Government Debt and the Libertarian View

After a mere four years, I'm posting my Facebook flame war with my wonderful (and I mean it) Andrea about government debt. It quickly got to where I'm sure only she--something of a libertarian--and I were reading it. But I wanted to capture it all, and leaving it on Facebook wasn't going to do that...

Gail Oakes shared Mad World News's photo.

December 18 at 8:45pm · 

Comments

Patty Dalbec LBJ borrowed from Social Security to Pay for the war.

· December 18 at 8:56pm

Patty Dalbec The Vietnam War.

December 18 at 8:56pm

Andrea Habura Since the Social Security trust fund has to be held as government bonds, and the rest of the government is running a huge deficit, it kind of doesn't matter -- the missing money is going to come out of the taxpayers' pockets one way or the other. The only question on the table is *which* taxpayers are going to take the hit.

Gail Oakes It would be solved by upping the cap on income. Pretty simple except the wealthy will fight it.

Josh Fisher Drives me crazy, @Andrea Habura: " the missing money is going to come out of the taxpayers' pockets one way or the other." Sure, that would be true if only it were, say, a household that owed the debt. But it's the US government, the one that (1) prints the money, and (2) somehow borrows it really, really cheaply despite all the fear-mongering. All that's at stake, if there is anything at stake, is some small amount of inflation, which we probably could use a little of now. THERE IS NO "MISSING MONEY". There is a very complex system--a system like those you and I deal with (dealt with for me) professionally. To compare that system to our intuitions about debt--which politicians do all the time to scare people--is incredibly naive. Look at historic tables of debt as a % of GDP.

Andrea Habura Hmm. Not sure I'm entirely following. 

I'll grant you that debt owed by a sovereign country with its own currency is not the same animal as debt owed by a private household. However, it's not like economic forces completely don't apply. 

F'r example: My understanding is that it *is* possible to inflate away a certain amount of debt, but you have to be careful in how you do it. Inflation is basically a tax on all individuals (domestic and foreign) who hold assets denominated in the relevant currency. 

If you keep that "tax" low, you're not going to have that much of a problem when you go to retire the debt and issue new debt, which is something you have to do with government bonds on a regular basis. It also has useful side effects, such as counteracting "stickiness" in prices and wages.

But if inflation is high, bond holders start demanding higher returns, so you essentially have to issue more debt to make up for the inflation. You start getting diminishing returns. Plus, the recipients of the SS benefits start demanding higher and higher COLAS as the buying power of the payments falls. To a certain extent, that can be resisted (cf. "stickiness", above), but not completely. 

High inflation also causes people to start investing in commodities whose value will naturally rise along with the currency. But *that* can cause knock-on effects like asset bubbles which play merry hob with the overall economy. Which sucks, because it impairs your ability to organically grow your way out of the debt. 

Honestly, I think what might save us isn't responsible debt reduction -- politically, it'll never happen -- but rather possible decreases in the costs of several important categories of living expenses. I think technologically, we might be able to make transportation, housing and medicine cheaper by the time the demographic pinch really starts to hit, which means we can both slightly reduce the real value of benefits and crank up taxes a little.

Josh Fisher "What might save us". Save us from what? You are a priori arguing that debt is bad. I feel that way about my family--we avoid it like the plague. But debt is *good* for countries. It gives the knobs you can turn to manage the economy, which isn't so good at managing itself however much we wish it were. As Krugman points out http://www.nytimes.com/.../paul-krugman-debt-is-good-for..., England has had government debt for 300 years, an era spanning the Industrial Revolution, victory over Napoleon, and more. And we have had debt for 180 years, and our economy hasn't done so poorly either, except when things were too unfettered. Yes, the mechanisms you mention are part of the knobs and results in a very complex system. All successful national economies have debt, when they don't they invariably fall apart. And as a percentage of GDP, ours is just fine. The concern is just a boogeyman, as rational as witch burning and other things that explain what we don't intuitively understand.

Debt Is Good

A problem with the economy may be that we aren’t in deep enough, not that we’re in too deep.

NYTIMES.COM|BY PAUL KRUGMAN

Andrea Habura "Save us" from having more demands for current cash flows than we can raise. I am not a priori arguing that debt is bad -- I am saying that beyond a certain point, your ability to take on more debt is constrained. And the problem with things like SS and Medicare is that you can't easily stiff the recipients for a couple of years while you get things sorted out. 

I'm not sure -- are you arguing that the US government can effectively promise any level of entitlements desired, and pay for it via more debt and/or inflation? If not, what do you see as the effective limit?

Josh Fisher Sure, "beyond a certain point", you are right. But what makes you think we are anywhere near that point or I would believe such a crazy thing? And SS debt is no different from any other--really, the US govt can't stiff anybody. I'm not arguing that "the US govt can effectively promise" anything. I'm arguing that what has been promised is reasonable, safe, and sane policy, and the opposite of dangerous for our economy. THERE'S NO CRISES, or even any sign of one. People have sung this song for centuries, and no one seems to notice that they're always wrong. I'll point you at two instructive links--a historical review of US debt, compared with other countries, http://www.tradingeconomics.com/.../government-debt-to-gdp and Krugman again, this time on Social Security. http://www.nytimes.com/.../republicans-against-retirement... The simple reality is that the wealthy--the same people who are now financing our elections--hate it, because they are greedy.

United States Government Debt to GDP | 1940-2016 | Data | Chart |…

TRADINGECONOMICS.COM

Andrea Habura I really don't think I'm following you. The Trading Economics table shows that our GDP to debt ratio is fairly high compared to most other nations -- we're at 104%, the UK is at 89%, and Canada's at 92%. Now, we may naturally be able to carry more debt than some other countries, but I think it's a little insouciant to think we are nowhere near the point where it might become a problem. Japan's definitely an outlier, but they seem to be making strong moves toward reducing their debt burden, which has been causing problems for them (https://www.bloomberg.com/.../japan-s-debt-burden-is...). 

Furthermore, if there's no crisis, then why does the SSA think there is one? (See link below.) 

The main problem is demographics. There isn't a huge problem right now, but the big demographic bulge of the Baby Boomers is starting to hit retirement age. In 2005, 12% of the population was Social Security age -- in 2040, it'll be 20%. So, the promised outlays are about to go up a *lot*. SS and Medicare already consume about half of the Federal budget, so if we increase the size of that recipient population by 40%, we are sure as hell going to have to increase either revenues or debt load. 

Oh, and finally: yes, governments certainly can stiff people, at least temporarily. Ask any civil engineering firm or other government contractor -- they sometimes go years without being paid if the government budget gets tight. That's not going to work with SS recipients, who need that money on a regular basis.

https://www.ssa.gov/policy/docs/ssb/v66n4/v66n4p37.html

Japan’s Debt Burden Is Quietly Falling the Most in the World

BLOOMBERG.COM

Josh Fisher 1. Yes, most governments have been on a completely self-destructive austerity kick since the 2008 crash. So let's look at GDP growth in the examples you mentioned: UK: 0.5%, Canada: 0.9%, US: 3.2%. Does that seem unhealthy to you? Due to our "socialist" president, we actually spent a little money, and didn't give away the entire treasury to the rich. Now look at the chart of US debt to GDP. Look at the late 1940s, where, because of the war, the number was very high. Of course, that led to the 1950s, a time of mass starvation, lack of innovation, and financial crises in the US. http://cdn.tradingeconomics.com/.../united-states...

Josh Fisher 2. Yes, governments sometimes delay payments to contractors, I actually had exactly that happen to me with the govt of Belgium (read @Elizabeth Fisher's wonderful book https://www.amazon.com/Multiflow-Computer.../dp/1482780666, also Kindle). But the US will not delay payments to bondholders, because the effect on the economy would be devastating, despite what the president-elect fantasizes. And your 11-year-old SSA paper is plenty old news, you imagined that I don't know about the ticking time-bomb, being a baby-boomer on SS myself? The paper hardly describes a crises! It describes a problem that's been anticipated for decades, and a spectrum of relatively easy solutions.

Josh Fisher Look, here's my bottom line. The right wing has always hated SS, starting in 1935 (I cribbed the following: Alf Landon, the Kansas governor running as the Republican Party's 1936 presidential candidate, called it a "fraud on the working man." Silas Strawn, a former president of both the American Bar Assn. and the U.S. Chamber of Commerce, said it was part of President Franklin D. Roosevelt's attempt to "Sovietize the country." The American Medical Assn. denounced it as a "compulsory socialistic tax."), just as they always hated Medicare. But now these programs are too popular to attack, so they've resorted to a crocked-up "debt crises". They hate these programs because they are too greedy and short-sighted to understand that sometimes investments that don't immediately and directly benefit them might actually be good anyway, even for them. So now we have to worry about the solvency of a thriving economy, that is only being dragged down by austerity mania, corporate welfare of one sort or another, and tax giveaways and havens for the wealthy.