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September 8th, 2008
09:25 pm

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Shared Responsibility
So...I doubt that any of us, when you really get down to it, are willing to literally or figuratively whip out our checkbooks and write a check made out to "Creditors of the United States" for our share of the national debt...or even a part of it.

We wouldn't even need to pay off the whole debt. Having an economist for a father, one gets to learn a few things about markets and money. A reasonable structural debt is actually quite normal--it represents the investment that a nation has made in its future. We see this from the personal level--home mortgages and car loans--things which we plan to receive value from for a long term, and for which we deem it worthwhile to go into debt. Small municipalities, school districts, businesseses, state governments--all typically do managed borrowing. The market can correct for imprudent debtors by calculating credit scores, bond ratings, and the like...as it gets more expensive to borrow, the value calculation changes. All of a sudden it's not worth going into debt to get that expensive car, because no lender will give us the money at a reasonable rate.

The problem is that nation-states--or at least the United States--seems to not have had enough disincentive from rapacious borrowing to deter the hungry appetites of borrow-and-spend politicians.

The trailers for I.O.U.S.A., the overall feeling of financial crisis, including the recent nationalization of Fannie and Freddie to prevent their collapse, definitely has this on my mind all of the time.

$9.6 TRILLION dollars of Federal debt...That can't be good. But what is a healthy federal debt burden in absolute dollars or normalized against something like GDP? How do we get there from here in? What's the Debt Reduction Plan for the U.S.?

Get ready to tighten your belts and whip out your checkbooks...I think it's time to go on a debt diet.

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From:servingdonuts
Date:September 9th, 2008 02:25 am (UTC)
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I wouldn't worry all that much. Per this chart the national debt relative to GDP is no higher than it was at its peak in the mid-nineties, and more or less at the same level it's been at since the mid-eighties. The structural debt appears about as reasonable today as it has been for the past twenty years.

There are moral implications about the debt - can I be liable for debt incurred in my name but against my will? But let's just say that the national debt has roughly the same moral validity as taxes and move on to less touchy subjects, namely: what to do about all this debt? The anarchists (such as yours truly) would deny the moral validity of the debt and say the correct way to dispose of it is simply to repudiate it. But then the realists (such as yours truly) would point out that that's not going to happen until Anarcho Claus comes down from the North Pole with a sled full of Loosely Allied Autonomous Microstates for all the good little boys and girls, and so in the meantime we might as well consider our next best options.

In my view, the relevant question is not the debt, nor even the federal budgetary deficit (i.e. how much the debt grows by each year). The question is spending. You see, thanks to something called Ricardian Equivalence, there is no difference whatsoever versus paying for a dollar of spending NOW through taxation, or paying for it LATER by taking out a loan and then eventually paying off that loan through taxation. The damage isn't done by WHEN it's paid for, the damage is done by having spent it in the first place.

Now, you can quibble over Ricardian Equivalence. Okay, you can do a lot more than quibble. You can write careers' worth of papers arguing it back and forth, and people have. But consider this blunt but illustrative analysis: if you take a collectivist view such that you aren't concerned with who specifically should be paying, but rather only consider what the total burden to society in general is, then it certainly doesn't matter whether you pay with present taxes or borrow against future taxes. Contrariwise, if you do pay attention to who is doing the paying, then without a doubt we should be doing more borrowing and more deficit spending than we are today. Why? Because deficit spending will be repaid by future generations - and future generations are going to be much, much, much wealthier than we are. In fact, by avoiding deficit spending we're actually leaving those future generations worse off, assuming that the marginal dollar of spending goes to things that provide lasting benefits (they don't have to be long-lasting, just something more durable than immediate consumption). That may or may not be the case; I think you'd be hard-pressed to argue that anyone really knows what the marginal dollar of spending goes to, given that it's all controlled by the Sausage Factory.

Bottom line: worry about how much we're spending, worry about what we're spending it on, but don't worry about the debt.
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From:happypete
Date:September 9th, 2008 09:48 am (UTC)

I know....

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It's this chart that's got me worried. The GAO has no reason to be pessimistic...if anything, the obvious.

It appears that we've written checks that we cannot cash, and that the current fiscal policy has us reaching a point where we are borrowing money to pay the debt service...not a good place to be.
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From:servingdonuts
Date:September 9th, 2008 12:16 pm (UTC)

Re: I know....

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The best way to think of that chart is not in terms of debt, but rather in terms of spending. The curve takes off because entitlement spending (i.e. SS/Medicare) is assumed to grow at X% while tax revenues are assumed to grow at Y% where X>Y. If you change assumptions, you can make the projected debt curve nice and flat - either assume that economic growth is higher, or tax rates are higher, or a sufficient combination of both. If you do that, poof the debt doesn't balloon.

But that just hides the real problem, which is not unrestrained growth of the debt, but rather unrestrained growth of entitlement spending. Regardless of whether that spending is paid for with present revenues or future revenues (i.e. debt) is irrelevant to the question of whether it is a good idea to spend that much on those programs.

The biggest problem with SS and Medicare is that it is structurally unsound. The implied obligations of the program have the potential not just to continually exceed tax revenues, but to actually exceed national income. In other words, as it is, if nothing changes, eventually SS and Medicare will cost 100% of everyone's salary - we'll all be working full-time to pay for the retirement benefits of the elderly, with nothing whatsoever left over for anything else. This is nonsensical, of course; something will change long before that point. But it points out that the current entitlement spending policies are not sustainable in the long run.

It would undoubtedly be wiser to stop making plans that are definitely not sustainable, and alter the programs structurally so that they are definitely sustainable. But that sustainability is purely a function of spending, not a matter of debt. It's just that talking about the debt gets people's attention, because it's scary, because everyone knows what credit card bills are like. Talking about structurally unsustainable spending programs for SS and Medicare gets you voted out of office by the AARP.
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From:coleoptera
Date:September 9th, 2008 02:29 am (UTC)
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Larry saw the film, then the new bailouts were announced, so he freaked out this morning and thinks we should move to another country.
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From:happypete
Date:September 9th, 2008 09:52 am (UTC)

Yeah..well...

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...if I could figure out where was better, and what nation would be insulated from the after-shocks of some sort of major economic collapse...I might think about it. The down-sides of day-to-day living in any country sufficiently isolated from globalization might not be worth the benefit...
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From:coleoptera
Date:September 9th, 2008 12:10 pm (UTC)

Re: Yeah..well...

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I think there will be no better place.
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From:servingdonuts
Date:September 9th, 2008 02:41 am (UTC)
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Oh, also: worry about unrecognized liabilities that should be considered part of the debt, but aren't. Such as the "implied" guarantees behind Fannie and Freddie's debt instruments. And the Social Security and Medicare benefits to be paid in the future. Neither of these are part of the official public debt totals... but they unquestionably are part of the public debt, official or not. They will have to be paid out of tax revenues, someday.

The good news is that markets aren't stupid, and in theory the current price of our debt (i.e. the interest rate on T-bills) takes into account all conceivable factors that could affect our ability to repay our debt. In other words, the market knows we're going to have to pay for Social Security and Medicare and the GSEs eventually, on top of all the existing T-Bills that are still out there to be repaid, and even with all that they still only are charging us 4.26 percent for a thirty-year loan. That's not bad.

The bad news is that markets can, in fact, be really really stupid, especially about things that nobody is really talking much about, like the unfunded Social Security and Medicare liabilities, or the possibility that the government might actually have to cover for the GSEs. Nah, that'd never happen, right? Oops. So never mind theory... in reality, the fantastically wonderfully low interest rates that T-Bills are getting may be just be blindness to the coming fiscal disaster that the Federal Government will find itself in in the coming decades.

Maybe.

Who knows?

If you do, then you can make a killing in the market. Good luck.
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From:happypete
Date:September 9th, 2008 09:54 am (UTC)

it's all in the assumptions...

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I'll have to look at the GAO numbers. My dad worked for CBO for twenty years, so I tend to trust their independence and impartiality more than I do other agencies. I should see what their projections look like, and on what assumptions they are based.
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From:datavortex
Date:September 10th, 2008 03:54 am (UTC)
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Worry about the debt. A lot.

A financial situation this bad, both fiscal and monetary is unprecented in recorded history. The structural debt and the real obligations over the next 20 years are staggering, and we won't even "meet the minimum". Before your child is in college we will have just enough revenue to cover interest on our debts and non-discretionary spending like social security payments. This means no military, roads, prisons, etc. After that the entitlements quickly die out too. We are facing total disaster and a debt the likes of which one generation has never thrust upon the next.

If you don't want to read any of the books and you can't sit down for 90 minutes for an informative and entertaining movie, then here is the short, short version.
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