The True US Debt Burden

In macroeconomics, it is often taught that that the US debt burden (ie., the metric we should gauge how concerned we should be about the national debt) is the amount of interest paid on said debt divided by the measure of GDP during the same time period.   This makes sense.   We can roll over the principal of our debt and we can just use some of our growing economy to 'pay for' the interest we owe and it's 100% sustainable forever with no real cost to anyone.   As long as the growth in the interest we have to pay to the bondholders does not exceed our economic growth (it would have to be decades for it to really matter that much), we are right as rain.

But then, many textbooks, including the one I use to teach my macro class go on to say the best 'rule of thumb' therefore is to try to keep a constant or shrinking debt to GDP ratio - not interest on the debt, just debt.  This I have a big problem with.

The problem with using that as a rule of thumb is that it is not very useful, mainly, because it assumes that interest rates paid on the debt remain constant.  But as we all know, interest rates are anything but constant and in fact real interest rates have drifted negative in the past few years in some cases to the point that the government actually can theoretically earn money by going in to debt.  Even if that is not the case right now, the fact remains that real interest rates have dropped dramatically (thanks to the Fed) in the past 6 years.   This means that any new government debt is dirt cheap.   IE., interest/GDP aka the debt burden cannot be nor should be approximated by using debt/GDP as a measure.   If what you care about is the debt burden, and as long as the government collects such information, why would you need another measure of approximation anyway?   I mean, unless you are trying to scare people:

The CBO, as an aside, believe the debt/GDP ratio will fall for the next decade or so before it starts rising again, but it's also important to note that the rise precludes any assumptions about the investments we are putting in to the economy today.   So, really, predicting this sort of thing a decade out is a fools errand anyway.

But, why scare people, when you can present reality:

The reality is we aren't paying anything more on interest to our debt really now than we were back pre-9-11.   IE., thanks to a recovering economy and falling interest rates, despite our increased debt values, the debt burden is actually falling and really has been since the 1990s if you take a longer-term view largely due to the tech boom, the end of the cold-war, etc., which despite the bust, still has aided our long-term economy to this day:

Say it with my tea-publicans:  the economy drives the debt burden, not the other way around.

How Classical Economics Misleads On "Government Debt"

The classical model is mandatory reading for most macroeconomics classes.  I teach it because I have to, but I teach it in a way that the caveats and assumptions are front and center.   It's apparent to me that the profession of economics perhaps has not drawn enough attention to those assumptions (or perhaps exacerbated the view that they are unimportant), since it seems a significant chunk of the American public is hyper-concerned about the debt, when perhaps such concern is not warranted compared to all our other problems du jour. 

The classical economic model is a ‘pot of gold’ model, where an economy has a certain fixed amount of resources by which it creates productive capacity.   The classical model assumes markets are perfect in the sense that there is 100% utilization of resources at market determined costs of those resources.  This means that at market given wage and interest rates, we have ‘full employment’ (not counting a certain amount of unemployment that may exist just due normal movements between jobs, etc.) of both labor and physical capital (buildings are staffed, machines are manned, etc.). 

So, now, in this classical world the government comes in to an economy that is already using 100% of the resources and says, “I want to spend $1B more and give everyone healthcare.”   In our classical world, there are no more resources to devote to this new policy so the government has to take it from the existing ‘pot of gold’.  In other words, they have to take resources that are currently being (presumably productively) used in the private sector (by businesses).   In this world, at a minimum, the healthcare spending does nothing for growing the economy and at worst it does one of two things (or some combination):  (1) severely harms economic growth by taking some of the existing ‘gold’ necessary for the private sector to do its thing – either by increasing taxes or some other mechanism, and/or (2) in the case where the government starts up the printing press and starts manually artificially creating more 'gold' to fund its spending, inflation will ensue.   Neither of these is pretty.    In either case, the classical model further assumes that when the government spends money, 0% helps economic growth, while, when businesses spend money, 100% of that spending helps economic growth. 

But, the real world doesn’t look anything like the above classical ‘pot of gold’ scenario.  In the real world, economies are subject to bouts of booms and busts for varying reasons: sometimes there’s an asset bubble that bursts (housing, stocks), sometimes there is an oil crisis that causes prices of all business activity to raise thereby stunting growth, and sometimes there is a large degree of uncertainty and other more ‘soft’ things that create pessimism in markets – reducing the revenues businesses need to operate and grow effectively. 

In the real world, therefore, economies often are not operating at ‘full employment’.  Perhaps a significant chunk of the labor force is out of work.   Perhaps perfectly usable buildings are sitting empty for months.   Perhaps banks aren’t lending and perhaps businesses are just sitting unproductively on their assets.   This seems like common sense reality, but it’s this common sense fact that changes the outcome of the government wanting to “spend $1B and give everyone healthcare.”   Now, the government can enter into a deficit situation not by taking from the private sector but simply by starting up the printing press and creating more funds.  They could do this in the classical world too but unlike the classical world this will not result in inflation because the increased spending/demand from the new government policy simply soaks up some of the already underutilized resources (it results in workers being hired to enact the policy and carry it out, and it results in certain capital being used that might otherwise be sitting idle).   In this kind of environment, there is enough 'supply' of productive capacity to fill the 'demand' for this new government program, and no inflation needs to occur.

But what if this healthcare policy were enacted in a ‘normal’ economic time – not on the tail-end of a recession?   Even if we assume that 'normal' means we have 100% full employment (which is itself debatable), classical economics falls apart.  The key here is the unfortunate assumption classical economics often makes about the difference between when the government spends and when businesses spend.   Recall from above, in the classical model, when the government spends money, 0% helps economic growth, while, when businesses spend money, 100% of that spending helps economic growth.   Most folks recognize that assumption to be patently false in the real world.   When BP invests millions of dollars in off-shore oil rigging that eventually causes multi-billion dollar environmental catastrophes, or when Chinese businesses invest money in making tires for export to the US that subsequent explode while us Americans are barreling down the road – not all of that sounds particularly productive: quite the contrary actually.  Conversely, when the government spends money on educational infrastructure, transportation and logistics infrastructure, or perhaps even providing some certainty for millions of Americans regarding their healthcare…. Some of that is likely very productive and adds to the economic capacity of the United States.   The point here is that some government spending actually increases the size of the pot.   And to the degree that the potential for that growth that might not normally occur in the private market is probable compared to the potential for the policy to cause inflation – even in ‘normal’ economic times that spending policy may be worth it.   In today's environment, the potential of Obamacare to increase economic growth is debatable.   But the potential for it to cause inflation is almost non-existent because (1) it is of relatively small cost in the grand scheme of our economy, and (2) if the markets thought significant inflation was on the horizon, interest rates on non-government backed securities would be pressured to increase as potential lenders would demand a higher rate of return to cover the higher future prices - but this is not happening at all today.

 

What this means for our present political debate over the government debt is that there is a fundamentally simplistic worldview that many Republicans have, that is largely based on the overly simple classical model of economics: the idea that when the government goes more into debt, it takes existing resources from the private sector and kills economic growth.  It ignores the reality that in fact, the debt is much more a by-product of economic growth and the cycles of booms and busts as supposed to the other way around.   And that in fact, sometimes, the government can have positive effects on economic growth albeit with a substantial upfront cost.   Most folks call that an 'investment' in the future. 

"Gender Gap"

The gap exists, but is it a problem?  Women make 20+% less than men depending on what study you point to.  Ok.  So what.   Just saying it, doesn't make it a problem.  Black men make less than white men.  People with college degrees make more than those with high school degrees only.  Do we need to 'fix' those issues too?

The Indianapolis Star obviously isn't interested in the actual research - just more interested in assuming the gap is something that needs 'fixing' (without of course explicitly stating how, though implicity suggesting employers just need to pay more to women).

The fact that the author dismisses the anger from those that think the wage gap is something that needs fixing is unfortunate.  There is anger because the wage gap, while not a myth itself, perpetuates the myth that by itself it is a problem that needs solving.

Economists have studied this for years and a main reason a gap exists is because women self-select into lower paying jobs than men.  Also, many of these gap studies only focus on basic wages and salaries and ignore the benefits side of the equation which for many employers is 30+% of labor cost.  Additionally, women tend to work fewer hours than men.  Due to child-rearing norms, women tend to have less workforce attachment than men.  Education levels, training, and work experience differences have also been found to be factors.    That is why they get paid less for the most part.  Is sexism part of it?  I'm sure it is, but to imply that the entire gap of 20+% is sexism that needs to be 'fixed' is ridiculous.

The anger comes from the fact that many people don't think that gap should be 'fixed' - because it's either not really that broken or the part that might need fixing itself is much lower that it is purported to be.   In other words, they are angry because they feel there are erroneous assumptions being made.  The St. Louis Federal Reserve estimates that the gap, just after adjusting for benefits and job characteristics, may be less than 5%.   This is not to mention any of the other points I mention above.  Or, if you do think it needs fixing, perhaps folks should focus on why these differences exist from a sociological perspective, as opposed to just looking at this as a quick fix that means 'employers need to pay women more'.   Should we pay women more if the reason they are getting a lower wage is due to their own job choice, or due to their education/training/job attachment, or due to the fact that they get more in benefits...?  If so perhaps we need to start paying blacks more.  Perhaps we need to start paying high school drop-outs more.   Perhaps we need to start paying the less experienced more.  I don't suggest the answer is one way or the other to any of these. But to ignore these deeper issues is to ignore the statistics.

Krugman - Still pacing the halls of his ignorant tower.

Rather that me attempting to write a long post about Paul Krugman's lack of understanding endogenous money, I'll let Naked Capitalism do it for me: http://www.nakedcapitalism.com/2013/08/james-tobin-versus-paul-krugman.html

"Price Gouging": Both Sides Get It Wrong

I was reading my facebook feed recently and someone mentioned something about how firms that price gouge (like gas stations) are shameful, etc. etc. etc.  This reminded me that the topic is one of my favorite microeconomics topics.  So I thought I'd write about it.  Price gouging is defined differently by the various State laws covering the term, but generally it is a situation in which a firm raises prices of a necessity good(s) (like gasoline) during a short-term shock (emergency - like a weather disaster) that is not easily justified by the cost of producing or exchanging said good.

To most conservatives or economists the very term "price gouging" is misleading and far from being a 'bad' thing, it is a necessary component to capitalism.   IE, it's just supply and demand.   When a hurricane hits, supply of gasoline falls, demand rises, so profit-maximizing firms raise their prices.   It's not outside of supply and demand - it IS supply and demand.  [the example/link given by the way is just an example and is not what I would technically define as a true price gouging situation unless you view bullets to be a necessity ;)]

Nevertheless, laws were put in place to protect consumers: to block price increases for situations when otherwise prices would increase based on reasons that cannot be explained by supply.  In other words - to prevent firms from increasing prices based on a demand spike (caused by people trying to flee a disaster).   The intentions are obvious and mostly on moral grounds.   The idea is that people are already suffering enough, it is not right to hit them financially during these times in life.

Consumerists have it correct that there is something morally amiss about jacking up prices during emergencies on necessity goods.  But their solutions are inelegant and target the wrong problem: unfairly targeting businesses.   Essentially they are telling profit-maximizing firms to temporarily stop profit-maximizing and to somehow only increase prices based on supply and not demand pressures, as if that is a simple napkin calculation during such times.   And if they don't comply, they could be fined.

Conservatives/Economists have it correct that it is all just supply and demand but they err in assuming that 'efficiency' (as defined in economics) is something society values or should value in time of emergency.   Consider an emergency where everyone is trying to fill up their tanks to leave the site.  The 'efficient' way to allocate resources is via the price mechanism - using supply and demand.   In other words 'price gouging' is efficient.  But the problem there (or at least a problem) is that only the well off are then able to flee, leaving the poorer members of society to suffer.   The rich full up their tanks and the top 5% flees while the 95% dies.  Whereas, in a disaster, sometimes it makes more sense to ration or do something less 'efficient' to ensure safety and fairness.   (So instead of the rich filling up, everyone fills up just enough to escape).  Demand, remember, is about the willingness AND ability to buy a good.   In other words, efficiency is not always welfare-enhancing or moral.

But here is why both groups, the conservatives/economists and the consumerists talk past each other.  In short, they both are correct, but missing the main problem.  The main problem is that we, as a society, don't like capitalism in all situations.  We particularly don't like it during emergencies.  (And many of us don't like it with regards to necessity goods in general - think health care).  But instead of altering our system to accommodate such emergencies (or even attempting to do so) we just pass these laws that essentially tell businesses to stop being themselves for some undefined amount of time.    In other words, price 'gouging' is not the problem, it is a necessary effect of capitalism.  The problem is that we chose to ignore that fact.

Part Time for Economics Reasons: Hardly Obamacare

The quacks are out in force suggesting that our economy is undergoing a transformation whereby we have less full-time workers and more people forced to work part-time.   That part is true.   The part that isn't true is the reason often given as the main cause:  Obamacare and the uncertainty of regulations. 

The truth is something different.  As you can see, the issue of part-time employment taking the place of full-time employment became an issue well before the health care legislation ever even become a law. 

In fact, since Obamacare was signed into law the overall number of part-time employed for economic reasons has fallen a bit, just as our unemployment rate overall has been slowly falling. 

Despite the obvious evidence that the phenomenon is almost solely attributable to the financial crisis and resulting recession, it hasn't stopped some economists and conservatives from blaming Obamacare (which by the way I don't disagree that Obamacare is being rolled out poorly, but to blame the entire employment situation on it is counter to the evidence):
here and here, for example.

Never-mind the fact that employment numbers have been revised upward and the unemployment rate continues to drop at a steady, albeit slow pace.   Consumer confidence continues to rise along with the stock markets.   The naysayers still insist that Obamacare is dragging everything down.

And it may yet be true that it might....but the data presently shows that it is the continuing effects of the crisis that are dragging us down.   Anyone who suggests otherwise is likely talking more out of politics than economics.  Yes, U-6 did tick up ever so slightly (unemployment rate including part-timers that would rather work full-time and discouraged workers) but as I've said before on this blog, you should never take one month's report and assume it is a new trend.   It is likely Obamacare will cause a slightly further shift to part time employment but only marginally, and for my money, we should be concerned about the mountain, not the mole hill.

Continuing Evidence: Mainstream Economists are Just Politicians in Disguise

On the right

and

On the left

The point of disagreement is disguised as being a disagreement over the Keynesian multiplier:  is it 1, is it less than 1, is it greater than 1 (recall the multiplier is simply the effect of a $1 cut or increase in spending on GDP)....

But really, economists' views on the multiplier have almost nothing to do with scientific inquiry and have almost everything to do with where they lie on the political spectrum.   Mankiw, being a Republican thinks the multiplier is small (big surprise) and that therefore the cuts won't hurt GDP or employment much.   Goolsbee (for example) being a Democrat thinks the multiplier is bigger - and that the cuts may in fact take a noticeable chunk out of GDP and employment.

The point is, all these economists pretend their differences are a matter of math and science, when they really are almost soley a  difference of politics.  

[Not to mention that both sides are ignoring that the Keynesian multiplier says nothing about employment - it only says what the effect of spending cuts on GDP is.   To the degree that GDP and employment are not 100% correlated (which of course they aren't), the multiplier itself says very little about employment.]

From Keynes' General Theory, Chapter 20:

"It follows from this that the assumption upon which we have worked hitherto, that changes in employment depend solely on changes in aggregate effective demand ... is no better than a first approximation, if we admit that there is more than one way in which an increase of income can be spent."