Climate change is bad but the federal debt is good. It allows the private sector to be net savers and creates overall stability. It’s also clearly sustainable, hundreds of years and counting.
Presumably there is some threshold at which debt (or the rate at which we acquire it, or one of the aforementioned adjusted for population) is a bad thing and unsustainable, right? This is a genuine question—macroeconomics is counterintuitive to me.
It is bad when it causes excessive inflation. The "debt" in itself can never be unsustainable, since it is denominated in USD, which is a floating fiat currency that the US government controls. The US government is the source of all dollars, so it can never 'run out of dollars'. However, printing too many dollars can lead to inflation. So the deficit could be called unsustainable if it causes unwanted inflation.
Debt does not (necessarily) mean high taxes in the future.
Deficit is Government spending - Tax collected. High deficits might lead to inflation. One way to control inflation would be to increase taxes(draining money out of the economy)
> In general, when the government consumes a lot, the private sector can consume less of the national product.
This is not exactly true. When there is still "slack" in the economy(it is not at full employment, the private sector isn't investing for other reasons etc.), government spending tends to have low inflationary pressure. It is only when the economy is operating at peak productive capacity that government consumption crowds out private sector consumption.
> Debt does not (necessarily) mean high taxes in the future.
You are right, that's why I called it another possibility. To list them all explicitly.
Higher debt now means that the future either has default, higher (than anticipated) inflation or higher taxes.
(A steady inflation doesn't do anything to debts: at the time the debt is incurred, any anticipated inflation shows up in the nominal interest rate. Similarly, getting a reputation for defaulting increases your nominal interest rate. A reputation for high taxes doesn't do anything to the interest rate directly.)
Responsible governments try to avoid default and ever increasing inflation. That leaves taxes. Or taking on less debt in the first place.
About slack:
Modern central banks target inflation. If there's slack like you describe, a competent central bank will inject more money until inflation is at the target.
Central banks wire their profits to the treasury. That includes the seigniorage income they make from propping up inflation back to the target.
That's just bog standard monetary policy. And doesn't crowd out private sector investment and consumption and is perfectly capable of picking up any slack.
(That's not to say the fiscal side of government doesn't have any effects at all. But that's more on the supply side.)
ISTM just looking at the federal debt as a single number is a bit misleading. Any treasury debut held by the Federal Reserve (in US terms, or similar central banks of other countries) is effectively interest-free, so it is certainly sustainable. The only downside there is the potential for inflation if it's done too much.
Debt help by citizens of the country is also somewhat neutral in terms of sustainability. The government needs to pay interest on it, but the money ultimately goes into the economy, so that might also be sustainable in larger amounts than might be intuitive.
Foreign-held debt is another matter, and I'm not enough of an expert to speak on the ramifications there. But I do think in general it's important to recognize that national governments which control their own monetary policy are a very different beast than a household or a business, and so their debt liabilities can't necessarily be thought of in the same way.
Foreign held debt is not much of a problem in principle, if the interest is lower than what the country earns from owning foreign assets.
But government debt is a problem even if the government doesn't go bankrupt:
You are right that a government that can print its own money can hardly go bankrupt financially. But it's perhaps not ideal for the government to consume ever increasing portions of what the nation produces? Forget about money and finance for a second: given the same material resources the private sector is usually more efficient at satisfying human wants.
> given the same material resources the private sector is usually more efficient at satisfying human wants.
I think this is a very dangerous simplification. There are certainly areas where private sector does a much better job than the public sector. But there are also areas where the public sector in general is superior. Examples are things like healthcare, infrastructure and education.
It’s not obvious that the public sector does a better job in healthcare, infrastructure or education. Rather we as a society feel that those things which should be available to all regardless of ones circumstances.
If you only educated those who could pay, they would be able to get educated more cheaply than our current system. However, this would eventually destroy the economic productivity of our country.
The private sector tends to do poorly in any area where the returns on an investment are not captureable by the investor individual but instead accrue to society as a whole.
The returns to education mostly accrue to the one get educated. So the private sector is perfectly capable of providing education. (And we see that in practice.)
If you believe 'The Case Against Education' the individual captures more than 100% of the net returns from education, ie there are negative externalities. That means society consumes more education than is optimal on utilitarian grounds.
That conclusion is counter-intuitive, but the argument is simple: education is mostly a signalling arms race.
> Caplan argues that the primary function of education is not to enhance students' skill but to certify their intelligence, conscientiousness, and conformity – attributes that are valued by employers. He ultimately estimates that approximately 80% of individuals' return to education is the result of signaling, with the remainder due to human capital accumulation.
There is certainly a LOT of signaling involved in education. As a college dropout and self taught developer this is intimately clear to me.
However, I have traveled enough of the world and lived enough places to see what happens when education systems are weak or non-existent. I think you underestimate the degree to which high levels of illiteracy and innumeracy absolutely destroy the potential for economic growth and prosperity.
It is possibly true that we (the USA) consume more education than is pragmaticly optimal. However, removing public education would result in a loss of economic output that far exceeds the savings. Predicting who will need that education sufficiently accurately is imposy for both society as a whole and for individuals contemplating their future.
Hypothetically - actually not so much - this was one of the issues in 2008.
If the financial system creates such quantities of debt, that the regular capital and interest repayments exceed the available money supply, that would be a hard threshold. This is quite a large number if you calculate, even with high interest rates, so highly unlike in practice. Plus bank lending has a side effect of money creation, which stops it happening within the banking system.
However government debt and company bonds are non-bank debt, and securitised loans also don't have the money creation property, so one of the issues in 2008 can be presumed to be that the expansion of the debt supply relative to the money supply probably did become an issue in some countries.
Probably, but it will depend on the interest rate.
The lower the interest rate, the higher the safe level of debt.
Right now federal bonds have a negative interest rate, so perhaps there is no limit to the amount of debt, and in fact that there might be a minimum safe lower bound. Or maybe not; we don't have much experience in dealing with this sort of situation since it was seen to be impossible.
Putting that aside, the UK had debt around 200% of GDP after the Napoleonic Wars, and eventually paid most of it down. So the "bad & unsustainable level" appears to be well above that.
That was in the midst of the Industrial Revolution and during a time when the UK also had direct and indirect control of exploitable colonies, I don't think the debt to GDP figures of the time are particularly relevant to modern nation states.
Japan has avoided financial collapse with a giant debt to GDP ratio for years now, I think the advent of QE and owning your own debt via central banks has made the whole thing seem a bit silly.
The question is: can you think of any that involved debt nominated in the country's own currency?
All examples I've ever read or heard of involved foreign currency debt, or to be more precise, debt in a currency that the country in question didn't control (e.g. developing countries with USD-denominated debt, Euro-zone countries, historical cases with debt denominated in gold, etc.).
> By the mid-1920s, interest on [British] government debt was absorbing 44% of all government expenditure, [...]
That definitely sounds like an issue. Without the debt, they presumably could have cut taxes in about half.
(And gold standard or not doesn't make too much of a difference, if you have a firm commitment to keep inflation in check and not to default on your debt either.)
> > By the mid-1920s, interest on [British] government debt was absorbing 44% of all government expenditure, [...]
That definitely sounds like an issue. Without the debt, they presumably could have cut taxes in about half.
That's not an issue if, by taking on the debt, the government allowed the economy to grow sufficiently faster.
The conservative analogy to a household budget doesn't make sense. Analogizing to a startup where you're best off taking on debt for more capital, to increase growth, also don't make sense. But it's an open question, which of these makes the least sense.
> That's not an issue if, by taking on the debt, the government allowed the economy to grow sufficiently faster.
Perhaps. Though that's a big If. Most government expenditures in practice are more like consumption than investment. (In Britain's case, the expenditure was sui generis: the first World War.)
So the yardstick for 'sufficiently faster' is not some absolute positive return, but the comparison to what the private sector would have done with the resources.
> The conservative analogy to a household budget doesn't make sense. Analogizing to a startup where you're best off taking on debt for more capital, to increase growth, also don't make sense. But it's an open question, which of these makes the least sense.
Please explain. As far as I can tell, making the household budget analogy work is almost the definition of competent monetary policy. So that analogy is more of an 'ought' than an 'is'.
The 'startup analogy' is perhaps more apt for small open economies. Though even there the total amount that foreigners are willing to lend the country as a whole is probably finite and limited by the country's total future earnings. Those total future earnings have to pay back the debt; either directly in the private sector, or indirectly via taxes.
Now, IF you have incompetent monetary policy, then indeed the household budget analogy breaks down. Incompetent monetary policy means that total nominal spending in the economy is not stabilized, and so fiscal stimulus MIGHT make sense.
(Interestingly, the conceptually simplest way to have competent monetary policy is to have no monetary police. Ie leave note issuing to a private laissez faire financial sector. That tends to stabilize total nominal spending in the economy. See the Canadian experience https://www.alt-m.org/2015/07/29/there-was-no-place-like-can... for a close enough approximation in the real world.)
Crowding out in the sense of preventing the private sector from using resources would only happen hand in hand with inflation, which an earlier commenter already identified as the real limit of deficits.
Crowding out in the traditional sense of discouraging the private sector from investment is really a function of interest rates. For a government that runs its own, free-floating currency, interest rates are a policy variable independent from deficit and debt.
That even competent monetary policy cannot be relied on to make the household analogy work was proven empirically beyond any reasonable doubt via the famous "zero lower bound".
There is also the question of whether monetary policy should even try to make the household analogy hold. This is ultimately a political question, and especially in a democracy there a good reasons why it shouldn't.
> That even competent monetary policy cannot be relied on to make the household analogy work was proven empirically beyond any reasonable doubt via the famous "zero lower bound".
The zero lower bond is not a problem. You can still do unlimited QE, independent of interest rates. Or you can do what Singapore does and not use interest rates as a policy instrument at all (they use foreign exchange rates; the US could use eg a basket of commodity prices, if they wanted to).
Venezuela, Russia and Ukraine all defaulted in debt in their own currency as recently as 1998. Argentina has had an ongoing partial default in peso denominated debt.
I don't know much about what you're referring to, and a cursory search did not provide any evidence that the root cause of sustained high inflation in Brazil was debt at any time, much less debt in Brazil's own sovereign currency.
Nobody disputes that bad governance can lead to high inflation. The point of dispute is whether we have to reduce debt today because in the future that high debt may lead to hyperinflation, recession, or some other negative economic outcome that is so bad that its badness would outweigh the badness of austerity measures implemented today.
Honestly, I have never seen any serious debate on the issue, mostly because I don't know of anybody that from the late 70's up to 94 that even contested it was caused by the ever growing domestic debt.
But yes, now that you have cited it, there aren't many mainstream media articles in English that say it. I couldn't find any either.
In fact the compromise that led to the location of Washington DC, was one factor that led to New York being the major money center of the United States. Hamilton (of New York) wanted the new federal government to assume the unpaid revolutionary war debt of the States of which New York had quite a bit. Virginia had responsibly paid off all of its revolutionary war debt, and felt it ought not be saddled with other states debt, so as a trade off the new Federal district was moved down to Virginia. When the state debt was federalized, much of it was held in NY which became the place to buy and sell it.
Another amusing story about US sovereign debt is the Louisiana purchase. As the story goes Napoleon sold Louisiana to the United States to raise money to finance his wars. The US didn’t have cash on hand to pay, so they floated the Louisiana 3’s which were bonds that paid 3% to raise the money. The agent for the bond sale was Barings, and they were sold on the London and Amsterdam markets. So it was largely the British investing class who were literally financing Napoleon.
