My rough macroeconomic thoughts (yeah, I shouldn't reply to CNN comments)

Ordinarily, I try to avoid reading comments on CNN articles. And I especially try to avoid replying to comments. But I found myself doing just that recently. It was in response to a question about the current deficits that appeared in an admittedly fluff piece about how the Nov. 6 date for a Presidential election has meant a Republican victory since the Civil War.

It was a good opportunity to get, in rough form, my understanding - limited as it might be - on the macroeconomic factors that make the debt question challenging, and why I'm inclined to answer "No, it's not a problem now. Maybe later, but not now."

Here was the question (possibly rhetorical, but I took it at face value):

Robert

Would some liberal Democrat please explain to me why we would want to re-elect a president who has racked up more national debt ($1.8 trillion) in his first four years in office than all 43 presidents before him combined ($1.3 trillion)? Why would we want to enslave our future generations to staggering debt they'll never be able to pay off? We haven't even paid for the debt racked up by President Kennedy 50 years ago! Why would we want to do this to our children??? Some liberal Democrat please give me a reasoned response.

Here's my full reply:


I really, really hope that this is not a rhetorical question. Although I suspect it is, I will reply as best as I can.

First, some points of clarification:
1. Debt measures are not always useful using absolute figures. Even ignoring inflation, an absolute amount isn't useful for assessing the ability of a country to pay off its debt. After all, this is what's used when a bank determines the creditworthiness of a prospective borrower. A standard, commonly used measure is debt-to-GDP. Admittedly, given this measure, one takes a historically huge deficit and makes it only merely pretty damn big.

2. Not all debt (and debtors) are created equal. Our debt-to-GDP ratio is somewhat lower (but not dramatically lower) than some of the so-called European PIIGS (Portugal, Ireland, Italy, Greece, and Spain). But these countries are experiencing a severe debt crisis - the US is not. Japan, which has a debt-to-GDP ratio of around 300%, has seen its currency STRENGTHEN vis a vis the Euro and the Dollar over the last couple years. Why these differences? It has to do with governance, the structure of the debt (Japanese corporations and the government hold each other's debt - which is stabilizing for small crises, but leads to systemic failure in large crises, as well as reduced ability to reform....), and the economic outlook for each country. For all the histrionics, the US is still a comparatively good place to do business, with prospects for economic growth, pro-business regulatory environment, an educated workforce, and - even with tax increases on the horizon - one of the lowest tax rates in the OECD.

3. The ability and willingness of the debt holders also matters. As the vast majority of US federal debt is held by US citizens, corporations, and trusts, changes across currency, to first order, matter less to them than to the foreign debt holders of Greek debt. Furthermore, the outstanding US debt, even pre-Obama and Bush, was such that the debt holders recognized that outsize histrionics could actually make an imaginary crisis real. (For reference: see the debt ceiling debacle a little while ago.)

4. Economically, a country like Greece has numerous liabilities - overly generous public sector compensation and retirement ages, a lack of a viable domestic growth industry, coupled with the inability to exercise either independent monetary or fiscal policy (former because of the Euro and ECB; the latter because it is a member of the EU and, at least on paper, subject to Maastrict). By contrast, the US dollar is still the global reserve currency, which helps put a floor on demand as well as guaranteeing liquidity. The Federal Reserve is independent, and in general, effectively run and organized, as well as increasingly transparent (which helps the purchasers of debt feel that US monetary policy will not engage in wild swings).

For those, and other reasons (most notably good subscription and pretty low yields) I hope I've made the case that the US debt burden, while historically large, has not yet hit crisis levels.

But perhaps the most significant point I'd make is that there is good evidence that we were still in the regime where Keynesian countercyclical fiscal policy was valid and effective. The fact that there was no inflationary spike post-stimulus confirms this.

One of the things I've been shocked by is how vitriolic the opposition has been from the Right regarding the proven track record of Keynesian policy during recessions. Indeed, the second recession during the Great Depression during Roosevelt's second term came precisely because his advisers pushed a belief that the debt burden was becoming too large, and austerity necessary. (This plunged the economy into higher unemployment and undid a lot of the progress done by the New Deal programs up to this point.)

Does there need to be a long-term plan for the debt? Absolutely. Does it also need to incorporate a more cooperative, less hysterical political environment? Absolutely. Note that S&P's downgrade cited not the absolute amount of US debt, but the political standoff that made it clear that, politically - not economically - the US might have problems coming up with a credible debt solution.

Keynesianism, in practice, does suffer from the problem that government spending is a ratchet, instead of a switch. So, down the line, some sort of official or unofficial restriction on deficits would probably be a good idea. However, to proclaim austerity in the middle of a fragile "recovery" is not only unwise - it's downright foolish.

The problem with comparisons with kitchen table economics is that the US, rightly or wrongly, plays by different rules, and is permitted to do so. We, as individuals, do not have a broad mandate to issue debt, change the amount of currency in circulation, or adjust interest rates via a discount or federal funds rate mechanism. We don't have a reserve currency.

One final point: it's also limiting to track responsibility solely by the budgets passed under an administration. First, one has to consider that Congress and the President aren't necessarily in lock-step (especially lately). It's a bit disingenuous to shift blame on Obama when Congress approves the budgets. It's equally disingenuous to place the responsibility of the Iraq war on President Bush when a vast number of Democrats voted for the war.

I haven't seen details of this, but if we really wanted to apportion "blame" - or more constructively, do a post-mortem and figure out what not to do again, it might be better to track policies and programs that helped us get to where we are today. So, given a certain amount of economic losses in the last few years, consider which fraction belongs at the doorstep of the repeal of Sarbanes-Oxley (under Clinton's administration and a Republican Congress), which fraction belongs to the expansion of home mortgages without corresponding oversight (largely, but not exclusively, Democrats under presidents of both administrations), what fraction is due to poorly conceived tax cuts for capital gains and the wealthy (largely Republicans, under administrations of both parties), and what might be due to the collective failures outside of government - Wall Street, bad lending practices, fraud by individuals on mortgage applications, overleveraging on households....

Under that picture, there's plenty of blame to go around. It's a bit disingenuous to lay it all on the new-ish guy's feet, especially given that he's has a Republican House since the 2010 elections (and a rather wimpy/difficult to manage majority in the Senate his entire term).

Such is the viewpoint of a somewhat left-of-center Democrat. But what do I know? I'm a physicist that took graduate level econ classes at Cornell - not a trained policy analyst or an economist.