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May 04, 2007

I Can Get Mad About Anything

Right now I'm mad at Matthew Yglesias for writing this:

...the objection that deficits "place an unfair financial burden on future generations" doesn't make a ton of sense. Think about an individual taking out a large loan for some reason or other -- a mortgage to buy a house, say. This may be a prudent investment, or it may be a foolish one. Whether or not the loan amounts to an "unfair financial burden" on future versions of yourself isn't an additional issue on top of the issue of how well your investment performs.

It's similar with deficits. If moderate levels of deficit spending allow us to finance growth-enhancing public sector investments, then there's no burden at all being placed on future generations.

The problem here is that—even as Yglasias tries to defend deficit spending—he's using a horrendously wrong metaphor. It doesn't match reality at all.

Conservatives often say things like: Just as families cannot borrow money to spend beyond their means forever, neither can America. We must not pass on this awful government debt to our children!

This sounds good, until you think about it for one second. Then you realize it's extremely stupid. Here's why:

When the government borrows money, it's not like a family borrowing money from a bank. It's like one member of a family borrowing money from another family member.

Thus, government borrowing doesn't place a burden on future generations. While every bond sold is a liability for one part of the "family," it's an ASSET for another part. For future generations of Americans overall, government debt is a complete wash.

In other words, the conservative homily cited above makes exactly as much sense as saying: Just as families should make sound investments for their future by buying bonds, so should America. We must issue lots of government bonds so we can pass this wealth onto our children!

Yglesias writes about America as though we're an individual rather than a family, but the problem is the same. Government borrowing is not like "an individual taking out a large loan." It's like an individual taking out a loan from themselves.

And this bad metaphor leads to a lot of bad thinking. Imagine two families:

In family #1, a sister borrows money from her brother to make sure her kids have enough to eat, get vaccinations, and can go to good schools. Twenty years later, the family overall is not in debt, and the grown children are healthy and educated.

In family #2, a sister is continually told she must not borrow money from her brother. So she doesn't, cutting back on her children's food, vaccinations, and education. Twenty years later, the overall debt position of family #2 is exactly the same as family #1. But the grown children are sickly and can't read or write.

Thus, by eliminating deficits, family #2 not only hasn't accomplished anything—they've actually made themselves worse off.

(Of course, the real world is more complex than this. One important exception to my preferred metaphor is when countries borrow from other countries. Then it really IS like a family borrowing from a bank. And it's true the U.S. government is doing a lot of this right now.)

Posted at May 4, 2007 10:06 AM | TrackBack

But what if in scenario 1 the brother loses his job and can no longer afford it?

Posted by: En Ming Hee at May 4, 2007 11:47 AM

YOU'RE KIDDING, RIGHT? This isn't mom borrowing from dad or sis loaning brother a couple of bucks. WE as CITIZENS OF THE UNITED STATES sell T-bills and Bonds to EVERYONE in the world (by extention through their governments). That means we owe everybody, banks ,corporations, governments, and individual people, MANY of whom are NOT in our circle of family and friends

Posted by: Mike Meyer at May 4, 2007 12:35 PM

En Ming Hee,

Then everyone starts yelling at the brother until he starts robbing banks.

Mike Meyer,

Nope, I'm not kidding. Look at the people who always talk about the terrible "burden on future generations" caused by government debt. Are these people who generally strike you as public spirited? If not, does that suggest to you that perhaps the welfare of "future generations" is not their prime concern?

The truth is, at current levels, there's really nothing wrong with the government of the U.S. owing lots of money to lots of people.

Posted by: Jonathan Schwarz at May 4, 2007 12:47 PM

Scenario #1 is only true if the sister repays the debt to the brother. What if she keeps borrowing money from the brother until he cuts her off then she goes to some guy she heard about at the corner pub who threatens to break her legs two weeks later when she can't pay him back so she gets a title loan on the car and ends up losing that, too?

Posted by: darrelplant at May 4, 2007 02:08 PM

That's when she starts impersonating her twin sister who works for the senile billionaire and marries him in Nevada without a prenup. Problem solved!

Posted by: Jonathan Schwarz at May 4, 2007 02:28 PM

The reality is that the government is the only viable bank in ANY country... This is why China, Venezuela and Iran follow ou ACTUAL model and not the neo-liberal policies we try and push on them. (In other words;What we do as opposed to what we say).

The U.S. doesn't want socialism anywhere it is not benefitting from that particular systems' success.(Like Cuba and Yugoslavia in the 1960's-70's, The USSR in the 20's and 30's, and the aformentioned modern-day "rouge states"). No power broker does. Unfortunately to counter this, that power broker will*have*to kill/embargo/sabotage everyone and everything in that country, then the MSM comes in, annexes the truth and cleans house. SOSO.

"Sorry guys, our interest are at stake. You understand..."

Posted by: at May 4, 2007 03:21 PM

Maybe if we disreguard gravity, the curvature of the earth, and the existance of INTEREST.

Posted by: Mike Meyer at May 4, 2007 03:51 PM

This is freaky - I literally just walked out of teaching this exact point in my Macroeconomics class.

But I think you are missing a point, assuming that there is no radical swings in net exports to accommodate changes in government deficit then government surplus are equivalent to drawing down private sector net savings. Seeing their savings fall will generally cause a fall in investment and hence a depression. The US has run surpluses seven times in its history (1817-21, 1823-36, 1852-57, 1867-73,1880-93,1920-1930,1998); take each one of those dates, add one to two years, and you then have a history of when the US faced a depression, with the only exception the last one where Bush's major deficits kept it at a relatively mild recession.

In short, since the public wants to hold net private savings the government deficit will be forced to accommodate by running deficits. Its not just that the government should run a deficit, but it must; attempting otherwise simply creates a drop in the economy till taxes fall to point of creating deficits.

Posted by: Andrew Barenberg at May 4, 2007 04:24 PM

Ok - to be the annoying asshole who writes too much it the comments...

Re Mike: we owe everyone. How much is owed to people and institutions outside the US by people and institutions in the US is determined by our trade deficit, not by the government deficit. You can create models of a casual link between the two deficits, but for the most part the trade deficits is caused by structural forces that changes slowly over time - in other words their is little reason to believe decreasing government deficit will decrease the trade balance.

Posted by: Andrew Barenberg at May 4, 2007 04:37 PM

I think I hold generally with Matt's metaphor more than Jon's, in that deficits are related to what the money is spent on. The French monarchy chose to go into deficit to play a power game with the British. One of the nice results for Americans was that the Americans won the French revolution. One of the bad results for the French monarchy is that they were squeezed on their domestic expenditures. In fact, it got worse and worse for the French monarchs.

However, even the French example isn't a rule - the British went into debt on a scale that dwarfs the current American debt to maintain themselves in the long Napoleonic war. But by shutting down payment in gold from the bank of england and issuing notes, they helped jumpstart a bond market and enlivened private investment in manufactures. Of course, it did help that they won the war.

The metaphor of the family or the individual does have one good thing going for it: creditworthiness. Whether loaning to your brother-in-law or your neighbor, much depends on whether you think you will ever see that money again. To retain that creditworthiness means assuming certain behaviors. Lately, the behavior of the U.S. - giving its president a long, slow, expensive party in Iraq, for instance - has not been creditworthy. Investment, in the Bush era, seems to gravitate to investment itself - financial moves that don't translate into anything solid, to use a vulgar perspective. Like making socks or something. Still, the U.S. is so big it can get away with that stuff. The question is: for how long?

Posted by: roger at May 4, 2007 08:34 PM

oops - "One of the nice results for Americans was that the Americans won the their revolution with that French money"

Posted by: roger at May 4, 2007 08:36 PM

America winning the revolution with French money resulted in making the Continental not worth a Continental.

Hamilton came up with a resumption of debt scheme, and with the aid of some tariffs, things stated moving again. We kept the centralized debt system, but somehow tariffs fell to the wayside. I think the leading tones to real debt is a balancing act between trade and debt--investments try to harmonize, often making very weird chords.

Posted by: P at May 4, 2007 09:12 PM

i guess it's official matt yglesias is the progressive, moustache-less tom friedman. if that's too harsh, you can consider him to be the david brooks.

Posted by: almostinfamous at May 4, 2007 11:43 PM

Ok, wait a minute...

If moderate levels of deficit spending allow us to finance growth-enhancing public sector investments, then there's no burden at all being placed on future generations.

Suppose, in your example, Family #1's sister borrowed the money from her brother and then spent it on a bunch of expensive toys, then blows all those toys to smithereens, killing some of her neighbors in the process? Then she borrows more money for more disposable toys, while not spending a dime on her children's health or education. And the rest of the family suffers from isolation from, and hatred by, all the rest of their neighborhood.

Iglesias' point stands, I think. War is not an investment; it is only waste. What do you think we're spending this borrowed money on?

Posted by: RobW at May 5, 2007 12:04 AM

Even if it is growth-enhancing public sector investments, still - you have to pay off the debt sooner or later and with interest.

In the 'family #1' example, it is still possible that twenty years later the children, while healthier and better educated, are worse off because they are in debt up to their eyeballs. Otherwise, it would've been simple: borrow as much you can, get as much education as you can. But obviously it's not like that.

Posted by: abb1 at May 5, 2007 08:05 AM

I guess my point is: why not just tax the rich bastard and give the people education they need?

Andrew Barenberg says it's a bad idea, but I don't see why. How exactly does the economy benefit from the fact that your rich uncle gets to keep a bunch of treasury notes in his drawer?

Posted by: abb1 at May 5, 2007 08:20 AM

Still no mention on the effect of INTEREST in the equation. Lending money is a business and not mom and dad making brother lend to sister. NO NEED to force a loan as both parties are willing, the borrower because of his need, the lender by reason of PROFIT THROUGH INTEREST. Perhaps by addressing this aspect of the theory you may add stability to your understanding. (the adding of INTEREST to that loan indeed makes it an asset and depending on the particulars of the contract can equal or out weigh the value of the original loan, given enough time.)

Posted by: Mike Meyer at May 5, 2007 12:17 PM

Running deficits tends to make this level higher, which is a good thing for most people.

Deficit is one thing, but the deficits accumulate into debt. The last time I checked (which was a few years ago), IIRC 18% of the total federal budget was spent on servicing the debt, paying the interest. I assume now it's much higher now (at least in absolute numbers, the budget is probably much higher too).

So, what happens is that while this wise patriarch borrows from his rich son more and more, there's less and less he can give to his poor grandchildren. And eventually the time has to come when he can't even pay the interest, right? This is when someone (probably all of them together) is gonna push his wheelchair down the stairs.

Posted by: abb1 at May 5, 2007 12:19 PM

Uh-huh. Deficit spending is akin to one family member borrowing from another family member and is a "wash"... I didn't realise that China, Japan, all our other creditors were actually just family members.

Nice to know that we really don't owe them anything since it is just shuffling money amongst "family members". How are they with that idea, I wonder?

Posted by: Praedor Atrebates at May 5, 2007 12:42 PM

Besides the Chinese, Japanese, Australia, etc, owning a significant portion of our debt (and expecting payback) there is the little problem of family member "defense spending" (for instance) "borrowing" money from family member "social security fund". This little ripoff (of a family member) is what prompted BushCo to indicate that the IOUs in the social security fund are "useless" and what gets GOPer idiots to state that we need to privatize retirement because social security is going to go (or is, if it is funded by IOUs from another "family member") bankrupt.

But they then claim that deficit spending in this manner is NOT a problem and is, in fact, a wash? That means that social security funding is not in trouble...or it is NOT a wash! Which is it? Is borrowing from family member social security to pay for tax cuts for Bush, Cheney, Halliburton CEOs, etc, in order to fund another federal budget family member a wash or not? Can't have it both ways here.

Posted by: Praedor Atrebates at May 5, 2007 12:52 PM

Certainly he's someone who had the skills and life trajectory to become a Friedman...

Yglesias mixes metaphors at random and married into a billionaire family while pretending to be just a regular common-man kinda guy? I didn't know that.


See, the way your family analogy is a big part of why I don't really have any faith in economics as a science. Economists too often attempt to explain complex dynamic systems with overly simplistic metaphors. The metaphors fall apart at a glance and really serve more to cloud an issue than clarify it.

It's political science shrouded in statistics. This would be perfectly fine if it didn't try to deny its own political assumptions. Case in point: "Markets always work because people make rational choices in their own interest." Never mind that all of history shows, and psychology proves, that people make choices for all sorts of reasons that are only rarely rational.

Another problem I have is that in my freshman year the one economics course I took used N.G. Mankiw's textbook. Don't even get me started on that waste of my money. (Although the text itself served as a nifty example of inelastic demand: I would never in a million years paid over $100.00 for that drivel, but the profs choose the texts that the students have to pay for, so what do they care about price?)

Ok, now I'm just getting argumentative. I'm done now.

Posted by: RobW at May 5, 2007 02:20 PM

"I guess my point is: why not just tax the rich bastard and give the people education they need?

Andrew Barenberg says it's a bad idea, but I don't see why."

Whoa - no I didn't. Tax the bastards. Decreasing inequality will shift money from people with a high marginal propensity to consume to people with lower marginal propensity to consume. This will stimulate the economy more at a lower level of government debt. Not only level of debt matters but also composition; running a government employment guarantee program stimulates the economy far more then going to war.

Posted by: Andrew Barenberg at May 5, 2007 05:16 PM

You know what two small things would "stimulate" it even more... Legalization and implementation of industrial hemp and the nationalization of at least most of the energy infrastructure, period.

Until we do that, as well as rebuild our real-world manufacturing capability, we can all eat shit and pound sand with that beautiful capitalist system we just had to have... China wins..You dumb fuck-asses.

Posted by: at May 5, 2007 08:10 PM

"See, the way your family analogy is a big part of why I don't really have any faith in economics as a science. Economists too often attempt to explain complex dynamic systems with overly simplistic metaphors. The metaphors fall apart at a glance and really serve more to cloud an issue than clarify it."

Thats why we use complex mathematical models - it makes more difficult for the uninitiated to realize its complete bullshit. ;-)

Posted by: Andrew Barenberg at May 5, 2007 09:58 PM

I think there's another flaw in your argument, besides one government borrowing from another -- how many poor people own treasury bills? Deficit spending is another way of transferring wealth from the poor to the already wealthy. IF the deficit spending is on behalf of the poor, that mitigates the transfer, of course. Otherwise, it is just an upward redistribution of wealth, which might explain, incidentally, why deficit spending is currently so popular with Republicans.

Posted by: shargash at May 7, 2007 02:37 AM

Again more stupidity. Let me make it simple for the Slightly Retarded Economist PHD's out there: Economics is not a science, it is a political "wrench" tactic that least somewhat involves wealth (mostly speculated wealth btw). Communists used it, capitalists use it still today. There is no one and nothing that has ever proven the former statment false, ever.

"Economists" are just, as Curtis Mayfield would sing: political actors. Nothing more. In any decent world these people would wake up shitting themselves wondering why they haven't been lynched yet.

Posted by: at May 7, 2007 09:21 AM