    ” And then there are liabilities that may not incur any cost, for instance because they can always be payed for by simply printing money ”
    Why do certain people think there are no concequences to a solution of “simply printing money?”

  42. Anonymous

    “Per capita medical costs are double anywhere else in developed world and outcomes are not better.
    Reduce these costs by half and the deficit/day of reckoning case disappears.
    Posted by: anon2 at July 4, 2013 11:12 AM”
    That’s because we weigh twice as much as anywhere else in the world. The fallacy that made in healthcare discussion is assuming the base health of an American is the same as the base health of anywhere else.

  43. anon2

    @anonymous
    An uncomplicated birth in America costs $9000+ more than double what it costs in other countries.
    You are chalking this up “because we weigh twice as much…”
    Come on. Get serious.

  44. Tom

    @jerry – Yes, savings can be simultaneous with investment. The only rule is that someone must finance it. The financing of investment is savings. These arent my definitions, these are the accounting principles enshrined in a UN convention and used in national accounts statistics around the world.
    Taking your example if the government funds investment from taxes the saver is the government, or if the government funds investment with debt the savers are the buyers of the debt.

  45. Anonymous

    “@anonymous
    An uncomplicated birth in America costs $9000+ more than double what it costs in other countries.
    You are chalking this up “because we weigh twice as much…”
    Come on. Get serious.
    Posted by: anon2 at July 8, 2013 10:57 AM”
    Your point? Everything costs more because there is no cost to anything for anyone, save your co-pay. If we had insurance that was for catastrophic illness and we paid cash for the rest of our care, it would be a lot cheaper.
    Also, before you say BLAH BLAH SOCIALIST SINGLE PAYER, they RATION as well, only it is by time.

  46. EconPirate

    Are going to email foxnews to advise that they edit their story and let them know that you do not think us debt is $79 trillion? Also, you might need to do a post for foxnews on the differentiation of liabilities & debt, off-balance sheet & on-balance-sheet, contingent debt & realized debt………

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