My Book Balancing the Budget is a Progressive Priority is Out!

My book Balancing the Budget is a Progressive Priority has been published by Springer. It is also available from other sources, including itunes and will be on Kindle soon.

The crux of my argument is that Progressives need a balanced federal budget more than Conservatives, both to provide room for new government action when needed (economic stimulus, infrastructure, education, energy), as well as to protect the key programs of Medicare, Medicaid and Social Security.  For this reason, developing a long term plan to balance the federal budget should be at the top of the Progressive agenda, because without doing so, the ability to address Progressive priorities via government action will be rendered moot.

We cannot and should not get to a sustainable budget immediately, but we need a credible long term plan. Such a plan might even make short term investments and stimulus more plausible. Balancing provides such a plan that will require an increase in taxes compared to historical levels and a reduction in federal spending as compared to future default spending over the next several decades. Specifically, the book suggests:

The CBO noted last week that delay of hard decisions only leaves of us with fewer options. I agree, and the federal budget will one day be overhauled substantially; the premise of the book is that Progressives should drive this agenda to best represent our long term policy interests and goals. I realize this post glances over lots of material and ideas, some of which will be viewed skeptically by many Progressives. I will be doing follow up blogging to try and clarify my points, as well as to listen to your thoughts.

As an aside, it was very hard to write a book that focused on a topic in the news. I self published an earlier version in August 2011, and this is a more complete and revised argument, completed quickly after the Super Committee reached no agreement and tweaked after the payroll tax extension in February 2012. In short, it about killed me, so of course my 17 year old daughter said when I showed her a copy “Dad, it is really a short book; that couldn’t have been that hard.”

Author: Don Taylor

Don Taylor is an Associate Professor of Public Policy at Duke University, where his teaching and research focuses on health policy, with a focus on Medicare generally, and on hospice and palliative care, specifically. He increasingly works at the intersection of health policy and the federal budget. Past research topics have included health workforce and the economics of smoking. He began blogging in June 2009 and wrote columns on health reform for the Raleigh, (N.C.) News and Observer. He blogged at The Incidental Economist from March 2011 to March 2012. He is the author of a book, Balancing the Budget is a Progressive Priority that will be published by Springer in May 2012.

50 thoughts on “My Book Balancing the Budget is a Progressive Priority is Out!”

  1. Do you address the issue of the Republicans re-unbalancing it through tax breaks for the rich, as Bush 43 did after Clinton?

  2. My immediate response was identical to Allen K’s above.

    Q: How many times will Democrats bring the budget into balance or surplus only to be followed by Republicans using those surpluses as a cause for alarm and a justification for tax cuts for the wealthy?

    A: Every time they are elected, since everything is a justification of tax cuts for the wealthy.

    I don’t disagree that over the cycle, either budget balance, or holding the deficit o being a stable fraction of GDP, is the best policy, but it, like so many other good things in life including so many other optimal policies, looks to be unattainable so long as the GOP has one overriding goal: lower taxes on the wealthy coupled with steadily decreasing govt. services for everyone else.

  3. Congratulations on your book Don. What the commenters say above cannot be overlooked: We had a hard-won budget surplus in 2000 and then Dick Cheney (“Deficits don’t matter”) and the economic team blew it with big tax cuts combined with big spending.

    But of course you will not convince Cheney that he is wrong. But I hope you can convince Krugman and his amen corner that they would have more credibility if they clearly endorsed the idea that there is a point in the amount of public spending and indebtedness where more deficit spending is not the answer.

    1. As I understand the PK/deLong/Summers argument: there is for practical purposes no such point, as Britain and the USA and Japan have successfully in the past managed debt-to-GDP ratios over twice the current level. (UK in 1815: around 290%). All Keynesians accept balancing the budget over the cycle (or at least the so-called “golden rule” that the deficit should not exceed net public investment). Do you have evidence to the contrary?

      1. What if it’s 500% and interest rates are 50%? 1000% and 90%? If there is truly no point at which more deficit public spending is not recommended, then it’s an ideological position and not one driven by data. It is fine of course to have such views, but if that’s what they are they should be labeled and argued as such.

        1. I don’t think you are getting my distinction between a debt ratio constraint (a bogeyman) and a trade cycle one (perfectly true but irrelevant in a depression). A 500% debt ratio at 50% interest implies that debt service is 250% of GDP, which is impossible. Long before countries reach 100% of GDP in debt service, they default.
          Such speculations have some relevance to Greece but none to the USA and Britain. US !0-year Treasuries have a current negative yield. Using historical benchmarks, the US could comfortably double increase its its debt by 20% without before returning to 1945 levels: that’s another 3 trillion $ of debt. Krugman is absolutely right to say that the hypothetical risks of a Keynesian expansion much smaller than this are tiny compared to the known social and political costs of large-scale unemployment. In Greece, an authentically fascist party just won 9% of the vote. Plus, you should consider the deLong-Summers argument that because of hysteresis, you will probably never return to the previous growth path; so austerity actually may worsen the long-run debt ration, and a deficit-financed stimulus pays for itself. Even if it doesn’t, the parameters that would make the stimulus counterproductive are so extreme as to be ignorable.

          1. James: “Long before countries reach 100% of GDP in debt service, they default.”

            OK, so would it at least be all right to not jack up spending the year/month/day/minute/second before a default — is there any limit, or is this endorsement of deficit spending like Republicans and capital gains tax cuts, i.e., always the prescription regardless of the economic situation, coupled with the claim that it more than pays for itself so it’s actually free?

            I am not trying to argue austerity vs. spending, I am genuinely trying to understand this viewpoint which is so prevalent.

    2. IIRC, the point at which more deficit spending is not the answer, according to Krugman, is precisely just before the Fed raises interest rates. It’s simply not the case that Keynes’ prescription is deficit spending always.

    3. I think this is unfair to Krugman, to whom I do usually say amen. It is just not the case that he calls for unlimited spending and deficits. He does call for aggressive spending now, but has, in what is actually more or less standard maxroeconomics, argued that this is necessary because the preferred solution to downturns – monetary policy – has reached its limit. Undoubtedly he repeats his message often, but that is because too many people who have responsibility for economic policy seem not to be paying attention, despite the accumulating evidence.

      In the US the Treasury can borrow money at 1% or less. At those rates there is surely a fair amount of additional spending the government can do that has a positive return. And that is withoput considering multiplier effects.

      1. Byomotov: It may be unfair to him, I am not a Krugman expert. I stopped reading his column because he always seemed to say the same thing regardless of the situation. That doesn’t mean he is wrong, but it does make him boring, much as are those who always say the market will solve everything, tax cuts will solve everything etc.
        If he has written columns in any circumstance calling for cuts in public spending (anywhere, even a .00001% cut in sausage subsidies in the Ukraine in 1726) I’d be interested in reading them, and I would have more faith that he was working from economics and not from a religious faith that more government spending is always always always better.

        1. Krugman has certainly opposed some government spending. He has criticized the structure of Medicare D as wasteful, for example, and complained of waste in defense spending. I can’t find his views on sausage subsidies.

          I understand your complaint about the sameness in recent years, but I think that’s because the problem hasn’t changed much. We have a recession, and policymakers, and what Krugman calls Very Serious People, seem to be dedicated to doing exactly the wrong thing about it.

          If there were a plague of mental illness, and you thought those responsible for treating it were plainly making it worse, you might be inclined to talk a lot about what should be done instead.

          1. I think Krugman understands that slow learners need the same information repeated and repeated and repeated. And obviously we have a lot of slow learners out there.

            You might try his blog. He’s a lot looser and funnier there, and also puts up a fair amount of posts where he goes into much more technical detail than he does in his columns.

  4. @Allen K, marcel and Keith
    The balanced budgets of ’98-’00 were actually created by three events: 1990 tax deal when 1st Pres Bush broke his no new taxes pledge; 1993 budget that raised top marginal rate and passed by one vote in House; and then Balanced Budget Act of 1997. So, there was a bit of a bipartisan nature to that achievement for two of the three.

    I follow the argument ‘why should we do the politically hard work of moving toward balance that will require tax increases and reduction in spending over planned levels if Rs will just undo them when they get in power?’ One answer is that I think it is the best policy, and you try and make that case for that (you need room for large deficits in emergencies; but if we continue to add relatively large deficits due to normal functions of govt, there will not be the same room to use in an emergency; it is true that no one is sure what the level of debt is that is too high, but without changes, someday we will likely find out). Second answer is that I think that clearly articulating a plan to make ‘the trains run on time’ and have the federal budget be sustainable, which will require a mixture of increased taxes, decreases in some spending, and increases in other areas driven by clearly articulated Progressive values could bring about political gains. I think the political ‘center’ of the nation is moving toward quite liberal on social issues, but a bit cautious on fiscal ones. One of the parties will appeal better to this group.

    In political terms, Progressives failure to articulate a clearer vision on fed budget has let Conservatives get away with quite a lot rhetorically on ‘fiscal responsibility’ when as everyone points out they have quite a bad record, esp since 2000 election.

    1. I’m not sure I follow your argument about those 3 events, since the budget gets affected by so many things, especially over a decade.

      However, I do agree that there did used to be a few Republicans who were much less crazy than what we have now, where we’ve got no partner for budget sanity, essentially. I think maybe the left is at the point where we might as well go out and try and find more of those people and get them to run. (Or really, some eccentric billionaire who’s *not* a whackjob libertarian should do it. Anyone out there?) They simply must exist, I refuse to believe otherwise.

      ‘Cause I’m with you that even if I don’t know, mathematically, whether there’s a point of no return, debt-wise, it does seem nonsensical to have all this political brinksmanship and uncertainty and nonsense, and we should try to have a long-term plan. You know, like the Chinese, f.e. We went to the moon, we should be able to do this.

        1. @NCG
          That is fair, and it makes it sound like that those 3 are all that occurred. Taxes collected in 2000 was 20.6% of GDP, the largest amount collected in the past 50 years. This was due in large part to booming economy and what we now call the tech bubble. Of course, it is obvious then that the tax code adopted in 1993 was not inconsistent with this level of growth. All else equal, it will take an increase in taxes and a reduction in spending as compared to default to have a balanced budget….and the 3 events above were two tax increases and one fairly significant budget cut.

          It does take two sides to cut a deal and there is lots of evidence Rs would never have cut a deal with Pres Obama. However, something has to take place as our current path is unsustainable for the medium or long run. The rhetoric of fiscal responsibility used by Rs needs to be put back on them; if taken seriously it will lead to tax increase and some sort of health reform (they have none). This convo can move things back toward Progressives.

          1. I’m not sure who can “put [it] back on them” though. It was my impression that Pres. Obama offered the Republicans what they might have seen as a pretty good deal on deficit reduction and they turned it down. I didn’t pay close attention because I was pretty sure nothing would happen, but my impression at the time was that it was a deal I couldn’t support either. So if even that isn’t good enough for “conservatives,” then I think we’re in trouble. They don’t budge, we keep budging, and for my part I am done with moving any farther for them.

            We’re a very split country, and I hope that by now, most Democrats realize that trying to meet the other side halfway is a complete waste of time. It’s *their* turn to move.

          2. I’m thinking here of the Republican debate in which *all* raised their hands, rejecting a 10-for-1 deal on spending cuts to revenue increases. The “if taken seriously” is, for the foreseeable future, the non-starter here.

    2. More props to the first Prezzy Bush, check this out:

      “”There hasn’t been any serious investigation of any of the large financial entities by the Justice Department, which includes the FBI,” says William Black, an associate professor of economics and law at the University of Missouri, Kansas City, who, as a government regulator in the 1980s, helped clean up the S&L mess. Black, who is a Democrat, notes that the feds dealt with the S&L crisis with harsh justice, bringing more than a thousand prosecutions, and securing a 90 percent conviction rate. The difference between the government’s response to the two crises, Black says, is a matter of will, and priorities. “You need heads on the pike,” he says. “The first President Bush’s orders were to get the most prominent, nastiest frauds, and put their heads on pikes as a demonstration that there’s a new sheriff in town.””

      1. You know, not that anyone necessarily cares, but I should say that while I would welcome prosecutions of financial fraud that weren’t just those committed by the odd independent mortgage broker here and there, which is what we have now, but some higher ups too for a change … I am not necessarily in favor of putting non-violent people in prison. There are lots of effective ways to deter financial or other non-violent crimes, we just have to be more creative.

        Hope I don’t sound “soft on crime.”

        Also, sorry for trying to change the subject here, I just get so excited whenever I see evidence that not all the other side is crazy. It’s pathetic, really.

        1. Financial crime, how about financial penalties? Makes sense to me. Fine the b@st@rds into poverty.

        2. Financial fraud is very technical in its definitions. If you want people prosecuted, please tell me who you want prosecuted, what charges you want brought against them and what evidence there is that will secure a conviction. I don’t mean evidence that they behaved badly. I mean evidence that would be admissible and that meets the threshold of proving the specific charges and not just bad behavior.

          I bring this up because people love to throw around the idea that the problem is that there have been insufficient prosecutions. When asked for something to actually do, they either fall silent or they clearly demonstrate that they don’t really have any idea what constitutes a crime or how one would be proven in court.

          Take fraud, for instance. Fraud in the legal sense is somewhat different than the meaning of the word in common usage. It does not consist merely of being dishonest when engaging in an economic transaction. It has to be material, which means that the defrauded party would likely have chosen not to enter into the particular transaction had they known the truth. This one is a problem in cases like the instance in which Goldman Sachs was fined for hiding the fact that they had selected the loans that went into a security that was then sold to a German bank. A pretty good case can be made that the German bank didn’t care all that much what was in the security, because the bank’s real purpose was to meet its capital requirements and a quirk of German banking law allowed the type of security in question to be considered as Tier I capital.

          Fraud also requires that the individual that made the statements either knew they were false or that they were grossly negligent (another term that might be narrower than you think) in making them. This has a couple of consequences. One is that a lot of the things that are claimed to have been fraud don’t meet the standard, because those making the statements didn’t realize they were false. This pretty clearly applies to Joseph Cassano from AIG. He really did think that he was authorizing a bunch of great trades. That he was hopelessly out of his depth and didn’t know what he was talking about doesn’t really enter into it. Ignorance of the law might not be a defense, but having no understanding of the business you’re running is.

          The other problem is that, in order to prosecute for fraud, you need to be able to point to specific evidence that a specific individual both is responsible for a given statement and that he knew that it was false. Just knowing that someone in a company lied doesn’t suffice. Even just knowing that someone in a company committed fraud doesn’t get you there. You must be able to produce specific statements by a specific person and prove that those statements mean that there was a knowing falsehood. That’s very hard to do, and it becomes easy for the defense to muddy the waters. Beyond that, in a lot of instances, there won’t be a specific statement made by a specific individual. The person in question would need to have made the statement in a form in which it would be preserved. People in the financial industry have gotten very good at avoiding those means of communications. Pretty much all sensitive conversations are done on individuals’ cell phones in order to avoid the requirement that all phone calls be recorded and preserved.

          None of this was helped when the Supreme Court threw out the crime of honest services fraud in most instances. It may well have been possible to charge financial executives on that basis, but it’s no longer an option. It’s also a myth that there haven’t been any prosecutions for financial fraud. The Justice Department tried two Bear Stearns traders for selling securities that they knew were bad. They had emails from the two in which they describe the deception. The jury acquitted them. A judge threw out the conviction of Henry Samueli for backdating options at Broadcom despite it being pretty clear that that’s exactly what he did. As I said, it’s very difficult to secure a conviction for financial fraud even in cases where common sense indicates that it’s obvious that someone is guilty. It would be both a waste of resources and deeply unethical for the DoJ to bring cases that they aren’t confident they can win. There isn’t much indication that they can get convictions of the people who it would be most satisfying to prosecute.

          So, provide specifics of what you want them to do.

    3. Hi Don

      I meant “we” in the sense of the US. I agree with you that the 2000 surplus was a bipartisan achievement, both through what G.H.W. Bush did but also in how Clinton and the Republican Congress stalemated each other and ended up paying off debt because they couldn’t agree on tax cuts or more spending.

      1. @Keith Humphreys
        I agree with you, and the economy boomed at least as measured by taxes collected as percent of GDP. Growing economy makes all the long range fiscal problems better….this is really the crux of Krugman and others. I agree with them, but really reject that it is austerity v. stimulus and we need a more nuanced policy. It is esp true that we should not have been losing public sector jobs during the very slow recovery given how low interest rates paid by US govt are….I think if we could adopt some sort of longer range plans it could hopefully free us up to do more in the short run.

        1. “It is esp true that we should not have been losing public sector jobs during the very slow recovery given how low interest rates paid by US govt are”

          This is extraordinarilly dangerous reasoning. At some point, those debts incurred at unusually low rates of interest will have to be rolled over to whatever rate of interest prevails at that time. If the interest rate goes from practically zero to several percent, the cost of servicing the debt can increase many times over.

          In short, one should not view “teaser rates” as an excuse to get deeper into debt. Thinking like that is why defaults happen.

          1. @Brett Bellmore
            if there were some sort of crisis that put interest rates to their 30 year historical avg., we’d be in tough shape for sure. I do think if we could manage a medium/long range plan to increase taxes, deal with Soc Sec and identify some steps we would take on health reform, then we can and should have done more to support public sector employment I think. In my book I say some day we will deal with the long range issues and it would be better to ease into it instead of have to address it due to some sort of economic calamity that gives us fewer options.

  5. We want a budget surplus in boom times so we have more room for action in emergencies. Yes, Republicans will waste it when they get power, but that is not a good counter-argument, for Republican rule, at this point, has to be considered an emergency.

  6. So I assume you in fact read the Progressive Caucus budgets of the last few years. They’ve been introduced and even voted on in Congress. And they balance the budget. Do you agree with them?

    1. @caphilldcne
      If you look at Progressive Caucus budgets or Center for American Progress budget, they are aiming for balance at around 23-23.5% of GDP. I think that is higher than optimal probably,and certainly higher than is politically feasible. However, because they are willing to raise taxes and have committed to a health reform strategy (incl calling for more health reform) their plans to achieve balance are far more feasible than say the Ryan budget, or the Heritage Foundation Balanced Budget amendment approach because they set balance levels of 18-19% of GDP–mathematically possible, but it seems politically infeasible to have spending that low as baby boomers mover in Medicare and Soc Security….plus, it takes profound health reform to balance at that level of GDP esp given their Military preferences, and they have of course not even marked up any health reform replace bill in the Ways and Means and Commerce committee.

      In short, my book proposes to achieve balance at a lower level of GDP, but these plans you note are credible plans.

      1. “I think that is higher than optimal probably…”

        What does this mean, exactly? I am willing to bet that you don’t actually have an empirically tested model that implies this.

        1. @Russell L. Carter
          I don’t have an empirical model that says the correct size of govt; optimal was not the best word to for me to use. There are many tradeoffs and preferences and deciding the size of the budget is a clash of values that have to be hashed out.

          We do observe that fed tax receipts the past ~40 years are 18% of GDP and spending is around 20.5% of GDP, though in 1970s and 1980s it was routinely ~23% and the baby boomers were paying taxes then and not drawing Soc Sec and Medicare. So, attempting balance at 21% is hard but I think possible. Of course it can be lower, but I don’t see plausible (politically) spending reductions to get down to the 18-19% that various Republican plans propose given their (1) defense preferences and (2) the fact that they don’t have a health reform plan. As I said earlier, the Center for American Progress budget that aims for balance at ~23-23.5% of GDP is more plausible than Repub plans for 18-19 percent because they are willing to raise taxes and Repubs have too many magic asterisks in their proposal (esp health reform).

  7. “We want a budget surplus in boom times so we have more room for action in emergencies.”

    Two things here: (1.) Politically, there will always be an “emergency”; (2.) The issuer of a fiat currency cannot “save” for the future….that is a concept that makes no sense.

    Don: I disagree strongly with this whole line of argument. Politically, we need to redress the severe power imbalances in our society. We need to flatten incomes. We need to end policies that relentlessly shift income upward (resulting in progressives arguing unsuccessfully for ‘raising taxes’). We need jobs. We need to end racism. None on these are taken on directly by a concerted push to balance the budget, or even worse, “reforming” Social Security. Sorry, I simply cannot see any positive result of such an approach.

    PS: The Clinton surplus was generated largely by a business/jobs boom, low interest rates, and a stock market bubble.

    PPS: Claim: “Long before countries reach 100% of GDP in debt service, they default.” The fed (or other central bank) can hold unlimited funds on its balance sheet. Why is this so hard to understand? It’s like Dean Baker repeats this a thousand times, and folks here just don’t get it.

    1. bobbyp: Claim: “Long before countries reach 100% of GDP in debt service, they default.” The fed (or other central bank) can hold unlimited funds on its balance sheet. Why is this so hard to understand? It’s like Dean Baker repeats this a thousand times, and folks here just don’t get it.

      100% GDP in debt service would mean that every single dollar generated by the economy is being used to pay off interest and principal on public debt.

      At this (purely theoretical) point, we’d be talking about an economy that has collapsed, and there’s little a central bank can do about it. Yes, a central bank can always create more money; but at that point nobody would (1) buy government bonds anymore and (2) the creation of sufficient money would lead to hyperinflation. In such a situation, default would be the only sane solution (see, e.g., Argentina).

      That a country never need to go bankrupt in a currency it controls does not mean that not going bankrupt is always the best option.

      In practice, there’s a limit to how much public debt a country can manage. Granted, that limit may be much higher than what we currently have, but it’s not infinite.

    2. bobbyp: “We need to end racism.”

      Put down your sword. I don’t think this is fair to Don Taylor to imply that if he wants a balanced budget he doesn’t care about racism. Is there some reason people can’t care about both? How about expanding health care coverage — I’ve worked a lot on that — does that mean I am neglecting the problem of racism? Give other people here some credit, no one here is arguing for racism.

      1. I implied no such thing. I am prioritizing. Joining the VSP’s in arguing for a balanced budget is way down on any list of political goals I may have.

  8. Too bad Keith stopped reading Krugman….if he did, he would know that Krugman does not hold the straw man position the KH applies to him…(a straw man, by the way, that he fails dismally to demolish). PK just doesn’t push it so much due to his analysis of the dire straits our economy is in right now. See also his vehement and rather public disagreements with the MMT crowd.

    1. I’ve been waiting for someone to produce the data on this KH rejoinder:

      “Long before countries reach 100% of GDP in debt service, they default.”

      (clue: your choice of econometrics displaying more or less the same results
      are a DuckDuckGo search away)

      It’s incredibly, amazingly economically illiterate. He could start by looking
      at GERMANY. Then as a second year exercise, contemplate, with patience,
      the debt level of Japan, and its borrowing costs.

      I want to say here, explicitly, that this blog is descending into crankitude
      on most things NOT related to substance abuse. It’s a real shame.

      1. That was actually James who wrote that, and he was talking about debt service, not debt level (and in a purely hypothetical way). A debt level of 100% of a country’s GDP isn’t a problem; a debt service amounting to 100% of a country’s GDP would be.

        1. Katja,

          In theory, the fed could hold $300 trillion of debt on its balance sheet producing $15 trillion of interest (this is just an example) or roughly the size of the economy. In the recent crisis, the fed took on several trillions of debt….where is the inflation? Where is the economic collapse? PS: The interest is remitted to the Treasury as “income”. Thanks.

          1. Debt service right now is around 6% of the federal budget, not 100% of the economy. That’s orders of magnitudes of difference.

            That was because James was talking about a purely hypothetical situation, as I had pointed out, not the actual situation of any country on Earth. So, naturally, no economic collapse because the America in our real world does not correspond to that hypothetical situation.

            If the Fed (again, hypothetically) created $300 trillion of M0 money overnight, given that our total money supply (M2) currently is about $10 trillion, then our problem would of course not be increased debt service (at least not initially), but the massive devaluation of the dollar.

      2. Russell: You have (1) Attributed to me something I did not say – it was a quote from a prior comment, (2) Thereby read and attacked the statement out of the context and data in which it was presented (3) Mixed up debt level and debt service, while accusing others of economic illiteracy.

  9. Katja,

    As Keith sharply pointed out, James confused two things: debt/gnp ratio and interest payments/gnp ratio. Obviously they are not the same. The point remains: The fed controls interest rates, not the money supply. To use US debt as a proxy for the money supply is not correct. To assume that a large debt/gnp ratio will automatically lead to higher interest rates is incorrect…because…well, the fed controls interest rates. Do you agree? Bringing up the inflation bogeyman is simply and flatly wrong because we have a concrete example right now of a huge increase in bank reserves (i.e.,’quantitive easing’)which is the traditionally assumed transmission mechanism whereby the central bank increases the money supply…..and, and….again I ask…..WHERE IS THE INFLATION?

    What I see here is a lot of misplaced worry about our level of public debt. We have bigger things to tackle (as stated above). I fail to understand the apparent animus that some here have returned.

    1. I am going to reply to a boppyp comment AGAIN, knowing full well that that is exactly my intention, and reiterate that KH and sadly Katja do not have a clue about what’s important about debt, in the short run, and the long run.

      I may be mistaken on this but there was a boppyp a long time ago who originally put a lot of PHK’s archives online.

      If our one here is the same one, you Loyal Party People are being gifted something you don’t deserve.

      I am sorry but I read Homage To Catalonia over the weekend and boy howdy is the group think centrism here shrieking loud and hard.

      1. Given that I have carefully avoided making policy statements about debt for any actual scenario, I’m not sure where you get the idea that I do not have a clue about what’s important about debt either in the short or long run.

        You may also be attributing policy ideas to me that I do not actually subscribe to. Not everybody who scrutinizes or even challenges the details of a policy is hostile to that policy.

    2. Bobby, you are assuming way too much. I’ve only been discussing hypothetical scenarios (hypothetical to the point of being impossible in practice).

      They have been discussed specifically because of their practical impossibility. How on earth you took that and from that started assuming that they imply anything about what I think about the actual current financial situation of the United States (which I have largely been silent about) I do not know.

      When you’re asking where the inflation is, let me just reiterate that I am not and have not been talking about the United States in 2012; I was talking about a hypothetical scenario, by way of explanation, that James brought up and where debt service equaled GDP (again, debt service, not debt level). I have never claimed that there was any inflation or that an increase of the current public debt would cause inflation (nor did I say that it wouldn’t). You just erected a strawman, falsely attributed its creation to me, and then furiously started bashing it.

  10. Katja,

    You wrote, “a debt service amounting to 100% of a country’s GDP would be (a problem).” You say this is a hypothetical, but it strikes me as a factual claim. I merely replied that it would be possible to have a debt service/gnp ratio of 100% that would not necessarily imply economic armageddon. Like you say, it’s hypothetical.

    In reply, you assert that under my hypothetical scenario there would be a “massive devaluation of the dollar”, again a factual claim that is asserted without any evidence or explanation as to how this would necessarily take place.

    My reply made some claims about monetary operations and the setting of interest rates and asked you some questions. I also pointed out that we have a real world example of a “massive increase” in the reserves in the banking system (the traditional way most think creates money) and there has been no massive devaluation or inflation. It was my intent to set the table for further conversation.

    For my trouble, I am accused of “assuming way too much” and “building straw men”. Since I did not build a straw man, I did not demolish any, furiously or otherwise.

    The internets are indeed hard.

    1. Bobby: I merely replied that it would be possible to have a debt service/gnp ratio of 100% that would not necessarily imply economic armageddon.

      If you have debt service at 100% of GDP, you’ll essentially have to tax everyone at 100% of their income and profits just to pay interest and principal coming due; you’d have nothing left over to pay for regular government expenses and citizens would not have anything left over. That or starting to sell your assets, which is not any better. Debt service at 100% of GDP is unsustainable. It is economic armageddon.

      Bobby: In reply, you assert that under my hypothetical scenario there would be a “massive devaluation of the dollar”, again a factual claim that is asserted without any evidence or explanation as to how this would necessarily take place.

      That was actually a different hypothetical scenario, namely that the Fed would create $300 trillion in base money. I’m not sure if you even understand the magnitude of that amount. Over the past years, the Fed has created about $3 trillion in base money for QE, give or take. You’re now talking about 100 times that amount. For $300 trillion you could buy the entire US economy and have plenty of money left over.

      Let me walk you through the consequences. You’re the Fed, you just decided to create $300 trillion of base money, and now you’re looking for something to do with it. Quantitative Easing sounds good; unfortunately, there are just not enough liquid assets in the world for you to buy. If you do it anyway, you’re creating a seller’s market and will be paying way above fair price => instant devaluation of the dollar. If you instead try to buy foreign government bonds for that amount, you’re selling massive amounts of US currency for foreign currency => devaluation of the dollar.

      Of course, to be clear, we may not end up with a devalued dollar, but only because we’ve destroyed the free market in the process (that’s what nationalizing most of the US economy will do, which is what happens when you go on a shopping spree for $300 trillion); we will also probably have started the biggest currency war the world has ever seen.

      I’m very much in favor of more government spending right now in order to fix the economy, but $300 trillion is undiluted insanity.

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