Deficits Are Not Always Bad, But They Always Matter
Pete's post on "Deficits Matter" discusses the impact they may have on future interest rates if debt becomes high relative to GDP. I contend that even if deficits never had an adverse impact on interest rates, they are still critically important as a matter of policy. Even if they don't matter for efficiency, they always matter for equity. The debt one generation of taxpayers runs up must be serviced or repaid by a subsequent generation.
There have been times in our history -- typically post-war periods -- where one generation has issued the debt and then quickly repaid it. In those cases the deficits were completely appropriate. But what countenances the increase in debt over the last decade? If we want to issue debt to overcome our problems in the financial and housing markets, that is fine as long as we intend to pay it back quickly. But it's clear that we don't -- the Obama administration has announced a target of reducing these bloated deficits in half in five years. That means that we are running these deficits even as the economy is projected to be growing again. That's just as pathetic, but on a much larger scale, than the budget target we had under the Bush administration. And, of course, long-term entitlement programs like Social Security and Medicare, where promising ourselves benefits at the expense of future workers and taxpayers is an embedded design feature, carry even larger burdens for future generations.
On Monday, the Rockefeller Center hosted a panel with the title, "Debtor Nation: The Threat to America's Future." I was one of the panelists, along with my colleague Jonathan Skinner and Jim Poterba of MIT. Here's a write-up in the campus paper, and the video will be posted shortly to this YouTube channel.
Great article and interesting
Great article and interesting website.
Serviced and -owned- by the future generation
I believe that there is not enough attention paid in these sorts of articles to the fact that the debt is not only serviced, but that the paper is also -owned- by the future generation.
Someone in the hypothetical "future generation" will be receiving the payments on that debt.
Now, that may be too concentrated in Chinese hands for our liking, or too concentrated in the hands of "the rich" for our liking, but that is fundamentally a -current distribution imbalance-, not an “intergenerational imbalance" and should really be talked about in those terms.
This point is well summed up over at the the Mosler economics blog.
Regards, Jonathan.
The net result is the same
The argument in the post is that the reason why deficits matter is that they increase the resources available to the current generation and reduce the resources available to the next generation. That's reasonable public policy if the current generation makes investments whose benefits will redound to those in the next generation. It's loathsome public policy if the current generation uses the resources to clean up its own mess without then taxing itself to pay down the debt.
If you continue to follow the money in your story, the owner of the debt in the future generation will have had to pay money to someone in the current generation for the privilege of owning it. The transfers you identify in your comment -- between members of the future generation -- do offset each other (excecpt for the distortionary taxes that must be levied to effect the transfers). But the transfer of resources that the future owner had to make to the current owner is not offset.
Thank you for responding
Firstly, and most importantly, thank you very much for responding. I have been following your blog for some time now and find it very informative and educational.
One point I want to make first off, is that the points I am attempting to make are not initially my own. Like many, I am an avid reader of those much smarter than myself. The views I am attempting to express I believe originate at the www.moslereconomics.com blog site and many points are very well articulated on the www.winterspeak.com blog.
I fully agree that excess consumption today, causing an inefficient allocation of resources, will impact the production capability of mankind tomorrow (spending on McMansion and gas guzzlers negatively impacts future generations, no doubt). And the extent to which that is exacerbated by a deficit is undesirable.
I would push back a bit on one side point you make, though, that the future generation necessarily has to pay money to the current generation to own that wealth. Surely, eventually the current generation just dies and all the real wealth is then transferred in some way to the future generation (government, charity, undeserving kids, whatever)?
Really, the reason I commented was that I would very much like to get your thoughts on a much more interesting topic, IMO. That is the assertion that the deficit should equal the desired quantity of private savings and should expand so long as the desired quantity of private savings is expanding. The suggestion is that any other state of affairs will cause unnecessary unemployment or inflation. These points are argued very persuasively at http://www.winterspeak.com/2009_01_01_archive.html (about 1/5 of the way down, entitled NYTimes 1, Chicago 0). I believe that this is likely a key insight that is essentially never discussed in the MSM.
Regards, Jonathan.
Re: Thank you for responding
I would push back a bit on one side point you make, though, that the future generation necessarily has to pay money to the current generation to own that wealth. Surely, eventually the current generation just dies and all the real wealth is then transferred in some way to the future generation (government, charity, undeserving kids, whatever)?
Well, say today national income goes 80% to consumption and 20% saving which is invested.
I. With a balanced budget, the 20% saved goes into creating productive assets, capital, for the future (factories, R&D, schools, financing education, starting new businesses, whatever) ... and the servicing cost on the debt (interest, etc.) will be paid back by the borrowers who benefit from the borrowing, so the financing overall is win-win.
But then say the voters today decide to consume more -- after all they have the votes to do so! -- so they commandeer half the saving thru govt borrowing to pay for them to have, say, a Faberge egg throwing party with all the beer they can drink. Fun! Now...
II. With the deficit spending, and half the 20% saved spent on govt consumption on behalf of partiers:
(1) Only 10% goes into creating future productive assets, capital, so such is halved, and there will be less capital wealth in the future, and
(2) Payments to service the borrowing comes from a later generation of taxpayers who did not benefit from it (they weren't invited to the party) this is a pure loss to them, making the loan servicing loss-win (taxpayer-lender), and
(3) Taxes needed to service the debt impose a deadweight loss on the economy. And when taxes are increasd to cover this new cost, the deadweight loss increases not merely with the tax rate but by the square of the increase in the tax rate (if tax rates double, the deadweight loss they cause quadruples). A bad deal!
That's three ways how deficit spending to finance consumption today makes the future a poorer place.
the assertion that the deficit should equal the desired quantity of private savings
Mosler, eh? I had some fun exchanges with him back in my usenet days. Still around and peddling "deficits create savings", is he?
The blogger you refer to there, among other mistakes, seems to be confusing an identity with a model, and claiming the model is wrong to refute the identity. But the identity can't be wrong, it is definitional.
Here's a tip: When every econ textbook in the world, written by from Krugman on the left...
"The most basic point to understand about savings and investment spending is that they are always equal ... This is not a theory, it is a fact of accounting called 'the savings-investment spending identity.'"
... to Mankiw or whomever on the right, includes the same identity, while a blogger says it is wrong ...
"So, if you acknowledge that savings does not equal investment..."
... it's really very probable that it is the blogger who is wrong. Occam's Razor.
cut what in half?
"...the Obama administration has announced a target of reducing these bloated deficits in half in five years. That means that we are running these deficits even as the economy is projected to be growing again. That's just as pathetic, but on a much larger scale, than the budget target we had under the Bush administration...." [my emphasis]
~~~
Right. The Bush adminstration promised "to cut the deficit in half", and was ridiculed from the left. Only half?
Obama now promises "to cut the deficit in half", from 13 POINTS OF GDP. This is supposed to be responsible?
Let's put the Obama deficits in perspective.
The Bush deficts, after his 2001 tax cut, giving no credit for his 2001 surplus, totaled 17.5 points of GDP over seven years, 2.5% of GDP average.
CBO puts this year's deficit alone at 13 points, projects the four year total deficit for Obama's first term (2009-12) at 33.3 points of GDP, then for his presumptive second term adds 17.6 points more. That's 51 points of GDP in deficits that Obama's budgets are planning to give us in eight years. An average of 6.4 points.
Now, all the infamous deficits of Ronald Reagan (who started off with a recession as bad as today's if not worse, 10.8% unemployment) totalled 34 points of GDP in eight years, 1981-1988.
Yes, Obama's projected eight-year deficits are as large as all the historic Reagan deficits and those Bush deficits combined! (Well, to within less than one point of GDP.) Obama is planning in just two budget-busting terms to match the four most budget-busting terms in our nation's history, combined.
Obama's smallest projected deficit over eight years is 4.1% of GDP (in 2013, then they start growing again, forever). Bush's biggest deficit in his eight years was 3.6%.
In short, it's well nigh time for people who affect concern about the national debt to stop looking backward and moaning about the relatively small Bush deficits and start looking forward at (and maybe pulling their hair out over) the far huger, record-smashing Obama deficits.
When are the people who bashed the Bush budgets for being so irresponsible going to take note of this?
(EconomistMom is beginning to, now referring to the "Bush-Obama tax cuts", but I've seen precious little note elsewhere.)
http://zero4file.com/
Even if they don't matter for efficiency, they always matter for equity. The debt one generation of taxpayers runs up must be serviced or repaid by a subsequent generation.
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