Polonious Was Wrong

May 19th, 2011 at 9:03 am

A few commenters have asked me to weigh in on the debt ceiling debate.

I haven’t written much about it, mostly because a) it’s been well covered elsewhere and b) I can’t think of good synonyms for “catastrophic” (actually, Word’s list is excellent: I like “ruinous”).

Sorry—gallows humor.  I don’t know about you, but I go from thinking this is really scary to telling myself, “no, they couldn’t really let this happen” (“they” being Congress, and “this” being not raise the ceiling).

As I noted in a post the other day:

“I understand that some of those playing this game of globally high-stakes chicken are not anxious to support a higher debt ceiling.  I mean, some of these folks were recently sent to Washington to cut spending and explaining to their constituents why they voted to add a cool trillion of borrowing headroom won’t be a cakewalk.

But to drag this out unquestionably hurts our economy and our country far more than any political advantage members might gain from holding out.  It’s time for elected officials to put the country first.”

But let me say a few words about why this is so important.

Obviously, we need to pay for current services, including debt services.  Here’s Sec’y Geithner’s list of what would be at risk in this regard:

“Payments on a broad range of benefits and other U.S. obligations would be discontinued, limited, or adversely affected, including:

    • U.S. military salaries and retirement benefits;
    • Social Security and Medicare benefits;
    • veterans’ benefits;
    • federal civil service salaries and retirement benefits;
    • individual and corporate tax refunds;
    • unemployment benefits to states;
    • defense vendor payments;
    • interest and principal payments on Treasury bonds and other securities;
    • student loan payments;
    • Medicaid payments to states; and
    • payments necessary to keep government facilities open.”

Here’s a related point I don’t hear made enough: Congress already agreed and is committed to the current level of spending.  For them to renege on this commitment because it means more borrowing, which of course they knew it would, is crazy.  No government or economy in the world could operate that way, and to my knowledge, none does (i.e., I can’t find any other countries with debt ceilings, but correct me if I’m wrong about this).

Then, there’s the economy, and what even the threat of default would mean to financial markets and the real economy (the latter being jobs, incomes, stuff like that which kinda matters to people).   Alan Blinder gives the gory details this AM is the WSJ.  His point about the fiscal contraction this would engender—the amount of money this would pull out of the economy—at a time of already very high unemployment is very important.

(Note: Some point out that a sovereign nation whose debt is in its own currency cannot default because we can print money.  But that would be a terrible solution with essentially the same consequences.)

All of the above is well known and understood, if not heeded, by many in this debate.

But here’s one thing that I think is missing: a rationale for borrowing at all.  There’s deep and serious misunderstanding of this point.  Too many people think deficits and debt are bad and they are not.  They are an important and necessary part of our economic life.  And yes, like anything else in life, you can overdo it.

We would all, households, business, and government sector, be less productive and less well-off if we couldn’t borrow to invest in our future.  Think about borrowing for college or starting a business.   Our fluid credit markets are one of the things that make our economy strong (recall what happened when they froze a few short years ago).

If any of these sectors, including the public sector, failed to borrow due to irrational fear of deficits when the return on our investments is potentially positive, we’d be a lot worse off.

And, of course, when the private sector stumbles, the government must temporarily run deficits to offset the shortfall in private sector demand.  To fail to do so is to consign millions to unnecessary joblessness and to sacrifice—forever— potential growth and income.

Now, none of this should be taken to imply that borrowing is always good.  To add to the debt to pay for inefficient consumption of health care, for example, is an unsustainable problem we must solve.

It’s also the case that our debt should not be “structural,” meaning we should balance revenues and spending so that in good times we pay down the debt…it doesn’t have to disappear, but you definitely want it shrinking as a share of the economy in economic expansions.  This is also essential to a healthy economy, and once they raise the debt ceiling, policy makers need to turn to this right away.  (Of course, they’re allegedly trying to do both at once…I get the politics of this but it’s dangerously lousy economics.)

So, while it’s surely not fashionable to speak out in favor of borrowing, the fact is it’s a perfectly natural and important part of economic life.  I’m sorry, Will…Polonious was wrong.

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16 comments in reply to "Polonious Was Wrong"

  1. foosion says:

    >> when the private sector stumbles, the government must run temporarily large deficits to offset the shortfall in private sector demand. To fail to do so is to consign millions to unnecessary joblessness and to sacrifice—forever— potential growth and income.>>

    A vital point that has been totally lost at the moment. Why have Obama and the Democrats given up on this? Even if it’s not politically feasible to pass meaningful stimulus, at least try to make the public understand and negotiate from a position of strength. It would be the right thing to do, both economically and politically.

    The public doesn’t ultimately care about the tone of Washington (which can be controlled by the Republicans) or the deficit. The public cares about jobs and personal finances and the only way to win on that is to do the right thing, not to play Republican-lite. Didn’t the Dems learn anything from the last election?

    Anything you can do to shed light on the administration’s thinking on this, or to explain why their actions make any sense, would be appreciated.


  2. Stephan says:

    “I can’t find any other countries with debt ceilings, but correct me if I’m wrong about this.”

    Well, there are. Here in Germany it is now part of the constitution. But the US is the only place I’m aware off with a debt ceiling which is a nominal amount of aggregate debt. The Swiss debt break aims for a balanced budget over the business cycle. They have a quite sophisticated system in place based on Hodrick-Prescott-Filters to do the math. The German debt break goes one step further and separates the deficit into its structural and cyclical component. The structural deficit must be below 0.35% of GDP. The cyclical deficit must be balanced over the business cycle.

    That said I think this debt ceiling/break voodoo economics is a very stupid idea. And once there aren’t enough Bund available our German financial overlords will for sure find a good economic reason why this debt break wasn’t such a good idea in the first place.


  3. roughdraft says:

    Seems to me that if the President and Treasury Dept. made it very clear to all parties that the salaries of Congress and their staffs is #1 cut to be made, and then all other government employees (in other words, the ones who can have an effect on this decision), things would move better. Don’t start with the people who have no say in this (Social Security, Medicare, etc.) The pocketbook speaks.


  4. Chief says:

    IMO, this ultimately comes down to the Repubs doing every thing they can to help defeat POTUS in Nov 2012.

    The R’s do not care about country. They just care about the revenue stream that their billionaire benefactors are pouring on them.

    And these two items are not mutually exclusive.


    • readerOfTeaLeaves says:

      I tend to share this view: it’s about domestic politics.

      Personally, after reading Shaxson’s “Treasure Islands”, I’m ignoring all the blather. When they get serious enough to talk about structural problems, like the Shadow Banking System and Tax Secrecy Jurisdictions, I might be able to listen to their nonsense. Until then, it’s a public spectacle aimed at electoral control.

      For me, this whole conversation about ‘debt’ has morphed to reveal a dynamic of bullying. It takes the form of whatever produces the most panic and the greatest stress: this week, it’s the Debt.

      I’m only one person, but at this point, if the limit is not raised, then so be it. It beats the heck out of having the Shrieking Meanies grabbing every news microphone and sending out email alerts.

      How long are we going to continue to be constantly held hostage by filibusters, by campaign donation requests (which long ago began to feel like extortion), and by Threats That The World Will Come To An End If We Don’t Cave To The Bully’s Demands?!

      Enough already.
      If the damage is done, we’ll figure out a way to sort through the wreckage.

      I’m at the point where I’d rather pick through wreckage and rebuild than continue to be badgered by Meanies.

      We’re a pretty resilient nation, but allowing ourselves to be constantly badgered and threatened is long past its pull date.


    • Ann in AZ says:

      “IMO, this ultimately comes down to the Repubs doing every thing they can to help defeat POTUS in Nov 2012.”

      I think that’s it in a nutshell. They have only one agenda: beat Obama! They barely have a single candidate capable of handling the job, much less win a campaign against Obama without playing dirty (hence all the calls for legislation to guard against “voter fraud”). They have no plan going forward other than to abandon all their concern for the deficit and such, go back to spending like drunken sailors on frivolous stuff that will not supply one job, and legislate others sex lives and reproductive rights. They would consider election a mandate to treat whole groups of people with all the discrimination that they muster (one of the R Governors just called for barring gay’s “significant others” from hospital visitation when only family can visit), demand that women carry every pregnancy to term regardless of the burden it places on the women, their families, their health, or society at large. But heaven forbid that the mother cannot provide for the child’s needs because they would let anyone die in the streets before they’re prepared to offer financial help to the poor and needy, of which the majority is children. Unconscionable!


  5. beowulf says:

    “Here’s a related point I don’t hear made enough: Congress already agreed and is committed to the current level of spending. For them to renege on this commitment because it means more borrowing, which of course they knew it would, is crazy.”

    Well, the statutory debt limit is probably unconstitutional– once Congress has pledged the nation’s “plighted faith” to repay a debt, “the Congress has not been vested with authority to alter or destroy those obligations.”
    http://supreme.justia.com/us/294/330/case.html


    • Vaccine says:

      The debt limit prevents the government from incurring new debt, so I fail to see how not raising it would “alter or destroy” an existing obligation.


      • beowulf says:

        Fair point, but old debt is continually expiring and must be rolled over into new debt. What’s more, the Supreme Court considers debt to be broader than simply Treasuries. Govt contractors who are owed money have a constitutional claim to being paid (see Cherokee Nation of Oklahoma v. Leavitt).

        Hmm, bondholders and defense contractors get paid, everyone else gets stiffed– no wonder GOP congressmen are so blase about the debt ceiling! Of course, if the President asserts that the statutory debt ceiling is unconstitutional because it’d interfere with repayment of valid debts, Tsy would treat the debt ceiling statute as a dead letter as to all spending until the Court said otherwise. The wrinkle there is other than Congress– and Senate Democrats could bottle it up– I’m not sure who’d have standing to sue to challenge it.

        Of course, there is a perfectly legal solution available which wouldn’t trip over the debt ceiling– platinum coin seigniorage. The downside would be that it’d too clearly reveal to the public the Treasuries market is as necessary to our economy as universal literacy in Esperanto.
        http://moslereconomics.com/2011/01/20/joe-firestone-post-on-sidestepping-the-debt-ceiling-issue-with-coin-seigniorage/


  6. Vaccine says:

    “..and once they raise the debt ceiling, policy makers need to turn to [paying down debt] right away. (Of course, they’re allegedly trying to do both at once…I get the politics of this but it’s dangerously lousy economics.)”

    Just like your statement that “we should balance revenues and spending so that in good times we pay down the debt” is good economics but dangerously naive politics. The entire purpose of the debt ceiling is to provoke the debate we are seeing now, where debt-hawks can finally get some leverage to cut spending or pay down debt. Otherwise, history shows that “balancing revenues” is pretty much last on the political agenda.


  7. Matt Carmody says:

    Why do we continue to see Social Security conflated with other budget expenses/outlays? Social Security has a dedicated tax separate from income taxes and the general fund. The fact that the funds in there have been plundered continuously for the past thirty years doesn’t change the fact that working people got hit with a regressive tax thanks to Reagan and Greenspan and now political whores are trying to get their hands on that money to pay their criminal friends on Wall Street.

    We need derivatives reform; we need root and branch structural reform of the entire financial system; we need a complete overhaul of the tax code with the elimination of most loopholes and exemptions; and, most importantly, we need someone with the balls to stand up and say enough is enough, get rid of the Bush tax cuts and the illegal wars that are draining not only our treasury, but the lives of Americans across all age groups and innocent civilians in the countries where they are occurring.

    We can’t even begin to start a serious dialogue about our national debt as long as the favored tax policies towards hedge fund managers continue. Almost anyone with an eight grade education can figure out that if you don’t take in any money, you can’t spend any. What, do people get dumber with each successive grade? Forget about the fact that Republicans and Blue Dog Democrats are going to go absolutely batshit when it comes time to bring the FICA taxes back to the level they were at before the poser in the WH chose to endorse a tax holiday.

    Nothing at all was done to fix the problems that led to the bailouts of the financial industry. Minsky has shown that with each successive bailout without concomitant structural reform, the seeds of the next, bigger bailout are sown. We’ve seen it over and over again when it comes to saving capitalism’s ass. But when it comes to helping labor, the workers who work in increasingly onerous conditions with no organized support or enforcement of their rights, well, that’s socialism and we can’t have that.


    • beowulf says:

      “Why do we continue to see Social Security conflated with other budget expenses/outlays? Social Security has a dedicated tax separate from income taxes and the general fund.”

      That’s the way it was intended yes, but operationally it all goes into a big pot (if a real life trust fund operated like that, the trustees would go to jail). So as taxes are paid, FICA revenue flows into Tsy General Fund and then, per statute, Tsy transfers an amount equal to 100% of SS FICA revenue collected over to the Social Security trust funds.

      If there’s a 20% shortfall in OASDI trust fund beginning in 2036, anytime between now and 2035, Congress could simply amend transfer amount to 125% of SS FICA revenue collected. Problem solved!


  8. Linkmeister says:

    Congress already agreed and is committed to the current level of spending.

    It’s nice to hear my thoughts confirmed.


  9. RatesAnalyst says:

    You can also add Australia to the list of countries with a debt ceiling, and a ceiling which is expressed in nominal dollars.

    However, ours is about to be raised, hopefully with no fuss, in the upcoming budget.


    • jared bernstein says:

      So, Australia and Germany…good to know, and thanks. And good luck with the no-fuss raise.


  10. Concerned says:

    Two points that I’ve not seen anywhere:

    1) Republicans are using the debt ceiling negotiations to get a second chance to negotiate already-made an voted on issues.

    2) The Republican’s biggest policy initiative is, according to Mitch McConnell, to defeat Obama in 2012. They care more about their political future than the country’s future. They believe beating Obama will be much easier if the economy is in the tank. A default will help that come about. Don’t think for an instant they won’t bring about a default if:
    a) they can’t get concessions from Democrats in the debt ceiling negotiations that they believe help them in the 2012 elections,
    b) they believe the country’s gullible enough to be made to believe Democrats are as responsible for the default as Republicans are,
    c) Democrats are spineless enough to not take the truth to the country in a robust manner.


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