Data on the Debt

So far, my foray into the world of the national debt has consisted of this:

One of the curious things about the debt scare that is building in the media is that it is happening at a moment when long-term interest rates are very low. In other words, it’s based on a theory that the market is wrong in its collective assessment of the debt situation. I’ve heard this blamed on “non-economic actors” (that is, foreign governments that buy U.S. Treasuries not as a good investment, but for political reasons), or on a “carry trade” where investors are exploiting the steep yield curve (free short-term money, positive long-term interest rates), as Paul Krugman discusses here.

Menzie Chinn crunches some numbers. He takes a model that he and Jeff Frankel created several years ago to estimate the impact on interest rates of inflation, the future projected national debt, the output gap (economic output relative to potential), and foreign purchases of Treasuries. That last term is important, because the oft-heard fear is that foreign governments will suddenly stop buying our debt.

Using the future growth in the debt projected by the CBO, this model predicts that real interest rates will … go down by 7 basis points over the next year, assuming foreign purchases of debt are constant. The reason the impact of the debt is so small is that it’s already priced in; since the looming debt is no secret, it should already be showing up in the data.

The counterargument is that it hasn’t shown up in the data because of the “flight to safety” and foreign governments’ irrational purchases of Treasuries. So Chinn also looks at what would happen if foreign purchases of U.S. debt fell to zero, nada, zilch (which is an extreme scenario). In that case, interest rates go up by 1.3 percentage points. That’s not nothing, but it still keeps interest rates at reasonable levels by historical standards. In addition, the CBO is already incorporating higher interest rates into their forecasts; they expect the 10-year Treasury bond yield to go from 3.3% in 2009 to 4.1% in 2010, 4.4% in 2011, and 4.8% in 2012-13, and that’s built into their projections of future interest payments.

So I’ll say again: none of this is good. But if we’re going to make important policy decisions based on fear of the debt, we should have a rational way of thinking about the impact of that debt rather than just fear-mongering.

As for me, this is far from my area of expertise, but the first thing that comes to mind as far as a solution is some kind of binding commitment (or at least as binding as out government can make it) to raise taxes (or undo the Bush tax cuts) when the economy has fully recovered according to some objective metric like the output gap. That and, of course, fixing the health care system.

Updates: Whoops! Link fixed. Also, a reader says I should include the caveat from Chinn’s post:

“These estimates were obtained using data that spanned a period without extraordinary Federal Reserve credit easing, and in the face of an unprecedented financial collapse. And, the relationship is not precisely estimated.”

This implies that the model may not be accurate. On the broader issue, it’s not as if quantitative easing is a secret, nor is it a secret that it’s going to end sometime in the next few years. So this isn’t something that investors in 10-year bonds don’t know about.

By James Kwak

38 responses to “Data on the Debt

  1. “Non-economic actors”, that’s good. I thought according to their ideology everyone is always by definition a rational market actor, guided by the invisible hand.

    Is that their non-falsifiable heads-I-win-tails-you-lose dogma scam – any noise in the data, any contrary evidence, is simply excluded as “non-economic”? Excellent. Very scientific.

    So I’ll say again: none of this is good. But if we’re going to make important policy decisions based on fear of the debt, we should have a rational way of thinking about the impact of that debt rather than just fear-mongering.

    I don’t think anyone is trying to be rational here. Fear-mongering is the point. (Krugman put up a blog post comparing this to the buildup to Iraq. If I recall correctly he used the word “uncanny” to describe the resemblance.)

    The point is to conjure some economic scare to justify radical steps forward on the neoliberal agenda, namely gutting Social Security and other spending.

    I’m starting to think this is an only-Nixon-could-go-to-China thing. Only the Democrats, still believed by many who haven’t been paying attention to be the party of the people, as opposed to the Republican party of greed, can carry out the most extremely radical elements of the feudalist agenda.

  2. Does it occur to any other regular readers of these posts that the underlying problem is income inequality?

    For instance, the debt—it is large, maybe not unmanageably so, but eventually we have to pay it back. This means money from taxes, but now tax revenues are down. The middle class is squeezed by unemployment, stagnant wages/living standards, and so on. So where is the money going to come from? It is going to have to come from the people who have the wealth. Ever increasing taxes on the shrinking middle class, and ever higher sin taxes on the lower class, just won’t fund the kind of society we want to live in.

    Eventually we have to face the fact that a democratic, free market society doesn’t function well, doesn’t efficiently allocate its capital, when too much of that capital is concentrated in too few hands. Too much concentration of wealth seems, to me at least, to conflict on a structural level with both democracy and a free market economy. A certain degree of equality among citizens, conceptually and at least to some degree practically, is essential for democracy. Similarly, a free market requires competition etc.. But what we have seen very clearly over the past eighteen months is that the banker class, because of their extreme wealth, control both the government and the market. Until that changes, how will the problems it has caused ever be fixed?

  3. The government plans its expenditures long time in advance, and once it fixes such plans, it is difficult to change them. So the risk here IMO is in the following potential dynamic:
    - In January-2010 the government announces its second stimulus package, which will start in June-2010 and will extend through June-2011
    - The long-term yields start rising in Spring of 2010, reflecting rising long-term inflationary expectations.
    - It will be close to impossible to counterbalance these expectations: you can’t undo the stimulus package, you can’t attempt to monetize the debt again because it would fuel the inflationary concerns, and you can’t raise interest rates when the unemployment still is in double digits.

    People who argue that inflation is impossible when the unemployment is so high should only think of stagflation in the US or any number of developing countries.

  4. “One of the curious things about the debt scare that is building in the media is that …. it’s based on a theory that the market is wrong in its collective assessment….”

    Surely not!!!

  5. If the critics of debt growth were being honest, they would understand that the best way to pay off the increasing debt is to grow the economy at such a rate that tax receipts increase dramatically. When consumer demand is near nothing, government investment is the surest way to create demand. The safest way to exit large debt levels 5-10 years from now is to have consistent growth in the now to 5-years-from-now period.

  6. One of the curious things about the debt scare is that nobody is telling how and who will pay the debt back. As you said is not about really about sustainability, manageability but who is going to bear the burden of increasing taxes to pay the debt back. Unless those economists will say simply that the debt is sustainable because nobody will pay it back and nobody cares of doing it…

  7. The U.S. Government is never going to “pay back the debt.” It didn’t borrow the money in the first place – it created it. The only limitation on Government debt issuance and level is inflation.

    Debt the U.S. incurred in WWII was never “paid back.” The economy grew fast enough post-war that the debt to GDP ratio decreased. The absolute amount of debt decreased only very slightly when the Government ran a surplus. Which was very little and not often.

    The U.S. can’t run a $500 billion dollar per year current account deficit, a Government budget surplus, and grow the domestic economy all at the same time.

  8. “Assume the economy starts growing again”

  9. The Menzie Chin link points back to Krugman — you may wish to correct that.

    Otherwise, Chinn (or someone using a similar model) needs to calculate the effect on rates if foreign governments don’t just stop buying Treasury debt, but actually start dumping all the debt they have thus far accumulated. That’s what the fear-mongerers want us to worry about. That _could_ have a significant effect on rates, but Treasury and Fed could probably retaliate if they had spines.

  10. Nobody can tell what will happen to interest rates. Mining past data to predict future events has created most of the problems we now face. Private debt was the problem from 1994 to 2008. It spiraled out of control because all the experts ‘knew’ it would never be a problem.

    The next gaming strategy involves public debt. It’s size doesn’t matter because we never pay it off. The go’mint is free to continue fueling speculation with interest free loans and to absorb toxic assets on the fed balance sheet using ‘fair value’ accounting. The go’mint is also free to finance freehand nit wit sch emes to create jobs for those left out of the shrinking real economy. No one bothers to wonder what sort of sch emes we will get from the shy sters who created this mess over the past twenty odd years all of whom are still in power. No one admits that the stimulus is just another looting operation from which we are supposed to look away because people need the work.

    The real economy remains com atose because speculation remains the only sensible use for all the bank money created during the past year. Speculation is a zero sum game. Leverage makes disaster inevitable. After the bubble inevitably bursts, all the go’mint debt will remain and asset values will have shrunk even further.

    What will all you Keyenesians suggest then?

  11. Two basic points.
    1) you’re raising the point about market being smart enough to make good judgements about interest rates, in the wake of the internet bubble, housing bubble, bizarre mortgage derivative instrument blowups, etc.

    2) the US has very large looming entitlement expenditures, it’s showing signs that it can’t reform itself in medical and financial areas becasue of vested interests paying off the political structure, its showing signs of a lowering of economic growth rates going into the future due to existing concumer debt loads, high unemployment and continung loss of manufacturing…. etc.

    Are you sure your argument is intelligent?

  12. The debt scares me less than the fact that we got into all this debt without creating any jobs. In fact, we got into this terrible debt and concurrently saw the loss of millions of jobs.

    There is no way we’ll be able to claw our way back to economic health without job creation. I’m not seeing how funneling billions to the financial sector has done/will do anything to foster job creation.

    How has the country benefited from the enormous investment we made in the financial sector a year ago? To say the bailout made it “less worse” is not a valid argument in a year when we’re seeing highest unemployment in decades, a record federal deficit, no hope for job creation coming from any pundit anywhere.

    But we ARE seeing record bonuses for Wall Street. So are we still waiting for “trickle down” to happen?

    Maybe someday Lloyd Blankfein will explain how “god’s work” can be utilized to actually create jobs, not just bonuses for his bankers.

  13. This implies that the model may not be accurate.

    An inaccurate macroeconomic model based on aggregate numbers?

    *black swan flies by*

    So this isn’t something that investors in 10-year bonds don’t know about.

    Rational expectations?

    *black swan flies by the other way*

    The real economy is grinding to a halt (look at credit to small business.) Japan went to 200+% GDP and only managed to draw out the precursor to their Great Depression by selling into The Greatest Credit Bubble In Known History. Now they are tipping over the cliff anyway.

    The “Government debt doesn’t matter” crowd is right. Just not in the way they think they are.

    Cheers,
    Carson Gross

  14. Debt has to be put into context, the total world’s debt can be repaid … how, exactly? Is a quadrillion dollar economy feasible?

    How can the US debt can be repaid? Isn’t non- payment what the on- running mortgage crisis all about?

    Just because US debt is denominated in dollars, how can repayment in dollars – which are lent into existence – be repayment? Doesn’t actual repayment require more of a barter transaction; a good or service in return for satisfying the debt?

    Where are the goods and services going to come from? China? Saudi Arabia?

    When does the invisible hand become the invisible whip hand?

    How will $12 – $15 – $25 trillion in debt be serviced? I know, interest rates are very low and Fed can always lend more interest dollars into existence. Will interest rates remain low forever? What about next year, next month? What will a rise in interest costs to historical levels do to the Federal budget?

    Certainly, money costs cannot remain near zero forever! Japan has done so for twenty years … with a balance of trade surplus. Where is the US balance of trade surplus?

    What kind of market do you have where the participants are the Fed and the Treasury? Aren’t private bond owners net sellers to the Fed, now? Where is price discovery going to come from? Do we WANT price discovery and if we don’t how can price discovery be avoided?

    Isn’t debt just a way of evading hard truths and putting off decisions into the future? Why does evasion have to be the centerpiece of government policy?

    Is debt a substitute for energy? Oil prices have risen 600 percent since 1998, can you put debt in your fuel tank? Or will more and more debt make fuel price matters increasingly worse?

  15. James,

    What you seem to be saying is that:

    A. The Fed isn’t really buying up gobs of Treasuries.

    Or:

    B. The public debt can keep growing at a historically rapid pace without consequence.

    it is one thing to say deficits aren’t harmful when they are 2-5% of GDP. It is quite another when those same deficits are 15% of GDP and possibly growing as far as the eye can see.

    Anne is quite correct. Unless we find a way real soon to create real, sustainable private sector jobs, we will never be able to grow our way out this debt hangover as we have in the past.

  16. I’m an intellgent layman, and I’d love to see someone (Krugman, Judis, James) address this issue head-on. Real economic expansion has to come about primarily by producing things. It’s all well and good to talk about how Keynes ultimately triumphed in the 1930′s-1940′s, but historically, it seems we forget that (a) the productive capacity of a good chunk of the rest of the world was devastated, and (b) another sizable chunk was being used/destroyed/not deployed for profit in a futile attempt to win an ideological battle, and (c) controls (i.e. Bretton Woods) were placed on the movement of capital. Due to all of this, the US was the producer of choice, and much of that profit remained here.

    So, since (a) and (b) and (c) do NOT appear to be true in the present situation, how exactly is “real” productive work from real capital investment going to “rematerialize” in the US economy? It’s nice to look at historic patterns, but I can’t help but worry that one has to look at the history, too.

  17. Let me echo many people here…

    It’s not about the Debt, so much as what we _got_ for it.

    It’s not about the deficit, so much as what we’re _getting_ for it.

    Our problem is that we are consuming, rather than investing. We are importing, rather than producing.

    The Keynesian argument is a story about society _consuming_ too little. The arguments about low utilization rates, unemployment, multipliers, etc… Are a story about underconsumption. Certainly at the height of the panic, one might have made this argument – largely because of the Fed’s inadequate monetary response.

    But FUTURE stimulus, and future deficits, should not be used to fund consumption. They should be used to fund investment. Massive, long time horizon, import-substituting, energy-saving, technology-advancing, environmentally sound investments.

    If we were in a situation where we couldn’t find anything useful left for government to invest in (we had no oil dependence, CO2 was down, our bridges and subways and rails were all top notch, our energy grid was sound and efficient and robust against black-swan events, we had achieved food security, etc.) AND we still had diminished capacity utilization AND the dollar wasn’t overvalued relative to any other currencies, then sure, we could argue that we are consuming too little. But most Americans are finally starting to realize we’ve been consuming too much. They know this in their gut.

    But Krugman et. al. keep framing the deficit argument in terms of under-consumption, even though the critical issue is under-investment (and the savings/investment gap).

    So when non-experts hear the pro-deficit greater-consumption arguments they just gets the sense that these economists are all confused, they have a point. Until the arguments begin to center around consumption vs. investment, the entire deficit debate is flawed.

  18. This seems to be part II of the GOP plan. Part I exceeded beyond there wildest dreams as they spent the US government into massive debt while wrecking the economy. Now it is time to pay the piper and shrink government to, oh I would say about 1832 when Jackson paid off the national debt and vastly shrunk tax revenues along with spending.

  19. StatsGuy,

    “The Keynesian argument is a story about society _consuming_ too little.”

    Maybe this is why the introduction to Hyman Minsky’s book on Keynes includes the bon mot that Minsky and Keynes shared a common trait – neither economist was a Keynesian.

    My reading of the “General Theorem” is that it is about shocks to GDP/income, the reasons why the Market doesn’t return to the neo-classical equilibrium of full employment after the shock, and what to do about it. I think Keynes had the intelligence to adapt to circumstances, although some of his followers may lack this ability.

    I think you are 100% correct about investment. Consumption is down/saving are are up a bit. Investment fell off a cliff. Just like 1929-1937. Investment is the key to recovery, meaning full employment and a steady or rising real wage for the middle-class. Consumption can’t get us there.

    “If we were in a situation where we couldn’t find anything useful left for government to invest in…”

    All the items you list are great ideas. Are you advocating direct Government investment via a jobs program or grants to private firms? After 30 year of supply-side denigration of Government, it would be politically very difficult for the Government to take a constructive role in direct investment. It seemed to work in the 1930′s though – Oregonians have enjoyed the benefits of cheap, carbon-neutral power for decades thanks to a system of Government-built dams on the Columbia River.

  20. Either I missed something or the maturity of the debt wasn’t addressed. It is borrowing, and with that comes interest payments. Right now the rates are low, and if it is all longer maturity it might be fine and dandy. However, if it is mostly short maturity and rates go up, the cost of rolling it over goes way up with little warning. This is the problem that worries me. Debt costs money in the long run, even though it spends like cash. There is a tipping point where debt costs more than the benefits are worth, and I think we’ve passed it both on the “consumer” and public levels.

    The other issue that the public is starting to realize (IMO) is that some of the same fine folk that benefitted from the bailouts are also the recipients of large US Sovereign debt interest payments.

  21. That’s a good question OregonGuy, and something I’ve wondered too. For all those economists out there who think innovative monetary policy like quantitative easing is the best solution to arresting economic decline, I have a few questions:

    1) Where does all that new money go?
    2) Who spends it?
    3) Who’s to say it will be spent well?
    4) If the public created it shouldn’t the public have a say in how it gets spent?

  22. This is really a terrific post James, and a great link to Menzie Chinn. This thing with the inaccurate perception of the debt is a problem very few people seem to be getting now. And you frame it perfectly–yes the debt is a big problem, but we need to see WHY the numbers have jumped as a percentage of GDP, and the REAL cause of that jump has little to do with President Obama. I don’t read everything, but Krugman is the only other commentator that I have noticed has gotten this important ASPECT of the debt.

    As long as you keep it within the frame that something needs to be done long-term about the debt problem, you cannot hammer this point enough James. You should keep hammering this aspect again and again.

    TERRIFIC post by James Kwak.

  23. “”” It’s not about the Debt, so much as what we _got_ for it.

    It’s not about the deficit, so much as what we’re _getting_ for it.

    Our problem is that we are consuming, rather than investing. We are importing, rather than producing.
    “”””

    Exactly. Borrow money to become educated, more productive, build P&E; or borrow money for flat screen TVs and to eat your way into obesity (with attendant medical expenses, of course).

    We needed a stimulus jolt to stop the free fall and avoid hysteria feeback, but going forward….?

  24. Many people know that most of the deficit is due to lack of revenues, versus added spending. No epiphany.

    Should we consider stimulaing a new round of adding more fast food productivty, McMansion building, gucci bag buying as what will pull us out of our problems?

  25. I think we have to distinguish between criticizing the various measures designed to prop up the banking sector and criticizing the stimulus package here. By far, more money has gone to bail out TBTF institutions. Mostly I feel that money could have been put to better use so I have no problem with over the top criticisms. I’m not so sure about criticisms of the stimulus package though. Most of the stimulus package went to A) tax-cuts, B) aid to states, and C) unemployment insurance extensions. In my mind those are all pretty good things (A less so than B or C). Looking through the stimulus package:

    http://online.wsj.com/public/resources/documents/STIMULUS_FINAL_0217.html

    I certainly don’t see any provisions for “fast food productivity, McMansion building, or Gucci bag buying.” Could the stimulus package have been more focused on long-term infrastructure, type investments? Absolutely. But the fact is Democrats took a lot of heat from Republicans for trying to include provisions that would not have immediate short-term effects. Some of that criticism was probably legitimate. Our economy certainly does have to shift away from being so dependent on consumption, but that’s going to be a very gradual process. In the mean time a certain amount of stimulus is going to be necessary to maintain consumption. Has the Obama administration struck the right balance? Probably not. But unlike us in the blogosphere President Obama and the Congressional Democrats live in the real world. In the real world things don’t always go according to plan.

  26. “” I certainly don’t see any provisions for “fast food productivity, McMansion building, or Gucci bag buying.” “”

    Ah, well you see I didn’t actually mean that “literally”. But why don’t you tell us what proportion of the stimulus money, including the bank bailout, has been directed toward re-industrialization, and in what sectors?

  27. I’m excluding the bank bailouts. I agree with you 100% that most of that money could have been put to better use. As for the stimulus package and re-industrialization; here are some of the bigger #’s (in millions):

    $4,350: Grants to provide wireless and broadband infrastructure to communities, including public computer centers and sustainable adoption of broadband service

    $3,000: National Science Foundation research, construction of new research equipment and facilities, and education activities.

    $5,000: Home weatherization grants to low and middle-income families

    $2,000: Advanced batteries manufacturing grants

    $4,400: Modernization of the electric grid

    …There’s lots more. Go to the website yourself and see. Is this enough? Not at all. Especially not when compared to the amount of money spent on bailouts for Wall Street firms. In fact, you could make a much stronger criticism of my previous post by claiming Obama’s real plan is just to save his banker friends. In that sense things might be going exactly according to plan. But that misses the point. The point of the stimulus was to stabilize aggregate demand. Like it or not, stabilizing aggregate demand is going to require subsidizing consumption. Over consumption is a problem, but unfortunately it’s a problem that’s going to have to be with us for a long time.

  28. Sorry, I misread. You asked for proportions, not numbers:

    http://manyeyes.alphaworks.ibm.com/manyeyes/visualizations/obama-stimulus-bubble-chart

    9% for infrastructure
    9% for energy
    3.5% for environment
    3% for science/technology

    I don’t know if you count education as money towards “re-industrialization,” I guess it depends how that money is spent.

  29. NMKlein, these are good points, but it’s important to distinguish between the structure of the Stimulus package, and the structure of the Deficit/Debt overall. The latter, projected out 10 years, derives largely from consumption focused activities – by which I include transfer payments (including much that is healthcare related) and military expenditures. Look at US expenses:

    http://en.wikipedia.org/wiki/United_States_federal_budget (doesn’t include special appropriations for wars)

    Only 17% is discretionary – and only a portion of that is real investment. 21% is military, and you can argue that some of that is investment. The vast majority of that it is consumption, regardless of the various “spinoff” arguments. 21% Social Security (and rising). 23% Medicare and Medicaid. 10% Other Mandatory. ALL of the latter three – that’s 54% of the current budget – are essentially entitlement programs. And that’s not even counting the part of the 17% that’s really entitlements (by which I include much of the subsidies for the overpopulated US prison system).

    Currently, Social Security is generating a surplus but projected to start generating a shortfall for 50 years starting soon (the date gets sooner the longer the recession/sub-par recovery last). Medicare is just a disaster, which has been covered elsewhere. Sustaining that level of consumption comes at the expense of paying down that debt which swallows 8% of national income in interest (which is incredibly deceptively low… because the term-structure of US T-bill debt shortened under El Presidente Bush’s banana republic policies, and the low-low-low rates of today could significantly increase in 5 years; the current treasury is going to spend the next 5 years trying to lengthen that term-structure to be more resilient, which will increase debt servicing costs – and, of course, Obama will be blamed even though this is really because of Bush. Right about now, a quote about “Sins of the Parent” is appropriate).

    In order to increase the measly 17% that is discretionary (which funds our real investments), we really ought to trim some of that 54% entitlement and the 21% (+special appropriations) for military. But Krugman doesn’t want to talk about that. Actual _cuts_ to transfer programs are non-starters, and unfortunately Social Security is indexed to inflation. (Economists like to talk about de-anchoring, which is the change in the structure of financial activities that indexes economic transfers to expectations of inflation – using that jargon, Social Security/Medicare is the most de-anchored part of our entire economy. In other words, when we use monetary policy to inflate the dollar, we devalue our debt, BUT we do not devalue our entitlement program obligations, which are actually worse than the debt. So we squeeze the productive part of our national expenditures – the puny 17% – and continue to bloat the unproductive part that goes to funding consumption-supporting transfer payments.)

    Those economists and pundits who will say that America is wealthy and can easily afford all this are ignoring prime evidence to the contrary – our extreme trade deficit. Some point to our low t-bill rates as evidence we can continue debt-financed-consumption, but these are being artificially supported. The weak dollar is additional evidence of the threat (but don’t confuse causality – the dollar may need to drop more).

    But as the dollar drops, inflation may go up due to our dependence on imports – which will force working families to cut expenses, BUT which will increase outlays to inflation-indexed transfer programs (and other transfer programs like Medicare that go up faster than inflation). This will create a deeper shift from producing families to consuming entitlement programs – and, wouldn’t you know it, that will happen _right_ when the Baby Boomers (who incurred a huge debt to fund their Bush tax cuts) all retire. What curious timing!

    Is this an anti-Social Security rant? No. It’s an anti-index-to-inflation-for-entitlement-programs-when-there-is-a-demographic-age-bubble-that-left-a-huge-debt rant. Especially when the average MEDIAN wage for workers is flat to declining in real terms.

    PS, don’t confuse median wage with median household income… the latter has increased slightly as we get more two-income households and primary earners working multiple jobs (but doesn’t account for things like increases in childcare expenses).

    http://www.epi.org/page/-/old/images/JB_21st_century_workplace_testimony_Fig1A2.jpg (only extends to 2004)

    Also, if you blame Obama, then you are only about 5-10% right… It was Bush&Cheney.

    The primary blame Obama owns is the failure to fully repudiate Bush’s consumption policies and create a more vigorous investment-focused economy.

  30. Thank you StatsGuy for a truly frightening and depressing post this Thanksgiving. I agree with you that our number one priority going forward should be reforming our entitlement programs. In fact, I use your “Healthcare Rationing is Good,” post as my baseline for measuring whether or not the various reform measures I read about are serious:

    http://baselinescenario.com/2009/09/02/healthcare-rationing-is-good/

    In the abstract, I think the Obama administration agrees with you too. The Obama people certainly want to reform the healthcare system of the United States. It’s just that they don’t seem to be able to accomplish anything without huge handouts to existing stakeholders. This has been true in pretty much every area they’ve attempted reform, from the debate over military spending and the war in Afghanistan to reigning in the financial sector. Is this because of political realities or because the administration has been “captured,” by oligarchs? I don’t know. Probably a little of both.

    But RA’s argument above was about “stimulus.” Looking through the previous stimulus package I just can’t seem to find anything really objectionable. Probably there should have been fewer tax-cuts, and the tax-cuts in the bill should have been targeted more at lower income groups. I work at a school where about half the student population receives free or subsidized lunch and breakfast. So when I hear stimulus measures are going to “fast food productivity,” I get a little annoyed. Looking at the portion of the stimulus package devoted to food production and consumption, I see that the overwhelming majority of funds are going toward food-stamp and other food security programs. When almost 50 million people are living in households that experienced food insecurity at some point during the last month I think that’s probably a pretty good thing:

    http://www.frac.org/html/hunger_in_the_us/hunger_index.html

    Debt is a reality in the United States. To the greatest extent possible debt should be used to finance productive investment. So far the Obama administration seems to be unable to do this. Mostly I blame that on their preoccupation with TBTF institutions’ balance sheets. The Obama administration needs to stop worrying about “credit blockages,” and start worrying about the real economy. In my opinion that’s going to require alleviating the worst aspects of employment. If you have to call that subsidizing consumption so be it. Since I work at a school I like to think of it as preserving human capital.

  31. Also I should add I don’t think much of all the money that went to highway and road construction. I would have preferred more money go to rail and other public transportation projects. And “the worst aspects of employment,” should read unemployment at the end there. I’ve confused employment with unemployment a couple of times in my posts now. Maybe it’s because I’m worried about my own employment future (I’m way on the low end of the seniority totem poll, so without the money going to state education budgets in the stimulus package I would certainly be out of a job. I guess that makes me kind of biased in this whole stimulus debate though). Anyway, I’m heading to Thanksgiving festivities now. Happy holidays everyone.

  32. You’ve got it right.

    The US needs a fundamental change from consumption to production, and very little has been done in that direction by the new administration.
    He had a good chance to sharply reduce the influence of Wall St. looters during the financial crisis, and all he did was bail them out w/ taxpayer money.

    A little stimulus spending toward fixing potholes is not what I was getting at.

    We need a fundamental shift – he was sending signals in his campaign that that is what he wanted to do – he had a chance to start it w/ the financial crisis and healthcare reform – all we have gotten are meager measures. This healthcare reform may well backfire by requiring many people to have insurance, but without an authority to control costs.

  33. “But RA’s argument above was about “stimulus.””

    I was talking about going forward with an economic reorientation. I thought that would have been obvious.

  34. I took the word “stimulating,” in your original post to mean you were deeply unhappy about the original stimulus package and wanted something radically different going forward. While I agree we need to shift away from a consumption based economy, I was by and large satisfied with the original stimulus package (especially given the political realities of the time), and feel any new stimulus going forward should contain a fair amount of what some on this blog have called subsidies for consumption. By that I mean aid to states (again, my job probably depends on continued aid so I’m more than a bit biased), extensions of unemployment insurance, health insurance, food stamps, etc…I feel that not only are these types of programs morally correct, but given the amount of slack we see in the economy right now, good economics as well (I’m sure Krugman has a multiplier for all of these programs somewhere). I apologize for any misunderstandings.

  35. Yes!!! Income inequality leading to excess saving of the rich and politically connected.

    What exactly do they do with all that excess savings? Nothing productive except for themselves?

  36. “This implies that the model may not be accurate.”

    Figure this into your model!!! I’m NOT voting for ANYONE who wants to raise taxes on the lower and middle class or cut SS, Medicare, or Medicaid to make the interest payments.

    I am also NOT voting for ANYONE who thinks china should be able to buy all or some of Boeing (or other similar companies) so they can “relocate” the jobs.

    I am also NOT voting for ANYONE who thinks a currency crisis is the perfect excuse for an amero currency and a nafta (more like shafta) superhighway.

  37. “One of the curious things about the debt scare that is building in the media is that it is happening at a moment when long-term interest rates are very low. In other words, it’s based on a theory that the market is wrong in its collective assessment of the debt situation.”

    And, how many times have “markets” (manipulated by the rich) been wrong???