Category Archives: Economics

Government Finances Aren’t Family Finances

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Economist Paul Krugman replies to confused readers:

Whenever I write about debt and deficits, I receive the same letter ā€” OK, not exactly the same letter, but a number of letters with more or less the same gist. They read something like this: ā€œIf I borrow money from the bank, the bank expects me to pay the money back. Why isnā€™t the same true for the government? Why can we keep borrowing when we already owe $31 trillion?ā€

Just about every economist will reply that itā€™s misleading to make an analogy between household and government finances. But it seems to me that we often arenā€™t clear enough about why, perhaps because we donā€™t say it bluntly enough. So hereā€™s the difference: You are going to get old and eventually die. The government isnā€™t.

I donā€™t mean that governments are immortal. Nothing is, and no doubt someday America will, as Rudyard Kipling put it, be ā€œone with Nineveh and Tyre.ā€ But individuals face a more or less predictable life cycle in which their earnings will eventually dwindle.

And lenders therefore demand that individual borrowers pay off their debts while they still have the income to do so.

Governments, on the other hand, normally see their revenues rise, generation after generation, as the economies they regulate and tax grow.

Governments, then, mustĀ serviceĀ their debts ā€” pay interest and repay principal when bonds come due ā€” but they donā€™t necessarily have to pay them off; they can issue new bonds to pay principal on old bonds, and even borrow to pay interest as long as overall debt doesnā€™t rise too much faster than revenue.

In fact, when governments for one reason or another run up large debts, it is, as far as I can tell, unusual to pay those debts off.

The most famous example, albeit one that many people apparently donā€™t know about, is the debt America incurred to fight World War II. By the warā€™s end, this debt was around 100 percent of gross domestic product ā€” roughly comparable to the debt level today. So how did we pay off that debt?

We didnā€™t. John F. Kennedy entered the White House with federal debt roughly the same as it was on V-J Day. [This shows the gross federal debt between 1940 and 1960 — I assume adjusted for inflation.]

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Why, then, wasnā€™t the 1960 election dominated by questions of how to pay off the national debt? Because while the dollar value of debt hadnā€™t gone down, economic growth and modest inflation meant that the ratio of debt to [Gross Domestic Product] had fallen by half. [This shows the same period, 1940 to 1960.]

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For all those whose instinct is to assume that a responsible government would, like a responsible individual, pay off its debts as soon as it can, again: Governments arenā€™t like people. If death and taxes are the only sure things in life, well, death isnā€™t an issue for governments, and taxes are an asset ā€” a growing asset ā€” rather than a liability.

Unquote.

Of course, it isn’t exactly true that old debts aren’t paid off. The government is constantly paying investors interest on the government bonds and notes they’ve purchased, and those bonds and notes eventually mature, making old debts disappear. But investors are buyingĀ  new bonds and notes at the same time (which will eventually be paid off as well).

Biden Needs To Be Ready To Act

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“extort”:Ā to obtain from a person by force, intimidation, or undue or illegal power.

In other words, if you don’t give me what I want, something very bad will happen to you. This is not the same as negotiation.

Ā “negotiate”: to confer with another so as to arrive at the settlement of some matter.

You’ll get something you want, I’ll get something I want, and neither of us will be too worse off.

Which brings us to the debt limit or debt ceiling:

Management of the United States public debtĀ is an important part of theĀ macroeconomics of the United States economy and finance system, and the debt ceiling is a limitation on the federal government’s ability to manage the economy and finance system. The debt ceiling is also a limitation on the federal government’s ability to finance government operations, and the failure of Congress to authorize an increase in the debt ceiling has resulted in crises, especially in recent years.

Prior to 1917, the United States did not have a debt ceiling, with Congress either authorizing specific loans or allowing the Treasury to issue certain debt instruments and individual debt issues for specific purposes. Sometimes Congress gave the Treasury discretion over what type of debt instrument would be issued.

Between 1788 and 1917, Congress would authorize each bond issue by theĀ United States TreasuryĀ by passing a legislative act that approved the issue and the amount.

In 1917, during World War I, Congress created the debt ceiling with theĀ Second Liberty Bond Act of 1917, which allowed the Treasury to issue bonds and take on other debt without specific Congressional approval, as long as the total debt fell under the statutory debt ceiling. [Wikipedia]

The story of the debt limit “crises, especially in recent years” begins in 2011. From Brian Beutler of Crooked Media:

Just as clear-eyed political analysts knew well before President Obama that Republicans would abuse the filibuster rule in an unprecedented way to stymie his agenda, they also recognized before the Democratic leadership that, after crushing Democrats in the 2010 midterms, Republicans would take the further unprecedented step of extorting Obama under threat of default. Thatā€™s why reporters asked then-Senate Majority Leader Harry Reid why Democrats, with their huge 2009-2010 majorities, wouldn’t neutralize the threat before Republicans took power.Ā 

ā€œLet the Republicans have some buy-in on the debt,ā€Ā Reid said.Ā 

This was the beginning of a fateful error that culminated in a significant shock to the economy, still hobbling out of the great recession, followed by years of indiscriminate, across-the-board discretionary-spending cuts, which Obama paid the Republicans in ransom.

This was supposed to be Obama-era Democratsā€™ biggest regret, one that they were committed never to relive. For the rest of Obamaā€™s presidency he rightly refused to make unreciprocated concessions for further debt limit increases, and each time Republicans eventually caved.Ā 

But it isn’t foreordained that Republicans will always cave, every time a Democratic president refuses to be extorted, from now through eternity. Republicans never forswore weaponizing the debt limit. Neither was their lurch further into extremism a piece of forbidden knowledge. Right out in the open, through the Obama and Txxxx years, Republicans have become significantly more aggrieved and vandalous, and because of that, permanently disarming the debt limit has become a matter of greater and greater urgency….

If Democrats were like Republicans, they wouldā€™ve treated turnabout as fair play, and held the debt limit hostage for ideological policy concessions after Txxxx took office. Of course, the parties arenā€™t similar, and Democrats never considered this, nor should they have: Extortion is extortion, and every bit as anti-democratic as stealing court seats, or elected offices.Ā 

But I did think that when Republicans came to Democrats for help increasing the debt limit, Democrats should have made oneĀ demand: that in exchange for their votes, Republicans would have to relinquish the debt limit as a tool of extortion forever. This could have taken many forms: Outright debt-limit abolition, indefinite debt-limit suspension, a debt-limit increase of effectively infinite size, or the permanent delegation of authority to increase the debt limit to the executive branch. Either way, the idea was that Democrats should have had enough dignity to insist the parties be bound by a single set of rules, and make it theĀ price of bailing Republicans out of a jam.Ā 

Democrats instead gave their votes away for free….

By the end of the last Congress, with Republicans poised once again to control the House under a Democratic president, the idea that Democrats should use their narrow, lame-duck majorities to moot the debt limit grew into something like a clamor…. Democrats thus had to respond to it, and their response was: sorry, no. This time, they seemingly just didnā€™t have the votes. But Democratic leaders expended almost no public effort trying to whip them up. Instead they and their loyalists treated supporters to excuses ranging from ā€˜we donā€™t have enough timeā€™ to ā€˜we are leaving the doomsday device armed and ticking on purpose!’ How better to force Republicans to produce a budget, which will contain unpopular policies, the better to run against?

So House Republicans have produced a budget. It’s filled with unpopular proposals they could never get implemented through the normal budget negotiations with the president and Senate that take place every year.

Their position is: give us all or much of what we want or we’ll create a financial crisis as bad or worse than the one in 2008. The government won’t have enough money to function and all hell will break loose. Extortion.

Biden’s position is: raise the debt limit, as Congress has always done before, and then we’ll negotiate the budget like we always do. Negotiation.

You might think it’s fine for Republicans to finally force Democrats to cut the spending Republicans want to cut and leave alone the spending Republicans want to leave alone. Do you think it would be fine for Democrats to do the same thing when there’s a Republican president? Regardless, letting a minority compel the government to meet its demands is not how a representative democracy is supposed to work. Democrats gave in to extortion before and they shouldn’t do it again.

Back to Mr, Beutler:

Democrats findĀ themselvesĀ at a choosing moment once again, only this time, they lack the means to disarm the debt limit with new law. Their choice is between caving to Republicans and maneuvering aggressively to disempower them….

Biden should be prepared to leave Tuesday’s meeting with Congressional leaders and announce that if Republicans attempt to default on the national debt, his administration will protect the country.

ā€¦ He can instruct the Treasury to continue auctioning bonds, and if Republicans then choose to sue the country into default, and the Republican-controlled courts choose to order the country into default, it will be on them. Biden could further justify this decision by referencing the 14th amendment, which holds the sovereign debt inviolable. [Other options have been proposed and are supposedly being considered.]

ā€¦ We need Democrats who will stop treating the Republicans’ serial default threat as a prompt to outmaneuver them, and instead simply overturn the game board… Republicans are the minority, trying to impose their will on the whole country by threat of mass harm, and that isnā€™t compatible with freedom or self-government. It isnā€™t hard bargaining, itā€™s terrorism.

Anything less than continued, complete refusal to negotiate would, in a profound and troubling sense, represent a violation of the oath of office. In a more partisan sense, it would breach the trust of millions of voters who view the Democratic Party as the last line of defense against extremist depredations. Itā€™s hard to imagine a clearer way to signal that, when push comes to shove, they’ll appease bullies, instead of standing up for usā€”and they’ll do it by handing over our lunch money.Ā Ā 

The country canā€™t survive in the long run if one shameless faction wields power in a consequence-free realm, while the other quietly acclimates itself to the mounting extremism. Eventually the trespasses will be incompatible with self-rule, and it will bring the whole republic down.Ā 

Note: In a TV interview, when asked if he might cite the 14th Amendment in order to bypass the debt limit (the amendment says the nation’s debt should not be “questioned”), Biden said he’s “not there yet”.

The True Nature of America’s Welfare State

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The New York Review of Books has an excellent article on poverty in America. It was written by a Princeton sociology professor. The subtitle is “The American government gives the most help to those who need it least. This is the true nature of our welfare state”. Here’s a summary:

  • The federal government did a great job reducing poverty during the pandemic. Child poverty was cut in half. But that assistance was mainly temporary.
  • The usual critics complained that the extra financial assistance made people not want to work.
  • Weā€™ve been trained since the earliest days of capitalism to see the poor as idle and unmotivated.
  • Most welfare recipients are white and don’t live in big cities.
  • Researchers have concluded that welfare doesn’t create dependency so much as it helps deal with temporary misfortune.
  • The biggest beneficiaries of federal aid are the affluent who take advantage of tax breaks, not the poor or unemployed. Tax breaks amount to twice the military budget.
  • We have chosen to subsidize affluence rather than alleviate poverty. We make up stories about poor peopleā€™s dependence on the government, while wrongly claiming it would cost too much to deal with the problem.

The Percentage of Poor People: A Correction

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A couple days ago, I sharedĀ a NY Times article that claims the percentage of poor people in the US hasn’t changed much in 50 years, despite the fact that we have lots of government anti-poverty programs now. Dylan Matthews of Vox quickly responded to the Times article. He argues that it all depends on how we measure poverty, a claim that Matthew Desmond, the author of the Times article, rejected. From Vox:

To come up with a poverty measure, one generally needs two things: a threshold at which a household becomes ā€œpoorā€ and a definition of income. For instance, in 2023, a family of four isĀ defined by the government as officially in poverty in the US if they earn $30,000 or less. Thatā€™s the Official Poverty Measureā€™s threshold….

But what does it mean to earn $30,000 or less? Should we just count cash from a job? What about pensions and retirement accounts? What about Social Security, which is kind of like a pension? What about resources like the Supplemental Nutrition Assistance Program (SNAP) that arenā€™t money but can be spent in some ways like money? What about health insurance?

These arenā€™t simple questions to answer … but I think itā€™s fair to say thereā€™s a broad consensus among researchers that income should be defined very broadly. It should at the very least include things like tax refunds and SNAP that are close to cash, and simpler to include than benefits like health insurance.

Thatā€™s why thereā€™s also near-unanimous consensus among poverty researchers that theĀ official poverty measure (OPM) in the United States is a disaster. I have … never heard even one expert argue it is well-designed. I was frankly a little shocked to see Desmond cite it without qualification in his article.

Its biggest flaw is that it uses a restrictive and incoherent definition of income. Some government benefits, like Social Security, Supplemental Security Income (SSI), and Temporary Assistance to Needy Families (TANF), count. But others, like tax credits, SNAP, and health care, donā€™t count at all. So many programs designed to cut poverty, like SNAP or Medicaid or the earned income tax credit, therefore by definition cannot reduce the official poverty rate because they do not count as income.

The Census Bureau now publishes aĀ supplemental poverty measureĀ (SPM), which uses aĀ much more comprehensive definition of income that includes the social programs the Official Poverty Measure excludes. It also varies thresholds regionally to account for different costs of living….

Using the Official Poverty Measure, poverty hasn’t changed much since 1970. From the Times article:

As estimated byĀ the federal governmentā€™s poverty line, 12.6 percent of the U.S. population was poor in 1970; two decades later, it was 13.5 percent; in 2010, it was 15.1 percent; and in 2019 [before COVID], it was 10.5 percent. To graph the share of Americans living in poverty over the past half-century amounts to drawing a line that resembles gently rolling hills.

For 2021, the last year for which the government has released official numbers, the rate was 11.6%, only 1% less than in 1970.

However, researchers using the updated Supplemental Poverty Measure calculated the poverty rate people between 1967 and 2020. They found that 25% of Americans were poor in 1967 (roughly twice as many as the Official Poverty Measure calculated), but — taking into account income from government programs created since 1967 — the percentage had dropped to 11.2% by 2019.

One odd thing about these numbers is that the official poverty rate, which is supposed to be obsolete, and the new, improved rate were almost the same for 2019 (10.5% vs. 11.2%). That’s even though the old calculation doesn’t include income from government programs and the new calculation does. Maybe that’s a statistical fluke, because the official rate is calculated very strangely. As Mr. Matthews explained in an earlier Vox article,Ā “The Official Poverty Rate Is Garbage. The Census Has Found a Better Way”:

It’s worth dwelling on this for a second. The way we measure poverty is based on a 51-year-old analysis of 59-year-old data on food consumption, with no changes other than inflation adjustment. That’s bananas.

Yes, the official government calculation was devised in 1963 based on an estimate of what people ate in 1955. A few things have changed since then.

I conclude from all this that, using the best measure of poverty we have now, the one that takes into account income from government programs, the poverty rate has been cut in half in the past 50 years. (The government releases both sets of numbers these days, although which numbers are reported is another story.)

On the other hand, there are a lot more of us now. In 1967, when there were 197 million of us, a poverty rate of 25% meant America had 49 million poor people. In 2021, there were 332 million of us, so a rate of 11.2% meant the number was still 37 million.

Should there be almost 40 million Americans living in poverty today? According to the Times article, which I still recommend, there wouldn’t be that many if there wasn’t so much exploitation, so many people being taken advantage of, especially poor people, in the labor, housing and financial markets. Or if, for example, Republican senators and one “Democrat” (Joe Manchin of West Virginia) hadn’t refused to keep the expanded Child Tax Credit in effect after it expired at the end of 2021. That change in the law is said to have lifted 3 million children out of poverty. President Biden wants to restore the expanded credit in his 2024 budget but will have to overcome the usual opposition from politicians who claim to support family values.

Why the Percentage of Poor People in America Hasn’t Changed in 50 Years

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If you don’t subscribe to the New York Times, you might not be able to read an important article called “Why Poverty Persists in America”. But the Times and some other papers are making it possible to share “gift” articles, like this one to the poverty article.

By making the article available, I’m not exploiting you and you aren’t being exploited. I’m not making any money out of the transaction and you aren’t spending any. If anything, you’re exploiting the New York Times (it was their idea and they can afford it).

The thesis of the article, however, is that exploitation is rampant in America and it’s the key reason why poverty persists. The author, Matthew Desmond, a Princeton sociologist, discounts the idea that the poor aren’t really poor (“you can’t eat a cellphone”). He argues that the poor (and others) are being taken advantage of.

The primary reason for our stalled progress on poverty reduction has to do with the fact that we have not confronted the unrelenting exploitation of the poor in the labor, housing and financial markets.

… Social scientists have a fairly coolheaded way to measure exploitation: When we are underpaid relative to the value of what we produce, we experience labor exploitation; when we are overcharged relative to the value of something we purchase, we experience consumer exploitation….When we donā€™t own property or canā€™t access credit, we become dependent on people who do and can, which in turn invites exploitation….

The author explains in detail how exploitation works in these three markets and how we might insure there’s less of it. Maybe I’ll share more of the article later. For now, here’s how the article ends.

In Tommy Orangeā€™s novel, There There, a man trying to describe the problem of suicides on Native American reservations says: ā€œKids are jumping out the windows of burning buildings, falling to their deaths. And we think the problem is that theyā€™re jumping.ā€

The poverty debate has suffered from a similar kind of myopia. For the past half-century, weā€™ve approached the poverty question by pointing to poor people themselves ā€” posing questions about their work ethic, say, or their welfare benefits ā€” when we should have been focusing on the fire. The question that should serve as a looping incantation, the one we should ask every time we drive past a tent encampment, those tarped American slums smelling of asphalt and bodies, or every time we see someone asleep on the bus, slumped over in work clothes, is simply: Who benefits? Not: Why donā€™t you find a better job? Or: Why donā€™t you move? Or: Why donā€™t you stop taking out payday loans? But: Who is feeding off this?

Those who have amassed the most power and capital bear the most responsibility for Americaā€™s vast poverty: political elites who have utterly failed low-income Americans over the past half-century; corporate bosses who have spent and schemed to prioritize profits over families; lobbyists blocking the will of the American people with their self-serving interests; property owners who have exiled the poor from entire cities and fueled the affordable-housing crisis.

Acknowledging this is both crucial and deliciously absolving; it directs our attention upward and distracts us from all the ways (many unintentional) that we ā€” we the secure, the insured, the housed, the college-educated, the protected, the lucky ā€” also contribute to the problem.

Corporations benefit from worker exploitation, sure, but so do consumers, who buy the cheap goods and services the working poor produce, and so do those of us directly or indirectly invested in the stock market. Landlords are not the only ones who benefit from housing exploitation; many homeowners do, too, their property values propped up by the collective effort to make housing scarce and expensive. The banking and payday-lending industries profit from the financial exploitation of the poor, but so do those of us with free checking accounts, as those accounts are subsidized by billions of dollars in overdraft fees.

Living our daily lives in ways that express solidarity with the poor could mean we pay more; anti-exploitative investing could dampen our stock portfolios. By acknowledging those costs, we acknowledge our complicity. Unwinding ourselves from our neighborsā€™ deprivation and refusing to live as enemies of the poor will require us to pay a price. Itā€™s the price of our restored humanity and a renewed country.Ā 

One funny note. This is the article’s subtitle: “A Pulitzer Prize-winning sociologist offers a new explanation for an intractable problem”. I guess whoever wrote that has never heard of Karl Marx or Das Kapital.