Monday, August 8, 2011

The unanswered austerity question: What level of debt is ideal?

Right now, a big chunk of the political class in the US, including the President, is in the mood for a little austerity.  The public debt is just too high, so sayeth the punditocracy. Some go far as to propose various flavors of "balanced budget amendment", though many such proposals contain other terms (such as requiring supermajorities to raise taxes) that many consider objectionable.  Ignoring salient issues such as the seriousness of deficit hawks (do they really want to lower the public debt, or simply oppose the spending desires of the other party, but don't mind at all spending public funds on their own priorities) and how do we get there, there's a significant question that hasn't really been discussed with regard to the deficit:

Where should it be, anyway?

Should it be zero, forever? 

Should it be zero over a long-term time window (several decades), but permit fluctuations as necessary to deal with short-term economic cycles?

Should a long-term deficit be maintained, albeit at a lower fraction of GDP than we currently have?

Should the permitted deficit be dependent on inflation-adjusted interest rates--in other words, if the bond market thinks the debt is too high, then its too high?  (And given that despite Friday's S&P downgrade, interest rates on Treasuries remain absurdly low--does the market really conclude that the US poses an unacceptable credit risk)?

Should the US government actually attempt to have a surplus?  (And if one assumes that the dollar remains a fiat currency which the US can create or destroy at will; what would the point be of the US having a surplus in its own currency?)

Should Congress be required to use PAYGO accounting--appropriations and taxes need to be balanced, albeit not in the same fiscal year? 

In other words, what is the endgame of austerity?  And what is the justification--economic, political, moral, whatever--for that position?

Simply assuming that it's good for you, without discussing why or in what dose, strikes me as a major opportunity for mischief.


  1. Yes, the endgame of austerity is to cut taxes on "us" and spending on "them."

  2. Given the fact that Bush along with the complicity of both houses of congress 'intentionally' put this country into insolvency by starting a hugely expensive war AND cutting taxes simultaneously the whole charade is nonsense.

    Created by the ruling class it, that same ruling class now proposes that the 'citizens' (more rightly known as serfs) need austerity and that austerity should come out of citizen 'entitlements'.

    I say get out the guillotines for these leeches who derive their luxurious existence off the rest of us.

  3. @Gary: Why? (I suspect I know, but feel free to state for the record...)

    Have you moral objections to public debt (or excessive amounts thereof)?

    Do you see restrictions on deficit spending as a means to limit the size/scope of government?

    Are you concerned about inflation or devaluation of the currency that might result as a result of either the multiplier effect (and government borrowing contributes here just as much as private-sector borrowing), or of a potential future devaluation that might occur should the US find itself insolvent?

    @Al, Cap'n: Yes, I suspect that's part of the plan... but where do you think the level of public debt ought to be (independent of whose hide any austerity might come out of?)

  4. I'm just a good old fashioned radical Whig at heart; and we radical Whigs argue that public debt is the surest way to fund things we don't like - like state surveillance, elective warmaking, systems of patronage (corruption in other words), etc. So yes, I oppose the Hamiltonian notion of a permanent public debt for the reasons that Hamilton was in favor of it - that is he wanted a permanent public debt as a means to create a vigorous state that could engage in warfare and all the other things European powers did in the 18th century. We should never forget that from warfare comes a host of evils, and elective warfare is not possible without public debt.

  5. Though not a Whig of the Bolingbroke variety, but of the Trenchard variety - the main difference being that the former distrusted commerce and the latter did not.

  6. @Gary--Reducing revenue sources on the grounds that you object to certain areas of spending, always strikes me as a bit disjointed argument, unless you wish to include structural reforms that limit how revenue may be spent. You seek to defund the warfare state (as do many progressives), others seek to defund the welfare state--who do you suppose might win that argument? After all--what do you think Norquist means by "starve the beast", and why do you suppose the GOP didn't care about the deficit when Bush was in office?

    Indeed--I suspect that the reason many modern progressives are skeptical about debt reduction and austerity, is that they are convinced they would "lose" the resulting budget fight. Already the "select committee on the budget", created as part of the recent debt ceiling deal, is being derided as "catfood commission 2" by the left--their assumption is that Social Security and Medicare will be whacked (along with discretionary spending, including infrastructure), but defense and taxes will be more or less left alone. Whether that assumption will end up being correct or not, I don't know, but there is a significant level of pessimism on the left that President Obama will "cave" on these matters, and that he shares the conservative point of view that a robust defense is a necessity but social insurance is a luxury we can no longer afford. Obama's stated positions don't support that view, but the beltway consensus seems to point in that direction.

    The broader Beltway consensus seems to be that in order to prosper as a nation, we need to win the race to the bottom, and enact policies which favor the wealthy--lest they continue to take their money and invest elsewhere.

    The experience of other Western democracies--notably Germany, which like the US is a federal republic and isn't known for leftist politics (it is more to the left than the US, but less so than, say, France), but has a robust manufacturing sector and is a net exporter, suggests that this isn't necessarily true. An obvious difference between the USA and the BRD is that the latter is a parliamentary democracy--where the sort of gridlock and paralysis presently plaguing Washington DC would likely result in new elections being called.

  7. Scott,

    The other Western democracies live under the military-welfare umbrella of the United States and they have done so for some time. Once that umbrella is withdrawn (which it will be sooner or later) they will have to fork over money for their own defense and that will mean money taken away from their generous welfare subsidies (which are already under a lot of pressure as it is due to the changing demographics of those nations).

  8. BTW, there are already radical whig limits on spending in the Constitution; take for instance the requirements regarding outlays on the military found in Art. I - that comes directly out of the country party efforts to place similar on the Parliament during the 18th century. The problem of course is that the rise of the imperial Presidency from FDR onward* (which the Obama administration has only exacerbated - see our unconstitutional invasion of Libya as an example) has worked those limits down to the nub. We live in exactly the sort of Hamiltonian warfare state that he would have loved; where local and state power are at an ebb and the populace looks directly to the federal government for its primary loyalty.

    *Or TR or wherever one wants to start it.

  9. FYI: Michael Ondaajte is going to be in PDX Oct. 8th.

  10. Perhaps we can call you a neo-Whig.

  11. It is a fair way to describe me; neo-Whig, member of the reconstituted "country party," etc. I myself find the term "libertarian" far too cumbersome much of the time - particularly given the vocal minority I call "libertarian interventionists" - an idea that boggles the mind.

  12. Outside of Depression conditions, keep the deficit as a percent of GDP over the business cycle on average below the growth rate, until the public debt is about 20% of GDP, then try to hold the deficit as a percent of GDP roughly in line with the average rate of growth over the business cycle.

    In Depression conditions, spend on useful infrastructure and direct employment until the Depression conditions (which is mostly a balance sheet problem) has passed, then switch to the above.

    Of course, we are presently in Depression conditions, with real labor unemployment certain to be over 10% for over three years. The push by the wealthy to have positive net savings must either be accommodated by government providing the debt or fiat currency with which to save, or by repressing income to frustrate that desired saving rate.

    Of course, if we would pull back on deficit creation that is less effective at stimulating the economy, like high income tax cuts and foreign military adventures, we could slake the private sector's demand for saving with a smaller deficit than if we insist on the high income tax cuts and the reckless foreign military adventures, but in either case, under Depression conditions, we should be providing the private sector with the public deficits in which to save that it is quite clearly demanding, as evidenced by the extraordinarily low interest rates on Treasury securities.

  13. Milton Friedman advocated a “zero public debt” regime. See:

    And unknown to the West’s ignorant elite, Keynes pointed out that it is unnecessary to run up debt in order to bring stimulus (i.e. a government can perfectly well print money instead of borrow it). See 2nd half of 5th para here:

    As for getting rid of the national debt, that’s easy. See:

    As for your other questions, they were all answered long ago by advocates of Modern Monetary Theory. Go through the “Mandatory Readings” here:

  14. What level of debt is ideal? The answer is thus.

    First, ALL the arguments for governments running into debt are total BS. For a full explanation of this point, see:

    The only reason for government running into what MIGHT BE CALLED debt is that it is good idea to run a deficit in a recession. But as Keynes and Milton Friedman amongst others pointed out, a deficit can perfectly well accumulate as extra monetary base rather than extra debt.

    Put that another way, for a government to borrow money and pay interest for the privilege is stark staring bonkers given that governments can print any amount of money they want anytime. It’s as daft as a dairy farmer buying milk in a shop when there’s a thousand gallon tank of milk outside the farmer’s back door.

  15. Sorry for the delay in approving a few posts--the site is configured to require moderation for posts older than a month or so.

    Yes, seigniorage is definitely an option, one with the indicated advantages over borrowing. Of course, it is generally regarded as hostile to the interests of the wealthy (the fight over strong vs loose money is an old one after all), borrowing far less so--which is why, I suspect, that "printing money" is frequently seen as a disreputable tactic. Even the limited levels of quantitative easing we've seen from the Fed in response to the Great Recession provoke calls of "debasing the currency" from critics, despite the fact that inflation is still low.

    Of course, if you're a certain Asian superpower which pegs its currency to the US dollar for mercantilist reasons, you probably don't like QE all that much....


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