Friday, March 1, 2013

Some Facts

I'm no Nobel Prize winning mind, but when yet another Nobelified economist says everything I've thought was true about our economic situation, I begin to think I might be right. It's so succinct I'm reprinting it in full, possibly breaking a rule, if not a guideline. It's by Robert Solow, appearing here, in the NYT:

THE significance of America’s national debt is a serious question, but you would not know this from the current political rhetoric, which consists mostly of vague apocalyptic warnings. I want to present a calmer view, by emphasizing six facts about the debt that many Americans may not be aware of. 
Roughly half of outstanding debt owed to the public, now $11.7 trillion, is owned by foreigners. This part of the debt is a direct burden on ourselves and future generations. Foreigners are entitled to receive interest and principal and can use those dollars to acquire goods and services produced here. If our government had used borrowed money to improve infrastructure or to improve the skills of workers, the resulting extra production would have made repayment easier. Instead, over the last decade, it used the money for wars and tax cuts. 
The Treasury owes dollars, America’s own currency (unlike Greece or Italy, whose debt is denominated in euros). So the Treasury can always make payments when due — unless it is prevented from doing so by political blackmail over the statutory debt limit, which is now due to be reached in May. Notwithstanding the unprecedented credit-rating downgrade by Standard & Poor’s in 2011, no foreign lenders realistically expect us to default. If they did, they would be insisting on higher interest rates, which they aren’t. Of course, if we were stupid enough to default even once, the cost of borrowing would go much higher, for a long time. 
One way to effectively repudiate our debt is to encourage inflation. When prices rise, interest and principal are repaid in dollars that are worth less than they were when they were borrowed. (This applies to Treasury’s borrowing at home as well as abroad.) The Federal Reserve has promised to keep buying bonds and to maintain near-zero interest rates until unemployment eases, a strategy that some fear could lead to uncontrolled inflation, though there is no indication so far that that will happen. 
Treasury bonds owned by Americans are different from debt owed to foreigners. Debt owed to American households, businesses and banks is not a direct burden on the future. Of course the payments of interest and principal are a burden on current and future taxpayers, but they will ultimately be received by American people and organizations, many of them taxpayers. Some of our grandchildren would be paying off others of our grandchildren; the result will be a net transfer from American taxpayers to American bondholders. 
The real burden of domestically owned Treasury debt is that it soaks up savings that might go into useful private investment. Savers own Treasury bonds because they are seen as safe, default-free assets, and the government can borrow at lower rates than corporations can. If there were less debt, and fewer bonds for sale, savers seeking higher returns would invest in corporate bonds or stocks instead. Business investment would expand and be more profitable. 
But in bad times like now, Treasury bonds are not squeezing finance for investment out of the market. On the contrary, debt-financed government spending adds to the demand for privately produced goods and services, and the bonds provide a home for the excess savings. When employment returns to normal, we can return to debt reduction.
In the long run we need a clear plan to reduce the ratio of publicly held debt to national income. But for now the best chance to reinvigorate the economy, spur business investment and encourage consumer spending is through public borrowing and spending. Instead, we’re heading into an ill-advised, across-the-board austerity program. (Bold, of me.)
Can't comment on the inflation part, which seems like a sword with at least two edges; but the rest makes sense.

[Image source]


AlisonH said...

Thank you. I read the NYT but I'd missed that one. If we keep spreading the common sense of sound economics around, maybe it will win in the end.

Anonymous said...

read some of bruce bartlett's articles on about how BHO's stimulus was poorly planned & implemented. leadership is finding the best people with the expertise to get the job done. this is especially true when borrowing large sums of taxpayer dollars (and expending immense political capital in the process) to stimulate the economy out of a recession.
you and i are part time wanna-be economists, yet we are able to find the academic research on past stimuli with a few key strokes on google.
"Bruce Bartlet + Stimulus + Obama"

interestgly, military spending is one of the largest "bang for the buck" and FASTEST stimulators. which candidate wanted to increase military spending & which one opted for "shovel ready jobs"? an apprentice contractor knows that big construction projects take years to implement


p.s. this is not an endorsement of R's.

Sid Schwab said...

I've often thought that the reason Rs are so hung-ho about military spending isn't their claimed tough-guy America fuck-yeah-ism, but their way of acknowledging without acknowledging that government does, in fact, create jobs.

The question is whether, in the long run, we're better off spending the money on military-created jobs, or ones that build roads and schools and dams and, oh, pipelines. Wars happen in a hurry, of course. But roads? Seem worth waiting for.

Anonymous said...

military and social/education/infrastructure spending arent mutually exclusive apparently. this approach would have been a good opportunity for BHO to give R's political cover to support stimulus w/o angering their base & maybe even making a larger stimulus politically feasible. the added benefit would have been the high muliplier effect enjoyed by true military spending along with the delayed benefits of infrastructure/education spending.


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