Time to Repaper the Debt Ceiling Again

bee

The U.S. Congress will learn on Wednesday when the federal government will likely run out of money to pay its bills, setting the stage for the latest in a long series of fights over what is known as the debt ceiling.

A failure by Democrats and Republicans to work out differences over whether government spending cuts should accompany an increase in the statutory debt limit, currently set at $28.5 trillion, could lead to a shutdown of the federal government -- something that has happened three times in the past decade.

On July 31, the Treasury Department technically bumps up against its statutory debt limit. Much like a personal credit card maximum, the debt ceiling is the amount of money the federal government is allowed to borrow to meet its obligations. These range from paying military salaries and IRS tax refunds to Social Security benefits and even interest payments on the debt.

Remeber that in 2011, Republicans launched a battle over the debt limit and federal spending, which led to the first-ever Standard & Poor's downgrade of the U.S. credit rating -- a move that reverberated through global financial markets.

https://reuters.com/world/us/every-time-its-messy-us-again-approaching-debt-ceiling-2021-07-21/

Crash

Repugnants want to limit any further spending which necessitates more taxes. Many just want to insulate their obscene wealth from Uncle Sam. I just think that is heinous. On the other hand, I can almost agree that WHERE taxes are directed is a big issue, and a lot of that money is wasted dollars, like throwing money down the toilet. I grow increasingly impatient with fiat-programs allegedly aimed at "prevention mechanisms" or creating a "woke" mentality.
Demublicans want to rescue everyone even before issues appear as real issues. Like saving us from ourselves.

LewisBraham

The latest U.S. household net worth is $137 trillion--https://bloomberg.com/news/articles/2021-06-10/u-s-household-net-worth-reaches-fresh-record-on-homes-stocks--so this graph is a bit old, but the point is there are always these cries about how the government is spending too much as though there isn't really a source for paying back some of that debt, i.e, a wealth tax. The majority of that household net worth is owned by the wealthy

davidrmoran

Moreover, ... governments don’t [have to pay back their debt] — 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 — ... U.S. debt is, to a large extent, money we owe to ourselves.
[Krugman 2012]

bee

"One man's spending is another man's income"...mentioned here, regarding the long & short term debt cycles.

So might our governments debt (spending) be a component of our citizenry income and a mechanism (debt) to grow the economy?

msf

all they need to do is ensure that debt grows more slowly than their tax base.

If we use GDP as a proxy for the tax base (I'm open to better suggestions), then the US is not growing its debt more slowly than its tax base. Quite the opposite. Debt has outstripped tax base (GDP), growing from 40% of GDP in 1966, and from a post-war low of 30.6% in Q3 1981 to 129% in Q4 2020 and 127.5% in Q1 2021 (most recent data). That's significantly higher than even the WW2 peak of 112.7%.


https://fred.stlouisfed.org/series/GFDEGDQ188S


https://www.theatlantic.com/business/archive/2012/11/the-long-story-of-us-debt-from-1790-to-2011-in-1-little-chart/265185/

If you want to ensure that debt grows more slowly than the tax base, you have to either reduce the rate of growth of debt (slow or reverse increases in spending), make the GDP grow faster (either expand the economy faster or inflate your way out since we're looking at nominal dollars), or expand the tax base, i.e. broaden what is subject to taxes. Hence the wealth tax that Lewis mentioned.

Here's the most current Fed chart for household net worth. The dip at the end of Lewis' chart is Q1 2020, when the figure was $111K. Since then it has soared, as seen in the tail of the current chart. In Q1 2021, household net worth is $137K, as he noted.

A rise of over 23% in a year, "despite the devastating economic effects of the coronavirus ... driven in large part by surging stock and home prices after interest rates were lowered to combat the financial fallout of the pandemic."
https://thehill.com/policy/finance/542791-us-household-wealth-hits-record-130-trillion-despite-pandemic


https://fred.stlouisfed.org/series/TNWBSHNO

LewisBraham

I've been thinking that as a developing nation grows and become a mature developed one--with a lot of valuable assets yet slower GDP growth--that it makes more sense to shift the tax base towards the assets and away from just income or GDP. The accumulated wealth in the U.S. is massive, yet its ability to grow its way out of debt becomes more challenging as its population ages and its growth rate slows from an already high GDP base. That accumulated wealth should be taxed appropriately via wealth and estate taxes.

davidrmoran

yes, and some more-interesting weeds

https://www.oecd.org/tax/revenue-statistics-united-states.pdf

davidrmoran

The Krug quote was from 9y ago, as noted, just making the general point, and over long spans.

As for

>> https://fred.stlouisfed.org/series/GFDEGDQ188S

click the 5y and 1y graphs to see the decline and leveling from a year ago. (Not large.)

If some of the new spending initiatives get passed but without any tax increase or enforcement action, then presumably it will go back to where it was a year ago, if not worse. Whether that's a problem remains arguable; more-recent thinking is here:

https://www.nytimes.com/2021/05/21/opinion/money-federal-reserve-deficit.html

msf

The Krug quote was from 9y ago, as noted, just making the general point, and over long spans. ...

Agreed. Blips over short periods, say one year or even five years, can be the result of so many one-off events that they should generally be disregarded.

click the 5y and 1y graphs to see the decline and leveling from a year ago.
Uh huh.

more-recent thinking is here:
https://www.nytimes.com/2021/05/21/opinion/money-federal-reserve-deficit.html

That's a piece about monetary policy; this thread is about fiscal policy. While they're not unrelated, it would help if you could explain what in the piece you found relevant to budget deficits.

What I read is an argument that if the Fed increases the money supply, that doesn't necessarily cause inflation because agents "stash[] away huge amounts of currency — probably mostly $100 bills" rather than put them into circulation.

[A minor observation: while Krugman says it is mostly about the Benjamins, he writes about "green pieces of paper bearing portraits of dead presidents"]

If Fed borrowing doesn't necessarily cause inflation, then we can dismiss one of the ways I'd mentioned for debt to grow more slowly than gdp - inflation.

Since the Fed was brought into the conversation, we can consider this quote from Powell:
“The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong.”
https://www.cnbc.com/2019/02/26/fed-chief-says-economic-theory-of-unlimited-borrowing-supported-by-ocasio-cortez-is-just-wrong.html

Which gets us back to the basic point that debt growing faster than gdp, i.e. the debt:gdp ratio increasing, is unsustainable. And that is what Krugman effectively reiterated in 2019 when he wrote: "But what matters for government solvency isn’t the absolute level of debt but its level relative to the tax base, which in turn basically corresponds to the size of the economy."

He goes on to state:

And the dollar value of G.D.P. normally grows over time, due to both growth and inflation. Other things equal, this gradually melts the [debt] snowball: even if debt is rising in dollar terms, it will shrink as a percentage of G.D.P. if deficits aren’t too large.

https://www.nytimes.com/2019/01/09/opinion/melting-snowballs-and-the-winter-of-debt.html

"Other things being equal" seems like little more than wishful thinking by Krugman if we look over long spans. Debt as a fraction of GDP has grown from 40% in 1966 to well over 100% now.

It's really hard to see how the US is meeting Krugman's assumption that deficits aren't too large. Here are debt:gdp projections from March (i.e. before the latest proposed expenditures are included)

https://www.crfb.org/blogs/new-budget-projections-show-record-deficits-and-debt

davidrmoran

>> it would help if you could explain what in the piece you found relevant to budget deficits.

Well, of course this, an interesting way of looking at it:

And the Fed has indeed bought a lot of government debt. But is the Fed really financing the budget deficit? ... and the following paras.

>> It's really hard to see how the US is meeting Krugman's assumption that deficits aren't too large.

... while there are plenty of reasons to worry about what’s going on in the U.S. economy, Fed purchases of bonds and rising M2 aren’t on the list.

Rather than being reactionary or putting it in personal / one-man terms ('Krugman's assumption'), it would be good to know what you actually think. Deficits are now too large? Or recently so, passing some threshold? At what point? Whatmeans concretely --- what would you advise?

In this more recent piece by what's-his-name

https://www.nytimes.com/2021/07/15/opinion/government-spending-deficits-infrastructure.html

is a link to the famous 2yo Blanchard paper on public debt in times of low interest rates

https://www.piie.com/publications/working-papers/public-debt-and-low-interest-rates

plus a link to the latest whitehouse chart apparently indicating that budget proposals' real interest payment are negative:

https://www.whitehouse.gov/wp-content/uploads/2021/05/budget_fy22.pdf#page=42

So ... do you argue (or feel) that things in August 2021 have become sufficiently direr, or whatever it is, that the preceding 'shrugman' conclusions do not obtain as much? What does msf advocate?

msf

When Krugman wrote nine years ago that all they need to do is ensure that debt grows more slowly than their tax base, he was talking about solvency. That's also the subject of this thread - raising the debt ceiling so the government doesn't default.

Nothing about inflation (increasing money supply), nothing about whether it's the Fed financing the deficit. So the conclusion that "Fed purchases of bonds and rising M2" aren't affecting inflation says nothing about how fiscal policy is putting solvency at risk.

In short, for the most part, references to inflation are red herrings.

As a reminder, Krugman wrote: what matters for government solvency isn’t the absolute level of debt but its level relative to the tax base.

As I already noted, and also as Krugman wrote: "the dollar value of G.D.P. normally grows over time, due to both growth and inflation." That's the only place where inflation enters into the equation, i.e. into the debt-to-GDP ratio.

If that ratio continues to increase, as it has for the past half century, then it doesn't matter what inflation is, or whether interest payments are negative in real terms. They're already incorporated into that ratio.

Blanchard argues that with low interest rates, the cost of servicing the debt is low. True enough as far as it goes. But if the debt is increasing faster than revenue because "deficits are too large", then ultimately the debt becomes unserviceable regardless of how low the nominal interest rate is.

The tired old WW2 debt warhorse aside, debt-to-GDP has been increasing pretty steadily over the past half century. With projected $1T+ deficits as far as the eye can see, do you see that trend reversing? (Hint: your budget projection link shows debt-to-GDP rising to 140.3% in 2025 and 140.5% in 2026 before receding, but that assumes that the 2017 tax cuts will expire on schedule after 2025.)

How much debt is too much? When the government cannot service its debt. That is, at the point of catastrophic failure. Of course it would likely be too late politically to reverse course well before that point.

What do I advocate? The immediate question and the start of this thread is whether to raise the debt ceiling. I'll give a Republican quote from the original piece: "My personal opinion is that once we have acquired the debt, we are responsible for the debt and you need to address the debt."

davidrmoran

>> What do I advocate? The immediate question and the start of this thread is whether to raise the debt ceiling. I'll give a Republican quote from the original piece: "My personal opinion is that once we have acquired the debt, we are responsible for the debt and you need to address the debt."

Okay, which is to say ... what ? (The utterances in quotes.) Whatmeans 'address'?

PK tweet today:

Rs are warning that infrastructure etc spending will boost demand and cause the economy to overheat — a 180 from their former position that stimulus is ineffective. 2/

Meanwhile Dems are arguing that things like childcare will expand the labor supply and other policies will raise productivity 3/

Now, Rs haven't done the math (surprise). Even if purely debt-financed, the Biden plans wouldn't be all that big a stimulus. Here's potential GDP as predicted by CBO 4/

https://pbs.twimg.com/media/E7d4-LmXMAUXq9J?format=png&name=900x900

Cumulative over the next decade is $295 trillion. So even a $4T plan is only slightly over 1% of pot GDP. [[This is stupidly understated.]] And largely paid for, although many of the pay-fors look like vaporware. Still, overall fiscal impulse [[he almost certainly means ‘impact’]] not big 5/

[[ This GDP-growth graph has to be the basis for the CBO - CRFP 107% - 113% range you show. ]]

Anyway, GOP is Keynesian when it suits them. Surprise. 6/

Again, you gotta get a blog or your own substack in order to delve unserviceability.

My first issue is whether that GDP growth constancy will come true.

LewisBraham

OK, reduce the debt. Keep all public services the same or increase them, but tax the wealthy appropriately to pay for them. Why is this always an either-or argument in the news, as in, either we cut public services or the debt becomes unsustainable? The real subtext of the discussion with Republicans has little to do with the risks of the actual debt. It's all about brinkmanship to dismantle the public sector and eviscerate the tax code.

davidrmoran

Agreed, but there is no reducing the debt unless the military budget takes a truly serious hit (as it should). Otherwise you will have many families living and dying in the streets, I expect. (Mil spending is not as large as each of the entitlement portions, SS, MC and Medicaid, I believe.)

LewisBraham

What, you're against $640 toilet seats? https://thenation.com/article/archive/only-the-pentagon-could-spend-640-on-a-toilet-seat/

davidrmoran

Yeah, I spent many years of my tech writing career doing DoD proposals and came to see full well how robust offerings come to be as pricy as they are. It was fascinating to see how the military puts such intense pressure on costs / cost-cutting and yet demands that things be fully hardened, as the phrase goes. This article covers the other aspects.

davidrmoran

Here is PK elaboration today (not specifically limited to debt-GDP ratio), w some repetition:

https://messaging-custom-newsletters.nytimes.com/template/oakv2?campaign_id=116&emc=edit_pk_20210730&instance_id=36716&nl=paul-krugman&productCode=PK&regi_id=22268089&segment_id=64949&te=1&uri=nyt://newsletter/941f0821-7bf6-5958-9983-b7d705bb93fa&user_id=83d45440ead1d14c2a89a1e7221337d1

bee

Are the Fed's efforts to buy bonds... bonds that I assume invest in the growth the economy... an effort to grow the tax base? Don't jobs and wages need to keep up with both the Fed's bond buying and Congressional Debt expansion?

Seems wage growth hasn't kept up with all of this debt expansion.

Fed Chairman Bullard's comments on wage growth, interest rates and future bond buying:

For more than a decade before the pandemic "economic growth was slow and not very volatile and inflation in tandem was slow and not very volatile," Bullard said in an interview with Reuters on Monday. "This environment is a very different one where you have upset the global equilibrium...The reverberations will continue, and you will have a lot more volatility than you are used to."

On the plus side that could mean a run of productivity- enhancing developments that keep U.S. growth and wages rising fast; the risk is higher inflation that could upend the Fed's current expectation that price pressures will ease on their own and allow for continued loose monetary policy.

hawkish-bullard-sees-more-volatile-economic-regime-emerging

kings53man

Debt ceiling discussions in Congress should be discontinued. Congress (both parties) knows very well that we will breach it when we hand out goodies & don't balance it with revenue increases. It moves from one hand to other so it is like funny money.

LewisBraham

The Multiplier Effect is not funny money: https://investopedia.com/terms/m/multipliereffect.asp

msf

Here I was all set to go with CBO scoring, PAYGO, ten year deficit neutral budgets, how waivers circumvent that (e.g. allowing the 2017 tax cuts despite their soaring deficits). And how there's a fundamental disconnect between the debt ceiling and budgeting, since the former is retrospective (must pay for money already spent or committed) while the latter is prospective.

https://budget.house.gov/publications/report/faqs-paygo
https://www.vox.com/policy-and-politics/2017/11/14/16651184/gop-tax-bill-medicare-cut-paygo

Then you give a good, terse, two word response: "multiplier effect".

bee

Not part of the infrastructure vote:

Democrats did not include an increase in the federal debt limit, which will have to be passed soon after Congress returns to work next month, along with a stop-gap spending bill to keep the government open after the fiscal year ends Sept. 30. That means an increase in the debt limit would not be eligible for the lower simple-majority threshold for budget-related legislation and be vulnerable to a filibuster unless at least 10 Republicans and all 50 senators who caucus with Democrats vote to limit debate.

biden-s-expansive-economic-agenda-teed-up-for-senate-endorsement

davidrmoran

I am interested also in the nonmonetary 'multiplier effects', retrospective reimagining of other outcomes and projected paths for current policy decisions:

https://messaging-custom-newsletters.nytimes.com/template/oakv2?campaign_id=116&emc=edit_pk_20210810&instance_id=37566&nl=paul-krugman&productCode=PK&regi_id=22268089&segment_id=65854&te=1&uri=nyt://newsletter/2ec0aedf-343d-5cee-8f35-687fb996a3fa&user_id=83d45440ead1d14c2a89a1e7221337d1

Crash

"...Basically, enhancing the social safety net for children is an investment in the future, and the available evidence suggests that it’s an investment with high returns..." Why just kids????? SINGLE PAYER HEALTHCARE!!!!! Ah, but too many goddam vested interests. Yes. That's right.