kinder, gentler debt ceiling discussion

[Riggerjack]

We had a thread locked on this subject. I think there is room for learning on this subject, so I'd like to try this again, with a caveat, when using the word "default " please include what debt you are talking about defaulting on.
My point is that there is a huge difference between not raising the debt ceiling, and defaulting on the interest on the national debt, let alone defaulting on the debt itself.
my numbers are a bit outdated as I'm posting by phone, but I'll edit this with links to current numbers when I get home.
If the debt ceiling isn't raised, that doesn't put us in default of anything. At that point, the line of credit is frozen, and as many businesses and private citizens found in 2008, that can be stressful and awkward. That doesn't mean immediately bankruptcy. It does mean an immediate cut in spending. If you believe high end neighborhoods in Colorado having to pay for their own trees, instead of stimulus spending making it free is a disaster, then it will be an instant disaster. If you think taxing landscapers to fund a stimulus that buys trees for lawyers boondoggle then not raising the ceiling will probably put a smile on your face. If you think our economy runs best by taxing landscapers to fund paying landscapers to plant free trees for lawyers, we're gonna have some fun quotes!
So, back to the subject at hand. If the debt ceiling isn't raised, then the federal government is limited to the taxes it takes in. A paltry 200 billion per month or so. 2.6 trillion per year, last I checked. Coincidentally, that was the total federal spending in 2006. Yes, there's been a bit of inflation since then, but this isn't an insurmountable obstacle. I'll be home soon, then I'll get some links to numbers together, and hopefully we can get a good thread out of this.

PS I fully admit to my part in getting the last thread locked, and will try to play nicer.

[Riggerjack]

ok, here's some links.

my favorite, the white house summaries: http://www.whitehouse.gov/omb/budget/historicals

i like this as a good starting point on the budget numbers. if they spin too much, somebody's gonna scream so I figure the numbers have to be fairly accurate. please look at table 1.3 turns out the estimated 2013 taxes should total 2.7 trillion. adjusted for inflation, that's 2.2 trillion 2005 dollars. the last time we ran the whole federal government on 2.2 trillion (2005) dollars was 2002.

Now even this cheats a little bit, as they are counting the Social Security "surplus" as income, but if you consider SS to be an unfunded ponzi scheme, then that's just accurate accounting.

[Riggerjack]

so, we know it's possible to run the whole federal show on the money we take in without raising the debt ceiling. 2002 was a recession year, with stimulus spending etc... gearing up to go make friends in Iraq, Bush style.

overall, not a hugely different environment, but wait, you say, what about all that unemployment spending we're doing? well, i'm glad you asked. Look at table 4.2. it is outlays in each dept. by percentage of total outlays.

Obama bashers talk about all the welfare and EPA spending. Bush basher cry about the war spending and TARP. What amazed my was how totally consistent the spending was, regardless of who was in office!

[Riggerjack]

So, that was the point I wanted to make on the last thread, that not raising the debt ceiling not only wouldn't be a disaster, it could be a very good thing. It could be the only way to pull back the crazy spending.

Tomorrow I'll dig into the whole stimulus based economy myth.

[Felix]

Hitting the debt ceiling means going directly to a balanced budget. This means that the government is unable to meet all of its obligations, which means it defaults on some of them. Where they cut is a policy choice. That they cut is math and accounting.

That it is default (as opposed to a mere government shutdown) is a statement coming directly from the treasury itself:
http://www.treasury.gov/initiatives/Doc ... 0FINAL.pdf

I have no problem with a balanced budget per se and would actually be in favor of a surplus when there is inflation. I believe it is disastrous policy in an environment of deleveraging and low private spending.

Either way, this is a matter to be discussed and decided when determining government policy and not simply by cutting off the funding to enact such decided upon government policy. Change the policy if you do not like it, but do not disrupt the functioning of the government.

I still do not see how a high deficit as such would be problematic. What's the magic number?

We have already established (I hope) in the last thread that government default is impossible except by choice. So with that boogeyman off the table, the only economic problem left would be inflation (I think).

Here's Mosler on the subject:

How the Government Spends and Borrows As Much As It Does Without Causing Hyperinflation

Most people are accustomed to viewing savings from their own individual point of view. It can be difficult to think of savings on the national level. Putting part of one's salary into a savings account means only that an individual has not spent all of his income. The effect of not spending as such is to reduce the demand for consumption below what would have been if the income which is saved had been spent. The act of saving will reduce effective demand for current production without necessarily bringing about any compensating increase in the demand for investment. In fact, a decrease in effective demand most likely reduces employment and income. Attempts to increase individual savings may actually cause a decrease in national income, a reduction in investment, and a decrease in total national savings. One person's savings can become another's pay cut. Savings equals investment. If investment doesn't change, one person's savings will necessarily be matched by another's' dissavings. Every credit has an offsetting debit.

As one firm's expenses are another person's income, spending equal to a firm's expenses is necessary to purchase it's output. A shortfall of consumption results in an increase of unsold inventories. When business inventories accumulate because of poor sales: 1) businesses may lower their production and employment and 2) business may invest in less new capital. Businesses often invest in order to increase their productive capacity and meet greater demand for their goods. Chronically low demand for consumer goods and services may depress investment and leaves businesses with over capacity and reduce investment expenditures. Low spending can put the economy in the doldrums: low sales, low income, low investment, and low savings.

When demand is strong and sales are high businesses normally respond by increasing output. They may also invest in additional capital equipment. Investment in new capacity is automatically an increase in savings. Savings rises because workers are paid to produce capital goods they cannot buy and consume. The only other choice left is for individuals to "invest" in capital goods, either directly or through an intermediary. An increase in investment for whatever reason is an increase in savings; a decrease in individual spending, however, does not cause an increase in overall investment. Savings equals investment, but the act of investment must occur to have real savings.

The relationship between individual spending decisions and national income is illustrated by assuming the flow of money is through the banking system. The money businesses pay their workers may either be used to buy their output or deposited in a bank. If the money is deposited in a bank, the bank has two basic lending options. The money can be loaned to: 1)someone else who wishes to purchase the output (including the government), or 2) to businesses who paid the individuals in the first place for the purpose of financing the unsold output. If the general demand for goods declines the demand for loans to finance inventories rises. If, on the other hand, individuals spent money at a high rate the demand for purchase loans would rise, inventories would decline and the level of loans to finance business inventories would fall.

The structural situation in the U. S. is one in which individuals are given powerful incentives not to spend. This has allowed the government, in a sense, to spend people's money for them. The reason that government deficit spending has not resulted in more inflation is that it has offset a structurally reduced rate of private spending. A large portion of personal income consists of IRA contributions, Keoghs, life insurance reserves, pension fund income, and other money that compounds continuously and is not spent. Similarly, a significant portion of business income is also low velocity; it accumulates in corporate savings accounts of various types. Dollars earned by foreign central banks are also not likely to be spent.

The root of this paradox is the mistaken notion that savings is needed to provide money for investment. This is not true. In the banking system, loans, including those for business investments, create equal deposits, obviating the need for savings as a source of money. Investment creates its own money.

Once we recognize that savings does not cause investment it follows that the solution to high unemployment and low capacity utilization is not necessarily to encourage more savings. In fact, taxed advantaged savings has probably caused the private sector to desire to be a NET saver. This condition requires the public sector to run a deficit, or face deflation.

Taken from here:

http://www.mosler.org/docs/docs/soft0004.htm

[Felix]

Looking at your tables it looks like you would cut 6% of GDP (estimated 2013 number for deficit in GDP) in private income with that move.

[Riggerjack]

well, i guess it depends on how much you trust your politicians to do what's right and wise.

When I was younger, and hadn't looked at the numbers, didn't know better, i thought indiscretions with interns were where the sex was going on. then I met with Mr. IRS in my 20's, and thought I'd asked for it. (what's self employment tax?) now, i'm in my 40's, make a good living, pay my union dues, and paid nearly 4 Jacobs in taxes last year. now i know where the sex is, and just how voluntary it is.

Then I read Larry elder's "ten things you can't say in America", and really started to realize how wrong my basic assumptions about how things are, and how they got there were out of line with what i was seeing. That's when i started looking at the numbers, and using history as a basis for reference.

now don't get me wrong, I'm fine with paying taxes, and i like a nicely paved road more than the next guy. but i have an emotional relationship with efficiency. the only part of the monetarist theory that is right is "taxation is the destruction of money".

Hey we all know when uncle sam buys a $400 hammer (I have spent $58 so we aren't that far apart), that the hammermaker then spends that money on groceries, etc. the money's not really gone.

the problem is more like Bastiat's broken window.

by taxing the carpenter to buy the hammer to buy the groceries, you could say that it is a better result than if the carpenter bought groceries. "3 transactions, instead of 2, the GNP just grew by an extra $400! Rock on, Taxman!" but that is an apples to oranges comparison. by that measure, any increase in monetary velocity is good. to even up the comparison, you'd have to look at what the grocer buys. If he buys a pair of xboxes for christmas gifts, then it's apples to apples. on one side you get an economy of $400 of carpentry turned to $400 in groceries to $400 in xboxes. on the other, $400 in carpentry to a $400
hammer, to $400 in groceries. Awesome $1200 to the GNP any way you slice it, they must be equal, right?

Again, we need to look at that hammer purchase. we all know if we, as individuals bought a hammer, it wouldn't be $400. I looked at a hand forged, custom made hammer, made for the express purpose of punching trough plate steel.(now that's a niche market!) it wasn't $400. so what makes that hammer worth the $400? partly, it'll be transaction costs, custom specification costs, but mainly it is political costs. Doing business with the Government is expensive, by design. very high barriers to entry, keeps competition low. political donations and the revolving door between purchasers and suppliers keep profits high. oh, and incidentally, the hammer. i bought one at home depot last year for $6.99.

Felix, you seem to believe both models are the same, that we should leave it up to our political superiors to decide what is best for us. When I was younger, I'd have agreed. But now, cutting graft out of 6% of the economy sounds just fine. We've shown we can run the show (with graft intact) at that level with absolutely no issues. i don't believe the messages of gloom and doom that say this time is different.

[Felix]

I understand (and to a great deal actually share) your distrust of politics and politicians.

I am making an economic argument.

Efficiency is not the only factor to look at in an economy. In engineering you have to balance efficiency with stability. Usually stability is the more important constraint. In economics it is generally assumed that maximizing efficiency is where it's at. Looking at how common crashes, depressions, bubbles etc. are, I do not have much faith in that assumption.

Another one is that the non-government part of the economy runs at full efficiency at all times. This can be easily shown to be false, just by looking at the unemployment caused by crashes, the houses standing idle and the businesses not selling their products. If permanent full efficiency were the case, the bailout would have caused the hyperinflation everyone has feared and Japan would not have had a stable CPI for the last two decades.

The government, by spending, employs idle resources and thereby increases real wealth creation, not just paper.

So in the example above, there would be no hammer to begin with and the government would pay someone to create that new hammer. You'd have whatever that guy buys as new business in the economy and a nice new hammer, plus one less person unemployed, something that apparently the private sector did not do by itself.

The point is that this new spending is needed to keep employment up. It is part of the system design, which seems to imply both savings and government spending to match it.

The issues with government corruption are genuine, but the government is central to the economy.

That 6% drop is just the beginning as you'd see credit fall drastically.

We may see how it goes soon.

[Felix]

Another thing:

I understand the anti-government stance. I really do. I believed that myself for about 4 years. The whole nine yards. Government steals our money. Government is inefficient. Privatize as much as you can. Selfishness is a virtue. A is A. Read Hazlitt, you sheeple!

I get it.

But I now believe that the policy advocated and implied by this stance is counterproductive.

Just look at what I am telling here:

You worry that the tax man steals too much of your money to waste on inefficiencies and lazy people. I can soothe that worry. It works the other way around. Instead, the government, through its deficit, finances both savings and tax payments. Now the savings are unevenly distributed as are the tax payments (thanks, crony politicians), but the fact remains that you are worse off in a balanced budget situation. More taxes and less savings are a direct result.

Even if they spend all the money at the ministry of corruption, laziness and inefficiency, they still support the existence of enough money in the economy to allow for employment, tax payments and savings.

If you want to challenge that notion, I really would invite you to read Mosler's book.

It can actually be very compatible with a small-government stance if you look at Mosler's suggestions.

You would have lowered taxes to support the economy, government expenditures only rising in times of a private sector sluggishness where it would temporarily provide people with minimum wage jobs as a pool of employed people for the private sector to draw from once it gets back on its feet while still maintaining economy productivity and enough money for savings and taxes.

Plus, you actually get social security payments.

[Riggerjack]

Well, Felix, if you want me to address the monetarist gibberish, I'd be happy to do that in another thread. We've done it before, i read mosler, i didn't convince you, nor you me, but i'd love to give it another try. just not here. i'm trying to keep this civil, and address an area of obsfucation. specifically debt ceiling not being raised, and those effects. I have shown that SS payments would get made, or more to the point, could be made.
I loved the treasury's comments: http://seattletimes.com/html/politics/2 ... obinsource

"Earlier this year the GOP-controlled House passed legislation requiring Treasury to "prioritize" its obligations to pay interest payments and Social Security benefits first if there's not enough cash to pay all the bills.

But while it's relatively easy to prioritize interest payments, Treasury's computer systems aren't programmed in such a way that it'd be easy to pick and choose what payments to make.

In an internal review after the 2011 debt crisis, Treasury officials told an agency inspector general that best option in a cash crunch would be to delay payments. In other words, Treasury would figure out how much a particular day's bills cost and then pay those bills when enough cash came in. That would mean the government would quickly fall behind on its payments"

Right, the software for cutting checks wasn't designed with prioritization in mind, so the right thing to do is avoid prioritizing in any way. Lovely. What do you say to the trophy wife, after the HELOC is frozen, and the credit cards are maxed, and the cash is gone, who thinks that simply writing the same checks for the same shopping sprees but slower, is the answer.

Now to be perfectly honest, while i believe that not raising the debt ceiling would be a very good thing, and going to a forced balanced budget is manageable, I also believe that our representative government would do everything in it's power to make it hurt as much as possible. neither side has any interest in cutting back to a balanced budget. both sides would have every incentive to make it painful, and try to blame the other side for the pain. Nothing from out current executive branch makes me suspect that there would be a break in partisan politics for the good of the country.

But as i said, it's all mute, neither side has any interest in letting it happen. too bad.

[Felix]

First things first: MMT is not monetarism.

http://en.wikipedia.org/wiki/Chartalism
http://en.wikipedia.org/wiki/Monetarism

My argument is basically that if you look at how fiat money like the US dollar actually works, the debt ceiling is nonsense. That's the MMT perspective. It is pretty much all I want to say on the subject. It would be hard for me to argue my point without, well, arguing my point.

But okay, you don't want to talk about it, then we just don't, clear and simple. I'll try.

The thing is that the priorization was never required for the system. It was supposed to pay out whatever the US owed. You do not change policy just by limiting the budget. You just become insolvent. The promised payments are still due. So you have to default on some of them.

Going cold turkey directly to a balanced budget is what causes the pain, not some evil government plan to have people suffer for it.

A break from partisan politics? The debt limit debate is partisan politics. Republicans do not want to finance Obamacare and unable to get rid of the policy want to kill it operationally by causing the US to not be able to meet the obligations such policy would require. They are very explicit about it.

In a sense, the debate itself seems to be not about balancing the budget as a primary issue, but about Obamacare, the debt ceiling appears to be just the instrument being used. As jaded as you are about politics, do you really believe that the Republicans, who have failed to balance the budget themselves, have suddenly found within themselves a reason to balance it? They even say themselves that they only do this to stop Obamacare.

Before this gets started: You don't want to talk about MMT here, I don't want to talk about the merit of Obamacare.

[Riggerjack]

Not a problem, obamacare is a separate subject.

As jaded as you are about politics, do you really believe that the Republicans, who have failed to balance the budget themselves, have suddenly found within themselves a reason to balance it? They even say themselves that they only do this to stop Obamacare.

Felix, you are arguing against the statements you think i should make, not the statements i'm making. as i said before I don't believe the republicans have any interest in a balanced budget, or reduced spending, for that matter.

My argument, is that a balanced budget isn't a disaster at all. it is a solution. if you look at the numbers I posted above, you'll see that is a perfectly adequate budget to work with. everyone else adjusts their spending when they run out of credit, no matter what level of mall addicted bimbo, or jet setting corporate CEO. Everyone prioritizes when forced to, if they are short sighted enough to avoid adjustment until then.

I believe there is no disaster to not raising the debt ceiling. if we had leaders, it wouldn't even be painful. That is my statement.

[Felix]

Well, you do not allow me to criticize it with the arguments I have about how cutting 6% out of the GDP means the economy will shirink and lower income and with it savings, investments, jobs etc.

The budget of 2006 was fine for a GDP of 2006, which was 81.5% of the GDP in 2013.

You can watch the Ray-Dalio-video I linked to on the strategies for deleveraging and how they cause a worsening of the crisis because of how credit works. We can work with that.

Our differences in opinion stem from the differences in our economic model, pure and simple.

If I did not believe the goverment deficit spending was necessary to avoid deflation, I would not argue for it.

[44deagle]

@Riggerjack

Most likely not raising the debt ceiling would cause the economy to go back into contraction. Since we have a debt money system the total debt in the system needs to keep growing. Right now I don't believe that debt is expanding enough in private sector to offset a balanced budget at the government level.

[Riggerjack]

So, if i'm understanding you both, you agree that not raising the debt ceiling would be workable budget, barring the capabilities of our leaders to work.

Your argument is an economic one, that a balanced budget would be bad for the economy, at this point?

[Felix]

No, I don't think this is workable for the government. You can not divide the two. A bad economy is "bad" for the government budget. You have higher unemployment (=higher welfare costs AND less taxes), lower business activity (= less taxes). Due to the constraint of a balanced budget, the government has to cut spending more or raise taxes to maintain its budget. This means the 6% drop in GDP is just the initial kickstart and ignores the drop in the rest of the economy. This is a downward spiral.

[Riggerjack]

Interesting poll: http://www.bloomberg.com/infographics/2 ... ficit.html

61% of americans believe it is necessary to limit what the US can spend, because congress lacks discipline on spending. So it is right to require spending cuts when the debt ceiling is raised, even if it risks default.

Huh. I didn't give joe sixpack enough credit. by more than a 2-1 margin, he agrees with me. that's a little disconcerting. but the poll next to it shows that most folks think the debt is getting bigger, reminding me that most folks don't discern debt from deficit clearly.

[Riggerjack]

felix, i'm just trying to make sure i understand you. your primary objection to a forced balanced budget is economic, not administrative?

[Felix]

What you mean by administrative? Whether this is default or not? It is partial default. Financial promises made by the government are broken. If they had passed a balanced budget and kept it despite a loss of revenue and an increase in spending, that's fine from an administrative view. But passing a budget and then refusing to pay the bills is not a good move.

[jennypenny]

Interesting poll: http://www.bloomberg.com/infographics/2 ... ficit.html

61% of americans believe it is necessary to limit what the US can spend, because congress lacks discipline on spending. So it is right to require spending cuts when the debt ceiling is raised, even if it risks default.

Huh. I didn't give joe sixpack enough credit. by more than a 2-1 margin, he agrees with me. that's a little disconcerting. but the poll next to it shows that most folks think the debt is getting bigger, reminding me that most folks don't discern debt from deficit clearly.

I'm usually all for holding fast to the debt ceiling, but now that the majority of americans agree, I wonder if it's time to rethink my position.