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I agree but one persons waste is a politicians path to votes. If I was the power behind a politician and they were going to cut my pet project having to do with the study of bugs and how they fly in warm weather vs cold weather because my daughter went to school for bugology and needs a grant then its no longer waste to me and I'll tell the politician that their career is over because of that picture I have of them making out with someone at a party on my yacht then we have a standoff and it doesnt get cut.
Everybody's pet project need to be thrown away, it just goes to show nobody fathoms failure to make debt interest repayment as a crisis. You can get elected on anything, a wall for example. Therefore if you show people how they living as a third world country, would be detrimental to their sons and daughters it can be done
It's not a good mechanism or solution though. It is one of the reasons Europe is actually struggling and paying the price for such an approach.
Government debt is really just a mechanism of intergenerational wealth transfers. Basically, we perform certain investments for future generations. In order to ensure we get these benefits, we issue a debt facility forcing future generations to pay us. It is a win-win situation if the projects we fund out of debt have higher returns than the interest rate.
It becomes not a win-win if our debt rating slides, bonds stop selling, and currency plummets. Hilarious how everyone believes they are impervious to any form of peril until it's too late.
Of course - that's why there is a limit to government borrowing from a fiscal neutrality perspective. The current interest rate probably already takes into account some of these impacts.
Economists have been estimating what is the fiscally neutrally level. Some point that debt to GDP could be in the 150-220% range and be sustainable (and potentially optimal). With current nominal growth rates in 6-7-8%, an interest rate of 4%, it appears the US is well within the sustainable region.
Nice diffusion, as if "all economists agree on something" would be an honest approximation of reality. Of course if you want to cherry-pick your economists like a Lawrence Summers or Joseph Stiglitz, they might say debt is good as long as its "debt with dividends" (for example Iraq and Afghanistan wars were bad forms of debt) "because we just need to predict GDP in 2050 accurately and things will go fine". Most economists do not agree debt above 100% is scarcely a happy go lucky kind of thing, because we can't predict 25-50 years into the future, and we have plenty of examples like where it can go wrong, like Greece, Argentina, Japan, Weimar Republic to name a few in the developed world.
I think most lay people as well as economists are agnostic on 'the dividends' in the matter, actually focus on what are the fundamentals at the end of the day this is what drives price activity for a currency and interest rates. The idea we can predict or determine what is cause and what is effect in economics is also mythology.
Rather than appeal to generic mythology "all economists agree", instead i'll pick an economist, let's see if you counter their line of thought (or their credentials):
I think the topic is being heavily researched, and you are right that there isn't consensus on optimal deficit or debt-to-GDP levels. In my piece, linked above, I focused on the speech given by Blanchard to American Economic Association in 2019, which started a new research push into the topic of optimal debt levels.
I believe more consensus has emerged around the notion that there isn't any global level of deficit or debt-to-GDP. Such rules can end up to be potentially extremely costly and harmful to all generations (see the European 60-3 rule). I think the focus should be on what we spend (the balance between long run investment vs consumption) rather than the debt level itself ( the debt level feeds into the decisions via the interest rates/costs of capital).
Regarding, the Kotlikoff piece - I don't have a particular view (I'm also not capable enough to judge). The note appears to focus on properly defining debt - an accounting question, which may be important. One things worth noting, that it has been 13 years since he wrote that piece.
I did look at some of his more recent research (here is an interesting piece discussing the dangers of the 'free capital' argument made by Blanchard and many others - https://kotlikoff.net/wp-content/uploads/2023/05/When-Interest-Rates-Go-Low-Should-Public-Debt-Go-High-April-2023.pdf - and whether such borrowing improves outcomes across generations in the narrow focus of risk-sharing). However, even in his latest piece he chooses to abstract from the wider issue of investment spending - p.25 "We are not considering deficit finance used to fund infrastructure, provide public goods, or correct externalities, like global warming. Nor do we consider the value of deficits as counter- cyclical policy."
I think the investment question is a complex one - how do we get today's generation to invest in things that will benefit future generations. That's where I believe debt is necessary since a 'promise' based system is not sustainable.
The literature review and cited works in Kotlikoff piece actually demonstrates how much research is being done in the topic (I can see at least 12 papers since 2019) - with two key questions - can government run large deficits (I think that the recent research suggests that it can be larger than we thought before); and should we run large government deficits (trade-offs, crowd-out of private investment etc.) The second is where there is less consensus, with Kotlikoff arguing that it is not welfare improving.
It was a pleasure discussing further with you but I need to agree to disagree with MMT people. Too many history lessons are available contrary to the core assumptions and we have a fundamental difference in philosophy on whether money is cause or effect.
I don't think this is an MMT discussion though (but I also don't know much about MMT, so not sure). To me it's an optimal inter-generational transfer mechanism question. Which is what government debt is at the end. Most research focuses on the issue of intergenerational risk sharing - such as the Kotlikoff paper. But there's also the long run investment issue which creates intergenerational tension.
But anyhow - I do enjoy the conversation as it also gets me to read other research work! So look forward to any other future discussions :)
Warren Buffett said this? “You just pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of congress are ineligible for reelection.”
I agree with you that the numbers and risks of insolvency are looking scary. However, the answer is not easy. The government employees a sizable portion of the population. When you talk about cutting spending, you are talking about cutting jobs and government contracts that many private sector corporations depend on. It will result in a severe recession/depression and that is when people expect the government to increase spending and boost the economy.
If Trump becomes president I expect him to take the approach of boosting GDP instead. It's the least painful way to make the numbers work.
You can also raise taxes, until the cutting can be done moderately. Besides, nobody said cut everything all at once. Funny how attacking the extremes is always the first response to any sort of diet.
The federal government is already required to balance the budget every year. They passed two laws in 1985 and 1987 that require it.
The problem is that every Congress since then has declared excess spending to be 'emergency appropriations' that are not covered by those laws.
When you say "last fiscal year" do you mean FY22 or FY23?
I agree but one persons waste is a politicians path to votes. If I was the power behind a politician and they were going to cut my pet project having to do with the study of bugs and how they fly in warm weather vs cold weather because my daughter went to school for bugology and needs a grant then its no longer waste to me and I'll tell the politician that their career is over because of that picture I have of them making out with someone at a party on my yacht then we have a standoff and it doesnt get cut.
Everybody's pet project need to be thrown away, it just goes to show nobody fathoms failure to make debt interest repayment as a crisis. You can get elected on anything, a wall for example. Therefore if you show people how they living as a third world country, would be detrimental to their sons and daughters it can be done
It's not a good mechanism or solution though. It is one of the reasons Europe is actually struggling and paying the price for such an approach.
Government debt is really just a mechanism of intergenerational wealth transfers. Basically, we perform certain investments for future generations. In order to ensure we get these benefits, we issue a debt facility forcing future generations to pay us. It is a win-win situation if the projects we fund out of debt have higher returns than the interest rate.
https://www.nominalnews.com/p/government-debt-should-we-worry-about
It becomes not a win-win if our debt rating slides, bonds stop selling, and currency plummets. Hilarious how everyone believes they are impervious to any form of peril until it's too late.
Of course - that's why there is a limit to government borrowing from a fiscal neutrality perspective. The current interest rate probably already takes into account some of these impacts.
Economists have been estimating what is the fiscally neutrally level. Some point that debt to GDP could be in the 150-220% range and be sustainable (and potentially optimal). With current nominal growth rates in 6-7-8%, an interest rate of 4%, it appears the US is well within the sustainable region.
Nice diffusion, as if "all economists agree on something" would be an honest approximation of reality. Of course if you want to cherry-pick your economists like a Lawrence Summers or Joseph Stiglitz, they might say debt is good as long as its "debt with dividends" (for example Iraq and Afghanistan wars were bad forms of debt) "because we just need to predict GDP in 2050 accurately and things will go fine". Most economists do not agree debt above 100% is scarcely a happy go lucky kind of thing, because we can't predict 25-50 years into the future, and we have plenty of examples like where it can go wrong, like Greece, Argentina, Japan, Weimar Republic to name a few in the developed world.
I think most lay people as well as economists are agnostic on 'the dividends' in the matter, actually focus on what are the fundamentals at the end of the day this is what drives price activity for a currency and interest rates. The idea we can predict or determine what is cause and what is effect in economics is also mythology.
Rather than appeal to generic mythology "all economists agree", instead i'll pick an economist, let's see if you counter their line of thought (or their credentials):
Laurence Kotlikoff : https://www.imf.org/external/pubs/ft/fandd/2010/09/kotlikoff.htm
I think the topic is being heavily researched, and you are right that there isn't consensus on optimal deficit or debt-to-GDP levels. In my piece, linked above, I focused on the speech given by Blanchard to American Economic Association in 2019, which started a new research push into the topic of optimal debt levels.
I believe more consensus has emerged around the notion that there isn't any global level of deficit or debt-to-GDP. Such rules can end up to be potentially extremely costly and harmful to all generations (see the European 60-3 rule). I think the focus should be on what we spend (the balance between long run investment vs consumption) rather than the debt level itself ( the debt level feeds into the decisions via the interest rates/costs of capital).
Regarding, the Kotlikoff piece - I don't have a particular view (I'm also not capable enough to judge). The note appears to focus on properly defining debt - an accounting question, which may be important. One things worth noting, that it has been 13 years since he wrote that piece.
I did look at some of his more recent research (here is an interesting piece discussing the dangers of the 'free capital' argument made by Blanchard and many others - https://kotlikoff.net/wp-content/uploads/2023/05/When-Interest-Rates-Go-Low-Should-Public-Debt-Go-High-April-2023.pdf - and whether such borrowing improves outcomes across generations in the narrow focus of risk-sharing). However, even in his latest piece he chooses to abstract from the wider issue of investment spending - p.25 "We are not considering deficit finance used to fund infrastructure, provide public goods, or correct externalities, like global warming. Nor do we consider the value of deficits as counter- cyclical policy."
I think the investment question is a complex one - how do we get today's generation to invest in things that will benefit future generations. That's where I believe debt is necessary since a 'promise' based system is not sustainable.
The literature review and cited works in Kotlikoff piece actually demonstrates how much research is being done in the topic (I can see at least 12 papers since 2019) - with two key questions - can government run large deficits (I think that the recent research suggests that it can be larger than we thought before); and should we run large government deficits (trade-offs, crowd-out of private investment etc.) The second is where there is less consensus, with Kotlikoff arguing that it is not welfare improving.
It was a pleasure discussing further with you but I need to agree to disagree with MMT people. Too many history lessons are available contrary to the core assumptions and we have a fundamental difference in philosophy on whether money is cause or effect.
I don't think this is an MMT discussion though (but I also don't know much about MMT, so not sure). To me it's an optimal inter-generational transfer mechanism question. Which is what government debt is at the end. Most research focuses on the issue of intergenerational risk sharing - such as the Kotlikoff paper. But there's also the long run investment issue which creates intergenerational tension.
But anyhow - I do enjoy the conversation as it also gets me to read other research work! So look forward to any other future discussions :)
Warren Buffett said this? “You just pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of congress are ineligible for reelection.”
Who passes such laws?
Vivek has talked about zero-based budgeting several times, actually
I agree with you that the numbers and risks of insolvency are looking scary. However, the answer is not easy. The government employees a sizable portion of the population. When you talk about cutting spending, you are talking about cutting jobs and government contracts that many private sector corporations depend on. It will result in a severe recession/depression and that is when people expect the government to increase spending and boost the economy.
If Trump becomes president I expect him to take the approach of boosting GDP instead. It's the least painful way to make the numbers work.
You can also raise taxes, until the cutting can be done moderately. Besides, nobody said cut everything all at once. Funny how attacking the extremes is always the first response to any sort of diet.