Debt crisis, what debt crisis?

I submitted this to the ABQ Journal Oct 20, still no joy. An earlier version in response to the Anthony Davies’ OpEd on October 5 is now past its use-by date. In addition, I have included below links to verify attributions I made and one to John Harvey, who is one of many from academia whose views I share. 

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The federal debt has almost everyone in a panic. Most pundits and politicians including those from President Obama to Sara Palin and from The Peter Peterson Foundation to The Committee for a Responsible Federal Budget have agreed that the federal government should manage its debt just like a household. “Government must stop spending more than it earns.” This note disputes that job-killing, intuitive myth.

Since President Nixon took our country and the world off the gold standard in 1971, we have had a fiat monetary system. All our money comes from the US government. Bank loans or federal spending bring money into the economy. 

Under a gold standard the amount of gold held by the government limits the amount of money in the economy. Under a fiat system only our productive capacity, our workforce and facilities, limits us. This is completely contrary to old economic thinking. 

Limited only by our productive capacity, we can afford anything we can do. Because our economy can have all the money it needs, our politicians need not worry about funding but how to grow our productive capacity and where to deploy it for a prosperous future. 

Gross Domestic Product (GDP), which is the monetary value of all the goods and services sold in our country, measures our economy. The elements that contribute to GDP are household consumption, business investment in the means of production, net exports, and the government deficit. 

To grow GDP, we must have people employed in productive activities. In a poor, slow-growing economy household consumption is low, because people choose to pay off debt or otherwise save rather than buy stuff. Also, business investment is low, because inventory is not needed when people are not buying stuff. In our country, net exports are negative, because we have net imports. All this results in slow growth and too many people being either unemployed or under employed.

The only choice remaining for growth is government deficits to increase employment and add to GDP. 

Deficits are not under the complete control of government. They depend on household decisions about saving and business decisions about investment. Additionally, a poor economy increases the deficit through unemployment insurance for more people and continuing support for the poor and disabled. 

Deficits add to our economic growth and well being. Reduced deficits would make our economy worse. Deficits alone do not cause inflation until demand for goods and services exceeds our ability to produce them. Only when all able bodies are employed do we reach our limit of production.

Private debt is larger than Federal debt. Private debt is the problem; it has to be paid back to creditor.

Government austerity represents an outdated economic view. After eight years of sluggish economic performance using the old views that rely on monetary policies to stimulate growth, many economists are looking at fiscal measures, which means more deficits. Recently, Jason Furman, Chairman, Council of Economic Advisors, published a conference paper advocating fiscal stimulus as part of a “New View” to replace the “Old View.” 

Empirical evidence of the dangers of too-small deficits exists in the Eurozone where the Maastricht Treaty limits deficits to 3% of GDP. Only countries with strong exports such as Germany can comply readily with that constraint. Eurozone countries are compromised further by having given up their sovereign currencies to the Euro. Consequently, they suffer under a de facto gold standard. So grave is the Eurozone crisis that the eminent economist, Joseph Stiglitz, has advised both Greece and Portugal to exit the Eurozone, and he predicts that Italy may exit in a few years. These economies are decimated, because they have not been able to run enough deficits to prosper.

Fiscal deficits, used productively, will expand our economy. The resulting federal debt is not a crisis. We never have to pay it off; we outgrow it by keeping our GDP growing.

Recent Furman paper:

https://www.whitehouse.gov/sites/default/files/page/files/20161005_furman_suerf_fiscal_policy_cea.pdf

Stiglitz Greece and Portugal advice and prediction for Italy:

http://money.cnn.com/2015/07/03/news/economy/greece-crisis-stiglitz-krugman/

http://www.theportugalnews.com/news/economy-nobel-winner-says-portugal-should-exit-euro/39411

http://www.reuters.com/article/us-eu-euro-economist-idUSKCN1252GM

Prof. John Harvey:

http://www.forbes.com/sites/johntharvey/2016/10/19/one-more-reason-to-be-depressed-about-this-years-election/#15a41f353ae2

There is no federal debt crisis

I tried again to counter conventional wisdom with this submission to the Albuquerque Journal. It drives me nuts if I don't keep trying.

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In his article in the Journal on October 5, Anthony Davies claims we must cut federal spending to solve the debt crisis. There is no federal debt crisis. Our crisis for over eight years has been slow growth of the economy and too few good jobs. 

First, Davies writes that when interest rates rise to pre-recession levels, the federal government will owe an additional 500 billion dollars in interest. Actually, it would be more than that, but let’s not quibble.

More importantly, we must understand to whom the interest is paid. That would be the holders of all US Treasury securities, which comprise the federal debt: banks, pension funds, mutual funds, wealthy individuals, and foreign central banks. Also, higher interest rates mean more income to our bank accounts.

In short, federal interest payments are income to the private sector. Income to the foreign sector provides dollars to foreigners that can be spent in our economy. 

Second, and more consequential, Davies apparently thinks that government spending can manage the federal debt. Our federal debt is the accumulation of deficits since the beginning of the republic. Deficits are largely determined by choices made in the private sector.

Conventional wisdom is wrong. Our debt provides assets for the future.

Our economic output is measured by Gross Domestic Product (GDP), which is the monetary value of all the finished goods and services produced in our country. The elements that contribute to GDP are household consumption, business investment in the means of production, net exports, and the government deficit.

To grow GDP, we must have people employed in productive activities. In a poor slow-growing economy household consumption is low, because people would rather pay off debt or otherwise save rather than buy stuff. Also, business investment is low, because inventory is not needed when people are not buying stuff. In our country, net exports are negative, because we have net imports. All this results in too many people being either unemployed or under employed.

Consequently, the only choice is government deficits to increase employment and add growth to GDP. Those deficits depend on household decisions regarding consumption and business decisions regarding investment. Additionally, a poor economy increases the deficit through unemployment insurance for more people and increased support for the poor and disabled. 

Clearly deficits add to our economic growth and well being. To reduce federal spending would make our economy worse.

Davies’ position represents an outdated economic view. After eight years of sluggish economic performance using the old views that rely on monetary policies to stimulate growth, many economists are looking more favorably upon fiscal measures, which means more deficits. To that point, on October 5, Jason Furman, Chairman, Council of Economic Advisors, published a conference paper advocating a fiscal stimulus as part of a “New View” to replace the “Old View.”

Empirical evidence of the dangers of too-small deficits is found in the Eurozone where deficits are limited to 3% by the Maastricht Treaty. There, only countries with net exports such as Germany can comply readily with the treaty. These countries are compromised further by having given up their sovereign currencies to the Euro. Consequently, they can not “print” money to pay their debts. So grave is the Eurozone crisis that the eminent economist, Joseph Stiglitz, has advised both Greece and Portugal to exit the Eurozone, and he predicts that Italy may exit soon. These economies lie in ruin because they have not been able to run enough deficits in their own sovereign currencies to prosper.

Fiscal deficits, used well, will benefit our economy. The resulting national debt is not a crisis. We never have to pay it off; we outgrow it by keeping our GDP growing.