Tag Archives: national debt

Who Cares About the National Debt?

By James Kwak

Not Greg Mankiw. Or, to be precise, not “Republicans.”

This past weekend Mankiw wrote a column for the Times laying out the arguments for a carbon tax. They are so well known and so obviously correct that I won’t bother repeating them. (A tradable permit system could work equally well, depending on how it is designed.)

In addition, many people think that the national debt is a serious long-term problem. A carbon tax (or a tradable permit system where permits are auctioned off) would obviously bring in revenue. In White House Burning, we estimated this at about 0.7–0.9 percent of GDP by the early 2020s (citing Metcalf, Stavins, and the CBO).

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Want To Reduce the National Debt? Find More Workers

By James Kwak

Why do some people oppose immigration reform? One conservative objection is that we should follow rules and punish lawbreakers (not to mention all the other arguments that have to do with protecting a white, Protestant, English-speaking nation). That fits nicely with the Strict Father worldview identified by George Lakoff. Another common conservative objection is that we can’t afford more immigration because it would increase deficits and the national debt; that also fits with the tough-minded, austerity-loving ethos of modern conservatism. The little problem is that more immigrants, and more legal immigrants, are unambiguously good for the economy and for the federal budget deficit.

This is the conclusion of two reports put out by the Congressional Budget Office this week: one a cost estimate of the bill currently in the Senate, the other an expanded estimate incorporating additional economic impacts of the bill. The bottom line is that the bill would make the economy 5.4 percent bigger in 2033 than it would be otherwise; per capita GNP would be 0.2 percent higher and wages would be 0.5 percent higher in 2033. Finally, immigration reform would reduce aggregate deficits by about $200 billion* over the first decade and about $1 trillion in the second decade.

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Fatal Sensitivity

By James Kwak

One more post on Reinhart-Rogoff, following one on Excel and one on interpretation of results.

While the spreadsheet problems in Reinhart and Rogoff’s analysis are the most most obvious mistake, they are not as economically significant as the two other issues identified by Herndon, Ash, and Pollin: country weighting (weighting average GDP for each country equally, rather than weighting country-year observations equally) and data exclusion (the exclusion of certain years of data for Australia, Canada, and New Zealand). According to Table 3 in Herndon et al., those two factors alone reduced average GDP in the high-debt category from 2.2% (as Herndon et al. measure it) to 0.3%.*

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Are Reinhart and Rogoff Right Anyway?

By James Kwak

One more thought: In their response, Reinhart and Rogoff make much of the fact that Herndon et al. end up with apparently similar results, at least to the medians reported in the original paper:

Screen shot 2013-04-18 at 4.20.55 PM

So the relationship between debt and GDP growth seems to be somewhat downward-sloping. But look at this, from Herndon et al.:

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More Bad Excel

By James Kwak

In 1975, Isaac Ehrlich published an empirical study purporting to show that the death penalty saved lives, since each execution deterred eight murders. The next year, Solicitor General Robert Bork cited this study to the Supreme Court, which upheld the new versions of the death penalty that several states had written following the Court’s 1973 decision nullifying all existing death penalty statutes. Ehrlich’s results, it turned out, depended entirely on  a seven-year period in the 1960s. More recently, a number of studies have attempted to show that the death penalty deters murder, leading such notables as Cass Sunstein and Richard Posner to argue for the maintenance of the death penalty.

In 2006, John Donohue and Justin Wolfers wrote a paper essentially demolishing the empirical studies that claimed to justify the death penalty on deterrence grounds. Donohue and Wolfers attempted to replicate the results of those studies and found that they were all fatally infected by some combination of incorrect controls, poorly specified variables, fragile specifications (i.e., if you change the model in minor ways that should make little difference, the results disappear), and dubious instrumental variables. In the end, they found little evidence either that the death penalty reduces or increases murders.

Now the macroeconomic world has its version of the death penalty debate, in the famous paper by Carmen Reinhart and Ken Rogoff, “Growth in a Time of Debt.” Thomas Herndon, Michael Ash, and Robert Pollin released a paper earlier this week in which they tried to replicate Reinhart and Rogoff. They found two spreadsheet errors, a questionable choice about excluding data, and a dubious weighting methodology, which together undermine Reinhart and Rogoff’s most widely-cited claim: that national debt levels above 90 percent of GDP tend to reduce economic growth.

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Moving the Goalposts

By James Kwak

Ezra Klein yesterday highlighted one of the underlying problems with even apparently informed discussions of deficits and the national debt: the CBO’s “alternative fiscal scenario.” As opposed to the (extended) baseline scenario, which simply projects the future based on existing law, the alternative scenario is supposed to be more realistic. And it is more realistic in some ways: for example, it assumes that spending on Afghanistan will follow current drawdown plans, not a simple extrapolation of the current year’s spending. But the problem is that it has become excessively conservative in recent years—to the point where, as Klein says, “Policy makers, pundits and others almost exclusively use this model to stoke Washington’s deficit anxieties.”

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Entitlements Scare Tactics

By James Kwak

A friend asked me about last week’s WSJ op-ed by Christopher Cox and Bill Archer claiming that the government’s true liabilities exceed $86 trillion—not the  $16 trillion national debt that people usually talk about. There’s something to it, but there’s also a huge scary story in there that’s purely meant to frighten people.

$16 trillion is the amount of Treasury debt outstanding at the moment. The more relevant figure is the amount of debt the federal government owes to people and institutions other than itself. If, for some reason, I lent money to my wife and she promised to pay it back to me, we wouldn’t count that as part of the debt owed by our household. The debt owed to the public is about $10 trillion these days.

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If Entitlement Programs Are Your Top Priority, the Fiscal Cliff Is Your Friend

By James Kwak

There is a lot of low-grade confusion in reporting on the fiscal cliff, primarily because most articles discuss two distinct problems: (a) the contractionary impact of automatic tax increases and spending cuts that go into effect on January 1 and (b) the large and growing national debt—often without clearly distinguishing between them. In fact, (a) and (b) go in opposite directions. Any deal that solves (a) will only make (b) worse; if you really only care about (b), you should be happy about (a). (Instead, Republicans who claim to care only about (b) are squawking about (a) because they want to preserve the Bush tax cuts.) Most reporters understand this and don’t make the obvious mistake of equating the fiscal cliff to the debt problem, but the two are juxtaposed so often they risk blurring into each other.

So, for example, the Washington Post published an article titled “Liberal groups mobilize for ‘fiscal cliff’ fight over Social Security, Medicare.” (As an aside, when did capitalization in titles become optional?) The facts in the article are fine, but you still could get the impression that the fiscal cliff poses a threat to Social Security and Medicare.

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Some Things Don’t Change

By James Kwak

Which of these things doesn’t belong? John Boehner: “The year 2013 should be the year we begin to solve our country’s debt problem through entitlement reform and a new tax code with fewer loopholes and lower rates.”

Can you imagine Bill Belichick (or any other football coach) saying, “This should be the year we win more games by giving up fewer yards on defense and improving our offense by reducing turnovers and gaining fewer yards per play”?

As long as Republicans persist in claiming to believe that lower tax rates will reduce deficits, nothing in Washington will change. Given their ability to deny both climate change and evolution, denying simple budgetary arithmetic is trivially easy.

Financial Lobby: Stupid or Disingenuous? You Decide

By James Kwak

Courtesy of Matt Yglesias, from the Financial Services Forum:

“We write today to urge you to work together to reach a bipartisan agreement to avoid the approaching ‘fiscal cliff,’ and take concrete steps to restore the United States’ long-term fiscal footing.”

And later:

“But merely avoiding the fiscal cliff is not enough. We further urge you and your colleagues to enact legislation that truly restores the nation’s long-term fiscal soundness.”

It’s too obvious to waste more than a sentence spelling out what’s wrong here, so here it is: “Going over” the “fiscal cliff” is the single best thing we could do to “restore the United States’ long-term fiscal footing.” The CEOs of every big bank (who signed the letter) must know that. Right?

There are valid arguments against going over the fiscal cliff, but the national debt is not one of them. Going over the cliff would do more to address the long-term debt than anything any politician has proposed. And, as Yglesias points out, “If you care about inequality, jumping off the cliff offers by far the best chance for addressing it,” since it is the only plausible way to significantly increase taxes on the wealthy.

The One-Sided Deficit Debate

By James Kwak

Michael Hiltzik (hat tip Mark Thoma) wrote a column lamenting the domination of the government deficit debate by the wealthy. He clearly has a point. The fact that Simpson-Bowles—which uses its mandate of deficit reduction to call for . . . lower tax rates?—has become widely perceived as a centrist starting-point for discussion is clear evidence of how far to the right the inside-the-Beltway discourse has shifted, both over time and relative to the preferences of the population as a whole.

What’s more, the “consensus” of the self-styled “centrists” is what now makes the Bush tax cuts of 2001 and 2003 seem positively reasonable. With Simpson-Bowles and Domenici-Rivlin both calling for tax rates below those established in 2001, George W. Bush now looks like a moderate; even many Democrats now endorse the Bush tax cuts for families making up to $250,000 per year, which is still a lot of money (for most people, at least).

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Because They Can

By James Kwak

It seems as if the Republicans, meaning both John Boehner and Mitt Romney, are trying to turn the national debt back into a major political issue. Now, a visitor from Mars might wonder how this is possible. How could a party that (a) passed the massive tax cuts that were the single largest legislative contributor to today’s record deficits, (b) increased spending rapidly the last time it controlled the federal government, and (c) cannot talk in detail about anything except deficit-increasing tax cuts possibly think that calling attention to deficits could be a political winner?

Well, despite the Republican Party’s abysmal record when it comes to fiscal responsibility, it could still turn out to be smart politics, for a few reasons. One is that many Americans reflexively associate large deficits with excessive spending, even though reductions in tax revenues have played just as big a role since George W. Bush became president. (Compare, for example, receipts and outlays in 2000 and 2011 as a percentage of GDP.) Then they associate excessive spending with Democrats, although the only president to reduce spending significantly in the past forty years was Bill Clinton. It turns out that if you repeat the same tired attack lines year after year—Democrats are all tax and spend liberals, for example—people believe them.

The other, more important reason why Republicans like talking about the national debt is that Democrats don’t have a good response. Sure, Democrats have lots of policy proposals, and theirs make a good deal more sense than the Republicans’; it was President Obama who proposed trillions of dollars in spending cuts and tax increases, which is what people supposedly want (according to opinion surveys, at least).

But most Democrats just don’t like talking about deficits and the national debt. They think it’s a distraction from talking about jobs and unemployment, or they think simply broaching the subject is succumbing to a vast right-wing conspiracy to slash entitlements, or both. The result is that there is no liberal progressive position on the national debt. There’s the Republican one (Romney, Boehner, Ryan), which is to cut taxes (boggle); and there’s the Obama one, which is basically the Republican-Lite position of George H. W. Bush, and which many liberal Democrats run away from. On the left, all there is is a vague belief that you can balance the budget by increasing taxes on the rich, but no one really wants to come out and say it. (Also, the numbers don’t add up unless you’re willing to boost the tax rates on millionaires to very high levels; just, say, repealing the Bush tax cuts for the rich won’t cut it.) Instead, the strategy is to demonize RyanCare, which is effective as a short-term tactic, but doesn’t really amount to a coherent message on the national debt.

This is one reason why I wrote White House Burning. I say “I” because Simon probably wouldn’t call himself a liberal, but I do call myself a liberal, and I think liberals need to have a coherent message on the national debt. I think the message should be something like this: the national debt is a real problem that needs to be addressed; we need to address it in the way that’s best for the American people as a whole; that means preserving the social insurance programs that almost everyone depends on; and we can preserve those programs, while bringing the debt under control, through a set of policy changes that make sense on their own grounds (eliminating distorting subsidies, eliminating tax expenditures, introducing Pigovian  taxes like a carbon tax and a financial activities tax).

You don’t have to agree with our recommendations. But as long as the liberal wing of the Democratic Party has nothing to say about the national debt, conservatives will be free to lead the debate, and the most likely outcome will be some sort of compromise between the moderate Republican Barack Obama an the now-”severe” conservative Mitt Romney. And you can expect the Republicans to bang on this drum from now until November.

American Taxpayer Liabilities Just Went Up, Again – Why Isn’t Congress Paying Attention?

By Simon Johnson

Most Americans paid no attention this weekend when the International Monetary Fund announced it was well on its way to roughly doubling the money that it can lend to troubled countries – what the organization calls a $430 billion increase in the “global firewall.”

The United States declined to participate in this round of fund-raising, so the I.M.F. has instead sought commitments from Europe, Japan, India and other larger emerging markets.

At first glance, this might seem like a free pass for the United States. The additional I.M.F. lending capacity is available to euro-zone countries that now face pressure, such as Spain or Italy, so it might seem that global financial stability is increased without any cost to the American taxpayer.

But such an interpretation mistakes what is really happening – and actually represents a much broader problem with our budgetary thinking. The I.M.F. represents a contingent liability to taxpayer sin the United States – much as the Federal National Mortgage Association (known as Fannie Mae) and Freddie Mac (formerly the Federal Home Loan Mortgage Corporation) have in the past — and as too-big-to-fail mega-banks do now. Continue reading

New “Debt for Beginners” Section

By James Kwak

I created a new “Debt for Beginners” page on the White House Burning website. It’s a collection of previous articles, mainly written for a general audience, on deficits, the national debt, government spending, taxes, and the politics thereof. It’s intended as a starting point for people who want to get up to speed on these issues.

Loyal readers are probably familiar with all the material already.

How Long Can We Finance the Debt?

By James Kwak

Everyone should know by now that the Treasury Department can borrow money at historically low rates. That is a major reason why some very smart economists think that the federal government should borrow more money in the short term (i.e., this year and next) and use that money to boost economic growth.

In the medium term (say, the next decade), however, the big question is how long we will be able to finance new government borrowing at such low rates. Today’s low rates are a product of several factors. One is certainly the slow rate of economic growth, in particular the depressed housing market, which has reduced demand for credit. But another factor is the Federal Reserve’s aggressive moves to keep long-term interest rates down; another is foreign central banks’ appetite for Treasuries.

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