The Debt and Deficit Follies

I find the constant angst over the national debt quite frustrating and, thoroughly vexed, I'm always hunting for a succinct explanation of why the size of the national debt doesn’t matter as much as folks believe it does. And I may have found that simple, focused explanation in Paul Krugman's opinion piece published in the New York Times on May 19:
 
“Whenever I write about debt and deficits,” Krugman wrote, “I receive the same letter — OK, not exactly the same letter, but a number of letters with more or less the same gist. They read something like this: ‘If I borrow money from the bank, the bank expects me to pay the money back. Why isn’t the same true for the government? Why can we keep borrowing when we already owe $31 trillion?’
 
“Just about every economist will reply that it’s misleading to make an analogy between household and government finances. But it seems to me that we often aren’t clear enough about why, perhaps because we don’t say it bluntly enough. So here’s the difference: You are going to get old and eventually die. The government isn’t.

 

“I don’t mean that governments are immortal. Nothing is, and no doubt someday America will, as Rudyard Kipling put it, be ‘one with Nineveh and Tyre.’ But individuals face a … predictable life cycle in which their earnings will eventually dwindle…

 

“And lenders therefore demand that individual borrowers pay off their debts while they still have the income to do so. Governments, on the other hand, normally see their revenues rise, generation after generation, as the economies they regulate and tax grow.

 

“Governments, then, must service their debts — pay interest and repay principal when bonds come due — but they don’t necessarily have to pay them off; they can issue new bonds to pay principal on old bonds, and even borrow to pay interest as long as overall debt doesn’t rise too much faster than revenue.”

 

There it is: “You are going to get old and eventually die. The government isn’t.”

 

So every entity who has ever lent you money has an expectation that you will pay your debts. Preferably on a strict schedule. And if you don’t do so, your creditors will come after you. And charge sometimes exorbitant penalties. And never lend you money again.

 

The government is in a different position. The government’s fundamental obligation is to service the debt. To pay interest. And sometimes to pay off the principal, but, as Krugman writes, the government can issue new debt, sell new bonds, which will work as long as there are buyers out there for those bonds.

 

And, yes, right now, default is a real threat for the US and that must be avoided at all costs. Default would mean that buyers of new bonds would disappear and the whole apparatus would come crashing down. But default is looming for political reasons. Not for economic reasons.

 

In practical terms, the extreme anti-government right would love to see the government crippled because that would end the government’s ability to fund change. The kind of change that in the past once kept the cost of a college education affordable for large numbers of people, poor people, and make it affordable once more. The kind of change that funded the expansion of public transit decades ago and allowed poor folks to find affordable ways to get to and from work. The kind of change represented by last year’s misnamed Inflation Reduction Act, which is actually the most significant government effort ever to target the climate change crisis and which will dramatically increase government investments in green energy. And in doing so invest in new jobs across the country. The kind of change that could threaten existing power relationships and dethrone incumbents for whom the status quo works nicely, thank you.

 

Of course, the size of the national debt is not inconsequential. As a line item in the country’s annual budget, the interest expense will be almost $650 billion in 2024. But spending for the military in the same year (including the portion of the military budget that is buried in the Department of Energy and other departmental budgets) will be more than $2 trillion in the same year. Education spending, which might well be cut in any debt ceiling compromise negotiated between Republicans and Democrats will hover between $60 and $70 billion, at best. So, sure, one could argue that annual interest on the debt comes at the expense of spending for other social programs, but one could make the same argument about $35 billion in federal farm subsidies, most of which goes to large agribusiness.

 

The point is that the national debt isn’t the problem. National budget priorities are. To address the issue of debt discussions that absorb so much rhetoric in a time of escalating climate crisis, increasing inequity and widespread attacks on the rights of sexual, racial and ethnic minorities, it’s past time for a national discussion of what we actually want government to do. And if anyone says that they want to balance the budget and reduce the debt, tell them to get serious.

Larry Summers misses another important point

He's clueless about the consequences of inequality

From time to time, Larry Summers gets things very wrong. He hypothesized that women were largely underrepresented in the sciences at least partially because of innate gender differences.

He championed bank deregulation during the Clinton years ("...it would take a Republican Congress and the Clinton administration’s Robert Rubin and Larry Summers at Treasury to repeal Glass-Steagall."), a deregulatory step that others, including Ron Suskind, author of Confidence Men: Wall Street, Washington and the Education of a President, suggest had much to do with the economic collapse of 2008.

And, following that collapse, from which he seemed to have learned the wrong lessons, Summers, along with Tim Geithner, was one of the leading actors pushing bank and corporate bailouts and downplaying stimulus spending and infrastructure investment within the Obama administration.

As Dean Baker put it in "How Larry Summers' memo hobbled Obama's stimulus plan," posted on common dreams.org, "In short, while the data was crying out for more stimulus, the Obama administration openly embraced the need for deficit reduction, effectively slamming the door on the prospect of further stimulus. The basis for this original sin can be found in [Summers'] December memo, which, unfortunately, provided the administration's game plan long after it should have been clear that it had been superseded by events."

Susskind makes it clear that Summers' policy recommendations suffer, in part, from his high opinion of himself. "Instead of looking at [Summers'] record pockmarked with bad decisions, people see his extemporaneous brilliance and let themselves be dazzled. Summers' career has come to look, more and more, like one long demonstration of the difference between wisdom and smarts," Suskind wrote in Confidence Men.

But no matter the various judgments of history, Summers isn't going to go away. He blogs on economic and political issues for Reuters, gives lots of interviews and writes a lot of op-ed pieces. His latest piece, "American inequality goes beyond dollars and cents," ran in today's (June 9) Washington Post.

Summers' op-ed begins with a nod to Thomas Piketty's new book, Capital in the Twenty-First Century, which examines the growing inequality in income and wealth in the United States and around the world. "This is indeed a critical issue," Summers writes.

Later he observes that increasing "tax productivity" would not do "any noticeable damage to the prospects for economic growth," but quickly moves on from serious consideration of policy changes that might reduce inequality. Instead, he considers unequal outcomes in life expectancy and educational achievement, two areas in which Summers has never previously demonstrated much interest.

Nevertheless, he's happy to point out that differences in life expectancy for older people "more likely have to do with lifestyle and variations in diet and stress..." Summers also cites figures that make it clear that children from affluent families are exposed to many more "enrichment" experiences than are children from poor families, but, he concludes, that to address unequal outcomes we should not merely focus on inequality. "...it is crucial to recognize that measures to support the rest of the population in other ways are at least equally important," Summers writes, though he does not specify what those other "measures" might be.

In any case, what seems mightily important here is a point missed by Summers, but noted elsewhere by others, notably Paul Krugman and Robin Wells in "The Widening Gyre: Inequality, Polarization and the Crisis," which they wrote for inclusion in The Occupy Handbook, edited and compiled by Janet Byrne. Citing the work of political scientists Keith Poole, Howard Rosenthal and Nolan McCarty, Krugman and Wells argue that there's no separating inequality from the political polarization and gridlock of our time.

"Soaring inequality is at the root of our polarized politics," they wrote. That polarization has "made us unable to act together in the face of crisis. And because rising incomes at the top have brought rising power to the wealthiest, our nation's intellectual life has been warped, with too many economists co-opted into defending economic doctrines that were convenient for the wealthy despite being indefensible on logical and empirical grounds."

Krugman and Wells may not have been including Summers in their list of "co-opted economists," but given his demonstrated preference for bank deregulation and bailouts over significant stimulus spending, we should be forgiven for assuming Summers belongs on the list. Krugman and Wells see many of Obama's policy compromises with his intractable opponents in Congress as a direct result of inequality-linked political polarization.

In 2009, they wrote, "we arrived at a Keynesian crisis demanding a Keynesian solution--but Keynesian ideas had been driven out of the national discourse, in large part because they were politically inconvenient for the increasingly empowered 1 percent."

Summers would probably prefer not to be reminded that the policies he has advocated in the past have done little to protect ordinary Americans from economic hardship. His Post op-ed actually includes a shout-out to progressive economist Dean Baker, suggesting that Summers would like us to forget his track record. But we ought not forget--if we want to reduce income inequality (and political polarization), and if Hillary Clinton follows Obama to the presidency, we want to do our best to make sure that Larry Summers finds employment somewhere other than the federal government.