If default is inevitable, the responsible thing is to allocate as many resources to your friends and allies as possible so they are prepared to emerge from the default on better footing.
Hence, I propose we pass sweeping child tax credit/incentives to boost the birth rate regardless of whether we can pay for it. If that bankrupts SS/Medicare faster so be it, give the money to the kids before the olds get it. When the reset comes, lets have more kids around.
People don't seem to realize that the fiscal impact of all the entitlements we have created and other spending may be well be beyond the possibility of financing through taxation. Any politically feasible taxation sufficient to address the problem, focused as it would be on hitting savings and investment rather than consumption, would wreck the economy and thus be self-defeating. Even if all the income and assets held by the rich were confiscated, it would only have a temporary effect, and would also wreck the economy. We have been in this situation for some time now, and most other developed nations are too. This is why central bank balance sheets have ballooned. They have been forced to buy their bonds to kept their interest rates from rising to levels that would wreck their economies. To make it worse, they have artificially depressed the rates to ridiculously low levels in order to hold down interest expense which would otherwise consume budgets.
Central banks can hold down interest rates if they are willing to buy unlimited amounts of issuance, and I stress unlimited. The recent rise in rates has been due to the Fed's attempts to dampen inflation by allowing a bit of a rise in the hopes of depressing the economy, or at least those portions most affected by interest rates, sufficient to slow its pace.
At the same time, there is no effort to control spending on the fiscal side. So far, it looks like the Fed is having little real impact on inflation, contrary to widespread propaganda to that effect. It may be that the Fed can't do it alone. Current rates are unsustainable due to the size of the federal debt; if kept up interest costs overwhelm other budgetary items (entitlements, defense, discretionary) further ballooning the deficit and requiring yet more issuance and Fed purchases, i.e., debt monetization. This heads toward a situation in which the central bank is the majority, or even the only holder of such debt, as others flee it, anticipating its loss of value through inflation.
It would seem there is a substantial risk that we head into hyper-inflation, which feeds on itself because of the impacts to normal productive relations. For example, instead of normal activity, everyone spends his time figuring out how to preserve himself from the loss of value of money. Scenes from Weimer Germany come to mind.
I think that a VAT could finance our current and some future (more generous unemployment benefits, expansion of ACA to cover the low income participants in employer "provided" health insurance, and a Child Tax Credit) safety net expenditures with less impact on savings and investment than the present tax on wages or deficits.
I feel like his statement is almost certainly technically true. A VAT would have "less impact" on savings and investment than the present tax on wages does for any level of benefits you want to fund (I'm not sure what the "or deficits" means at the end. I assume that's a mistake and should have been deleted, if he means it will have less impact on savings and investment than the present taxes have on wages or deficits, it seems nonsensical?).
Now could we fund current promised benefits with a VAT? I think for social security, yes. Medicare? I guess with some reforms? Not really promised benefits if you assume we'll have healthcare inflation at the same rate. Definitely don't think we could fund our current promised benefits and some of the wishlist items he mentioned.
You can bring your health, your relationships, your family, your skills, and your memories with you even if all your assets are confiscated.
Probably the simplest preparation would be to convert money today into time and convenience. We have small children and my wife has backed off working to spend more time with them.
Certain economists, namely Paul Krugman, seem rather sanguine about the federal debt. I keep reading his arguments on this subject and keep scratching my head when I do. Now, I know many readers of IMT think Krugman is a nincompoop. He might be a partisan hack, but he knows a thing or two about economics. He didn't win a Nobel Prize for nothing. Moreover, he thinks "Modern Monetary Theory" is a crock. So, I think his argument deserves consideration and careful refutation. As best I can tell, his argument about the federal debt (and uncovered retirement liabilities) is that we can handle it, and in any event we could in principle increase taxes to cover our debts over time. Again, I scratch my head! The only way I think his argument might work is to distinguish between federal debt held by U.S. citizens (including U.S. based organizations) and debt held by foreigners. Interest paid on debt held by citizens, in a sense, is paid to ourselves, albeit redistributing tax revenue from the middle class to bond holders, who are wealthier than average. By this argument, we would only need to worry about interest paid to foreigners because those payments represent a leakage from the domestic economy. And, BTW, foreign ownership of federal debt is a minority of the total. So, maybe we can handle it after all.
But don't jump on me about this; I'm merely trying to articulate the argument that the debt is not problematic. I believe it is problematic. As said, I' scratching my head.
Here is the problem with Krugman- he changes his argument every time the administration in D.C. changes. I am old enough to remember his stances during the the period of 2001-2009. Perhaps you and Stu are too young to remember this?
If I recall correctly, he favored loose fiscal policy in 2009 and for years afterward, and still favored loose fiscal policy in 2020 and ever since. I'm not sure he's changed much.
Wish you were correct. I remember what he wrote in 1998, "The Accidental Theorist," a collection of his popular op-eds about *economics* from the prior 10-15 years, before he started writing about partisan politics. I read that 1998 volume long after finishing grad school. It was worth reading to learn something about economics.
You must be talking about his political hackery. I rarely read those columns; I find them uninformative. I focus on his columns that feature the "Wonking Out" label, which focus on economic analysis. Those can be quite good, although Krugman seems to be always in favor of loose fiscal policy.
Doom loop - The assumptions and uncertainties are quite different yet I can't help but see the similarity in prediction of catastrophe between fiscal policy/debt and global warming. Both are possible, maybe probable, but neither is close to certain.
If "unsustainable" is false, how can it be falsified? It does seem that there will be an upper limit - but it will likely be higher than Japan's 250% debt / GNP. Where is the Japanese inflation???
As usual lately, Kling has econ alarmism, without mentioning the single most important economic issue for investors - what are the alternatives? Before the USD goes into hyperinflation, there must be some other investment. Gold? (/metals) Bitcoin? Stocks (& bonds, not the low interest ones tho)? Real Estate?
Ain't gonna happen this year nor next - very unlikely in the next 10 years.
The IMF report includes a note about high debt being especially bad for developing countries, made worse by the strong USD. Meaning if the US is bad, those other economies are even worse -- seems like OECD deficit spending is a Macro-Luxury-Belief.
The US deficits won't be reduced until Democrats start favoring reduced Federal spending - which they won't ever do with a Dem President. Anybody, like Kling or other AEI Republican donor-class dependents, who want to forestall the likely / plausible / possible / unlikely monetary problems, should be always wanting a Rep president, including Trump far more than Biden. But they don't - so the deficit ain't so important.
"We review the debate surrounding the macroeconomic effects of deficit reduction policies (austerity). The discussion about "austerity" in general has distracted commentators and policymakers from a very important result, namely the enormous difference, on average, between expenditure- and tax-based austerity plans. Spending-based austerity plans are remarkably less costly than tax-based plans. The former have on average a close to zero effect on output and lead to a reduction of the debt/GDP ratio. Tax-based plans have the opposite effect and cause large and long-lasting recessions. These results also apply to the recent episodes of European austerity, which in this respect were not especially different from previous cases."
Reducing govt spending has little effect on output, while higher taxes (like T. Hutcheson wants) do not reduce the ratio but do reduce output.
The USA needs to "freeze gov't spending" (NOT a cut); or at least start with a freeze on the debt limit, so gov't spending only grows as fast as GNP.
There are two problems with democracy and we are colliding with both-
1) Sooner or later the electorate will realize that they can just vote themselves goodies from the public trough. Someone else can always be made to pay, of course.
2) Sooner or later elections become a winner take all game and governance takes a back seat. Electoral factions just focus on gaining power and preventing the other side from tossing them out of power once achieved- at any cost. It becomes a game that must be won rather than a public debate of ideas and values.
Let's assume your analysis is correct. How do you think the individual can best adapt to these circumstances? I can think of a few points. For example, maybe you should work harder now. You may want to work less in the future, since you will pay higher taxes on your hard-earned dollars. It also clearly makes sense to keep as little money in cash as possible. However, I am not sure what assets as a category someone could expect to best handle the coming fiscal problems. Buy assets in Singapore and/or other countries with their fiscal houses in order?
What's interesting about the fiscal crisis is that the largest obligees are just normal voters and workers. Those obligations are also modifiable by the legislative process, and to some extent by standard notice-and-comment APA processes. The bond obligations, by contrast, are inflexible apart from the wiggle room granted by inflation, but the bond market has powerful and superbly well-organized representatives, whereas the people are a mob. The government will stiff the mob, but the manner in which it will be stiffed is an open question. Surely, it will be in some creative and explosive manner cloaked in propaganda and subterfuge. All the direct means (like means testing) are too unpopular, versus doing something horrible that can be blamed on some other guy.
Nothing constructive will ever be done. History is absolutely clear on this one item. The power of governments to borrow and print money is simply too corrosive and corrupting.
But they always end up with a new currency and new financial system, not the old currency and financial system, Thomas. All hyperinflations destroy the old currency, and they aren't rare despite your claim. There are several going on right now.
It doesn't matter, Stu, which ones are. I hate to tell you this, but we are ruled by autocrats that never stand for election. The political class in the first world has one tool- it's ability to buy votes and it will break the bank doing so over a long enough time span.
I wonder whether this is just a US phenomena, or a 'all governments world-wide' issue. Also, is it decades scale or generations scale? In short, are we proposing to solve a question of how resources get passed down to future generations and partitioned among government, market, church, and family by small adjustments? If the system breaks down, ... will it be part of the process by which the population appears to be collapsing, labor force participation rates are radically readjusting with demographics, and everyone is connected to a single supply chain?
If default is inevitable, the responsible thing is to allocate as many resources to your friends and allies as possible so they are prepared to emerge from the default on better footing.
Hence, I propose we pass sweeping child tax credit/incentives to boost the birth rate regardless of whether we can pay for it. If that bankrupts SS/Medicare faster so be it, give the money to the kids before the olds get it. When the reset comes, lets have more kids around.
This honest policy would be better than the current one, or any expected politically feasible ones.
People don't seem to realize that the fiscal impact of all the entitlements we have created and other spending may be well be beyond the possibility of financing through taxation. Any politically feasible taxation sufficient to address the problem, focused as it would be on hitting savings and investment rather than consumption, would wreck the economy and thus be self-defeating. Even if all the income and assets held by the rich were confiscated, it would only have a temporary effect, and would also wreck the economy. We have been in this situation for some time now, and most other developed nations are too. This is why central bank balance sheets have ballooned. They have been forced to buy their bonds to kept their interest rates from rising to levels that would wreck their economies. To make it worse, they have artificially depressed the rates to ridiculously low levels in order to hold down interest expense which would otherwise consume budgets.
Central banks can hold down interest rates if they are willing to buy unlimited amounts of issuance, and I stress unlimited. The recent rise in rates has been due to the Fed's attempts to dampen inflation by allowing a bit of a rise in the hopes of depressing the economy, or at least those portions most affected by interest rates, sufficient to slow its pace.
At the same time, there is no effort to control spending on the fiscal side. So far, it looks like the Fed is having little real impact on inflation, contrary to widespread propaganda to that effect. It may be that the Fed can't do it alone. Current rates are unsustainable due to the size of the federal debt; if kept up interest costs overwhelm other budgetary items (entitlements, defense, discretionary) further ballooning the deficit and requiring yet more issuance and Fed purchases, i.e., debt monetization. This heads toward a situation in which the central bank is the majority, or even the only holder of such debt, as others flee it, anticipating its loss of value through inflation.
It would seem there is a substantial risk that we head into hyper-inflation, which feeds on itself because of the impacts to normal productive relations. For example, instead of normal activity, everyone spends his time figuring out how to preserve himself from the loss of value of money. Scenes from Weimer Germany come to mind.
Have a nice day, indeed!
I think that a VAT could finance our current and some future (more generous unemployment benefits, expansion of ACA to cover the low income participants in employer "provided" health insurance, and a Child Tax Credit) safety net expenditures with less impact on savings and investment than the present tax on wages or deficits.
This is horsesh8t, Thomas. Europe disproves your entire comment.
I think most of Europe does a VAT and income tax?
I feel like his statement is almost certainly technically true. A VAT would have "less impact" on savings and investment than the present tax on wages does for any level of benefits you want to fund (I'm not sure what the "or deficits" means at the end. I assume that's a mistake and should have been deleted, if he means it will have less impact on savings and investment than the present taxes have on wages or deficits, it seems nonsensical?).
Now could we fund current promised benefits with a VAT? I think for social security, yes. Medicare? I guess with some reforms? Not really promised benefits if you assume we'll have healthcare inflation at the same rate. Definitely don't think we could fund our current promised benefits and some of the wishlist items he mentioned.
Weimer Germany should be Weimar Germany. Sorry.
What can an individual do in preparation for the economic woes you're predicting, Arnold?
You can bring your health, your relationships, your family, your skills, and your memories with you even if all your assets are confiscated.
Probably the simplest preparation would be to convert money today into time and convenience. We have small children and my wife has backed off working to spend more time with them.
Certain economists, namely Paul Krugman, seem rather sanguine about the federal debt. I keep reading his arguments on this subject and keep scratching my head when I do. Now, I know many readers of IMT think Krugman is a nincompoop. He might be a partisan hack, but he knows a thing or two about economics. He didn't win a Nobel Prize for nothing. Moreover, he thinks "Modern Monetary Theory" is a crock. So, I think his argument deserves consideration and careful refutation. As best I can tell, his argument about the federal debt (and uncovered retirement liabilities) is that we can handle it, and in any event we could in principle increase taxes to cover our debts over time. Again, I scratch my head! The only way I think his argument might work is to distinguish between federal debt held by U.S. citizens (including U.S. based organizations) and debt held by foreigners. Interest paid on debt held by citizens, in a sense, is paid to ourselves, albeit redistributing tax revenue from the middle class to bond holders, who are wealthier than average. By this argument, we would only need to worry about interest paid to foreigners because those payments represent a leakage from the domestic economy. And, BTW, foreign ownership of federal debt is a minority of the total. So, maybe we can handle it after all.
But don't jump on me about this; I'm merely trying to articulate the argument that the debt is not problematic. I believe it is problematic. As said, I' scratching my head.
I agree with your assessment of Krugman on both counts. I'm less optimistic than him but maybe more than you.
As I stated elsewhere, the debt is problematic but that doesn't mean catastrophe is certain.
Here is the problem with Krugman- he changes his argument every time the administration in D.C. changes. I am old enough to remember his stances during the the period of 2001-2009. Perhaps you and Stu are too young to remember this?
If I recall correctly, he favored loose fiscal policy in 2009 and for years afterward, and still favored loose fiscal policy in 2020 and ever since. I'm not sure he's changed much.
Then you are too young to remember what he wrote before 2009.
Wish you were correct. I remember what he wrote in 1998, "The Accidental Theorist," a collection of his popular op-eds about *economics* from the prior 10-15 years, before he started writing about partisan politics. I read that 1998 volume long after finishing grad school. It was worth reading to learn something about economics.
Then you are playing dumb? Read his opeds after 2000 and before 2009. Seriously- how could you be unaware of those opeds?
You must be talking about his political hackery. I rarely read those columns; I find them uninformative. I focus on his columns that feature the "Wonking Out" label, which focus on economic analysis. Those can be quite good, although Krugman seems to be always in favor of loose fiscal policy.
Doom loop - The assumptions and uncertainties are quite different yet I can't help but see the similarity in prediction of catastrophe between fiscal policy/debt and global warming. Both are possible, maybe probable, but neither is close to certain.
Arnold
I recall one ancient king (Solomon) wrote . . .
“Is not wisdom calling out?
Is not discernment raising its voice?
On the heights along the road,
It takes its position at the crossroads.
Next to the gates leading into the city,
At the entrances of the doorways,
It keeps crying out loudly:
“To you, O people, I am calling;
I raise my voice to everyone.
You inexperienced ones,
learn shrewdness;
You stupid ones,
acquire an understanding heart.’’
Wisdom, ability to solve problems, comes from observation, considering causes and effects.
Desire for ‘understanding’ precedes ‘wisdom’.
This Government leader, promoted - understanding, discernment and wisdom.
Who does this now?
Thanks
Clay
Online search for *Arslanalp Eichengreen Living with High Public Debt* yields a live link to a PDF of their research paper.
So you say the growing public debt is a problem.
Should the government raise taxes immediately to combat the deficit and pay off the debt?
Or should the government reduce public expenditures?
Are the borrowed funds spent well or wasted? If well, then the public expenditures should pay for themselves.
If wasted, should the government raise taxes or reduce expenditures?
Are taxed funds not also wasted?
Why is it okay to tax and waste, but not borrow and waste?
If "unsustainable" is false, how can it be falsified? It does seem that there will be an upper limit - but it will likely be higher than Japan's 250% debt / GNP. Where is the Japanese inflation???
As usual lately, Kling has econ alarmism, without mentioning the single most important economic issue for investors - what are the alternatives? Before the USD goes into hyperinflation, there must be some other investment. Gold? (/metals) Bitcoin? Stocks (& bonds, not the low interest ones tho)? Real Estate?
Ain't gonna happen this year nor next - very unlikely in the next 10 years.
The IMF report includes a note about high debt being especially bad for developing countries, made worse by the strong USD. Meaning if the US is bad, those other economies are even worse -- seems like OECD deficit spending is a Macro-Luxury-Belief.
The US deficits won't be reduced until Democrats start favoring reduced Federal spending - which they won't ever do with a Dem President. Anybody, like Kling or other AEI Republican donor-class dependents, who want to forestall the likely / plausible / possible / unlikely monetary problems, should be always wanting a Rep president, including Trump far more than Biden. But they don't - so the deficit ain't so important.
Tim Taylor also links to a fine 2019 paper: https://www.aeaweb.org/articles?id=10.1257/jep.33.2.141
"We review the debate surrounding the macroeconomic effects of deficit reduction policies (austerity). The discussion about "austerity" in general has distracted commentators and policymakers from a very important result, namely the enormous difference, on average, between expenditure- and tax-based austerity plans. Spending-based austerity plans are remarkably less costly than tax-based plans. The former have on average a close to zero effect on output and lead to a reduction of the debt/GDP ratio. Tax-based plans have the opposite effect and cause large and long-lasting recessions. These results also apply to the recent episodes of European austerity, which in this respect were not especially different from previous cases."
Reducing govt spending has little effect on output, while higher taxes (like T. Hutcheson wants) do not reduce the ratio but do reduce output.
The USA needs to "freeze gov't spending" (NOT a cut); or at least start with a freeze on the debt limit, so gov't spending only grows as fast as GNP.
Well, it probably needs to, and it should.
There are two problems with democracy and we are colliding with both-
1) Sooner or later the electorate will realize that they can just vote themselves goodies from the public trough. Someone else can always be made to pay, of course.
2) Sooner or later elections become a winner take all game and governance takes a back seat. Electoral factions just focus on gaining power and preventing the other side from tossing them out of power once achieved- at any cost. It becomes a game that must be won rather than a public debate of ideas and values.
Well here we are, aren't we?
As a retiree living on savings, the prospect of high inflation is frightening. I am uncertain of how best to protect myself.
Let's assume your analysis is correct. How do you think the individual can best adapt to these circumstances? I can think of a few points. For example, maybe you should work harder now. You may want to work less in the future, since you will pay higher taxes on your hard-earned dollars. It also clearly makes sense to keep as little money in cash as possible. However, I am not sure what assets as a category someone could expect to best handle the coming fiscal problems. Buy assets in Singapore and/or other countries with their fiscal houses in order?
What's interesting about the fiscal crisis is that the largest obligees are just normal voters and workers. Those obligations are also modifiable by the legislative process, and to some extent by standard notice-and-comment APA processes. The bond obligations, by contrast, are inflexible apart from the wiggle room granted by inflation, but the bond market has powerful and superbly well-organized representatives, whereas the people are a mob. The government will stiff the mob, but the manner in which it will be stiffed is an open question. Surely, it will be in some creative and explosive manner cloaked in propaganda and subterfuge. All the direct means (like means testing) are too unpopular, versus doing something horrible that can be blamed on some other guy.
Nothing constructive will ever be done. History is absolutely clear on this one item. The power of governments to borrow and print money is simply too corrosive and corrupting.
Actually, hyperinflations are pretty rare and short lived.
But they always end up with a new currency and new financial system, not the old currency and financial system, Thomas. All hyperinflations destroy the old currency, and they aren't rare despite your claim. There are several going on right now.
Which of those are capitalist democracies? I'm only aware of ones run by autocrats.
It doesn't matter, Stu, which ones are. I hate to tell you this, but we are ruled by autocrats that never stand for election. The political class in the first world has one tool- it's ability to buy votes and it will break the bank doing so over a long enough time span.
Name your examples.
I wonder whether this is just a US phenomena, or a 'all governments world-wide' issue. Also, is it decades scale or generations scale? In short, are we proposing to solve a question of how resources get passed down to future generations and partitioned among government, market, church, and family by small adjustments? If the system breaks down, ... will it be part of the process by which the population appears to be collapsing, labor force participation rates are radically readjusting with demographics, and everyone is connected to a single supply chain?
I’d be curious to hear and takes you are seeing on engaging in financial repression to push the default onto entitlements and debt holders.