Monday, January 2, 2012

Debt Myths and Reality

Paul Krugman on government debt:
First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.

But isn’t this time different? Not as much as you think.

It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.

Now, the fact that federal debt isn’t at all like a mortgage on America’s future doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion. But these costs are a lot less dramatic than the analogy with an overindebted family might suggest.

And that’s why nations with stable, responsible governments — that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today’s conventional wisdom would lead you to believe. Britain, in particular, has had debt exceeding 100 percent of G.D.P. for 81 of the last 170 years. When Keynes was writing about the need to spend your way out of a depression, Britain was deeper in debt than any advanced nation today, with the exception of Japan.

Of course, America, with its rabidly antitax conservative movement, may not have a government that is responsible in this sense. But in that case the fault lies not in our debt, but in ourselves.
And see this: The Meme That Refuses To Die: Government Debt Must Be Paid Back:

No it doesn’t. It almost never is. To pay back government debt, you have to run a budget surplus, and while there may be modest surpluses from time to time, they don’t add up to more than a minuscule fraction of all the accumulated debt. But don’t take it from me, look at the record.

(See the article for charts)

Do you notice our progenitors' great-great-grandchildren (us) paying off our forebears' debts? Yeah, neither did I. (It did happen once, and the result was economic catastrophe. Every depression in our nation's history was preceded by a big decline in nominal Federal debt.)

David Graeber, from Debt: The First 5,000 Years:
The reader will recall that the Bank of England was created when a consortium of forty London and Edinburgh merchants -- mostly already creditors to the crown -- offered King William III a £1.2 million loan to help finance his war against France.
To this day, this loan has never been paid back. It cannot be. If it ever were, the entire monetary system of Great Britain would cease to exist. That loan was issued 317 years ago -- in 1694.

Governments that issue their own money don't have to pay off their debts. They actually can't. In fact, they issue money -- the money that's necessary for a growing economy to operate -- by deficit spending. Private borrowers (and non-sovereign-currency states like Greece and Alabama) do have to pay off their debts (or default). That's why the level of private debt, not sovereign debt, is the big management problem -- a problem that neoclassical economics has not tackled, does not even have the theoretical apparatus to tackle.

As the article points out, since money is essentially debt, if you paid it off you would destroy the money supply. Don't believe me? Read this story from NPR. It appears that back when there was a chance that the national debt might be paid off (remember those days?), there was a real concern that this could undermine the world economy. Buying treasury bonds was a necessary function for the global economy. A bond is essentially the same as a currency - a store of value financed by debt:
It sounds ridiculous today. But not so long ago, the prospect of a debt-free U.S. was seen as a real possibility with the potential to upset the global financial system. This was seen in many ways as good thing. But it also posed risks. If the U.S. paid off its debt there would be no more U.S. Treasury bonds in the world.

"It was a huge issue ... for not just the U.S. economy, but the global economy," says Diane Lim Rogers, an economist in the Clinton administration. The U.S. borrows money by selling bonds. So the end of debt would mean the end of Treasury bonds. But the U.S. has been issuing bonds for so long, and the bonds are seen as so safe, that much of the world has come to depend on them. The U.S. Treasury bond is a pillar of the global economy.

Banks buy hundreds of billions of dollars' worth, because they're a safe place to park money. Mortgage rates are tied to the interest rate on U.S. treasury bonds. The Federal Reserve — our central bank — buys and sells Treasury bonds all the time, in an effort to keep the economy on track. If Treasury bonds disappeared, would the world unravel? Would it adjust somehow?

"I probably thought about this piece easily 16 hours a day, and it took me a long time to even start writing it," says Jason Seligman, the economist who wrote most of the report. It was a strange, science-fictiony question.

"What would it look like to be in a United States without debt?" Seligman says. "What would life look like in those United States?" Yes, there were ways for the world to adjust. But certain things got really tricky.

For example: What do you do with the money that comes out of people's paychecks for Social Security? Now, a lot of that money gets invested in –- you guessed it — Treasury bonds. If there are no Treasury bonds, what do you invest it in? Stocks? Which stocks? Who picks? In the end, Seligman concluded it was a good idea to pay down the debt — but not to pay it off entirely.

"There's such a thing as too much debt," he says. "But also such a thing, perhaps, as too little."

The copy of Life After Debt we obtained reads "PRELIMINARY AND CLOSE HOLD OFFICIAL USE ONLY." The report was intended to be included in the official "Economic Report of the President" — the final one of the Clinton administration. But in the end, people above Jason Seligman decided it was too speculative, too politically sensitive. So it was never published.
As a commentor to the Krugman article pointed out:
Actually, government borrowing has advantages which are rarely discussed.

Global investment in America's financial system takes place through the purchase of US bonds. US public debt is the largest single source of global capitol that is transferred into dollars and made available for lending to American businesses and families. The capital received from the debt is put to use to grow the economy. It increases aggregate purchasing power. It funds research. It helps business expand into new areas. US borrowing helps dampen the effects of recessions. Borrowing helps keeps taxes low. It is economically more cost efficient to borrow at current rates near zero than to increase taxes.

Once conservatives agreed. Ten years ago, an American Enterprise Institute report said: “Contrary to widespread claims, there is no theoretical or empirical support for the enduring notion that either lower budget deficits or surpluses that lead to government debt reduction are beneficial to the economy. High-quality liabilities of the U.S. government confer benefits on both the private sector and the government, enabling the government to borrow when necessary at low cost."

The AEI report called debt reduction "a preposterous idea." Yet because of the family checkbook model, reducing the debt is seen as the single, all purpose solution for national growth. The argument's real purpose is "fear and fault," the casting of political blame.
So if debt is so necessary to the functioning of the modern economy, why are Republicans claiming that debt is the end of the world? Especially after the vast, vast majority of debt has been wrung up by Republican presidents? Why was there not a peep about debt when George W. Bush was piling it on and unemployment was low?

Basically, they are demagogues lying through their teeth. They ignore debt when they're in charge - but now they see it as a convenient weapon to use to smash the state. Of course, the government's services to big business will be preserved.

Face it, debt will continue to grow no matter who is in the White House. It has to. The only question will be what the inhabitant of the White House will do to the American public in the bogus cause of "paying down the debt". The debt meme is just a useful weapon designed to reallocate wealth from those who produce it to a parasitic predatory investor class that contributes nothing (sorry to sound quasi-Marxist, but it happens to be true), and to create the ideal hollow state.

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