public debt

The collapse of social democracy

Published by Anonymous (not verified) on Fri, 18/08/2017 - 3:40am in


Acknowledgements to wikimedia.

Dear readers. The article below was written in April, 2017, and submitted to Spain's socialist party (PSOE) for publication. It remains relevant to wider debates about the collapse of social democracy, and so I am re-posting it here. 

The collapse (or Pasokification) of social democracy in Europe and the United States is tragic, but was not inevitable. The exhaustion of PSOE and Spanish social democracy was particularly tragic given the critical role played by the party during the transition from Francoism, and given its history of governing with popular support for longer than any other Spanish political party. 

But the most tragic dimension of the demise of social democracy across Europe is that it has led directly to the crumbling of democracy. Disillusionment with democracy is fuelled by the belief that social democratic politicians could not, and would not protect populations from the catastrophic impact of market forces after the 2007-9 financial crises. The political class appeared unwilling to restrain or tackle (through regulation) the sustained rise, and then implosion, of excessive private debt-creation by bankers and financiers, which in turn was used for reckless property speculation. Second, after the economic slump caused by the financial crisis, they failed to tackle the massive rise in Spanish unemployment. Instead politicians focussed relentlessly on trying to ‘balance the budget’. The focus on public, not private debt, hurt those innocent of causing the crisis, because in a vain attempt to fix the budget, politicians worsened the already falling living standards of their own supporters.

But even before the crisis, social democratic politicians had already been weakened. By gradually relinquishing public authority over private markets in finance, labour and trade, and by handing power over these markets to private authority, social democratic politicians had hollowed out their own role in the economy. By agreeing to relinquish the support of a publicly-backed Spanish central bank, and to depend instead on an unaccountable European Central Bank, Spanish politicians gave away a great power. They weakened their own authority and influence. No wonder they were powerless to protect society from the relentless and devastating impact of market forces during and after the period of the Great Financial Crisis. By contrast, British and American politicians could call on their central banks for support.

Private authority had naturally moved into the power vacuum created by the Eurozone, and seized control. Today, it is private authority that governs financial markets in Spain and across Europe, not public authority.

Zapatero, deficit targets, and why Government budgets are not like household budgets.

It is now widely accepted that José Luis Rodríguez Zapatero, PSOE’s leader in 2010, committed a form of ‘hara kiri’ when, with youth unemployment at a staggering 40%, he agreed to a budget deficit target of 6%, froze pensions and other benefits, raised the retirement age, cut civil-service pay, imposed austerity on regional governments and made collective bargaining ‘more flexible’.

Perhaps the most disastrous error was the decision to adopt a German-style ‘golden rule’ designed to embed policy on budget deficits into the constitution. In other words, policy would become like concrete – unchangeable and immoveable. This decision reflects a deeply flawed understanding of how economies work. Contrary to the ‘ordo-liberalism’ of reactionary politicians like Wolfgang Schauble, economies are ‘moving feasts’. They rise and fall, expand and contract, depending on a range of factors. Economic policy therefore cannot be fixed in concrete. It cannot be made law. It must be possible for government policy to respond to the ebb and flow of the wider economy. When the economy heats up, and inflation threatens, action to cool the economy must be taken. When the economy slumps, and unemployment and deflation threatens, policy must respond to prevent prolonged economic failure.

The ‘golden rule’ embedded austerity and with it continuing and high levels of unemployment into the Spanish economy. Unsurprisingly it led to a crushing defeat for PSOE in 2011.

Government debt is not like household debt

Mr. Zapatero was not alone. Across Europe and even in the US, there is unanimity amongst social democrats, policy-makers and mainstream economists that ‘austerity’ or fiscal consolidation is the answer to a rise in public debt caused by private economic failure. But ‘austerity’ at a time of crisis is a particularly deformed ideology, spouted by financial interests, concerned that there will not be enough money to support the private sector if it is ‘crowded out’ by the public sector.

It is an ideology based on the microeconomics of the household. Most of today’s economists are trained mainly as ‘microeconomists’ – with an intense focus on the firm, households and individuals. They use microeconomic reasoning to arrive at macroeconomic conclusions for the whole economy. But common sense dictates that governments are not like households. Unlike households, governments collect income from taxpayers – by law. Unlike households, and thanks to the backing of taxpayers, governments can easily raise finance by borrowing from both domestic investors, but also international investors. Government debt, including Spanish debt, is a scarce and valued asset or collateral, and is in great demand by millions of investors around the world. The reason is that all democratic governments are backed by taxpayers – and so repayment of public debt is much more assured than the repayment of private debts.

Public debt is like a see-saw

To understand how and why government debt rises or falls, it helps to visualise a playground see-saw. When the private sector slumps, and tax revenues fall, government debt, like a see-saw, rises. Why? Because private sector failure leads to a collapse in tax revenues, and in a democratic economy, to a rise in welfare benefits. When the private sector recovers, unemployment and welfare benefits fall, and tax revenues rise. Then, government debt, like a see-saw, falls too.

So the answer to a rise in public debt at a time of private sector failure, is not to worsen conditions by cutting public sector spending and investment. Instead it is vital for government to borrow and spend to revive employment and economic activity, which in turn will raise tax revenues, and also revive the weakened private sector.

The way forward: realize the power of public authority

 For social democratic politicians to regain power and the support of their electorates requires a total rejection of the deregulatory economic policies that led to the Great Financial Crisis. Above all, social democrats must end their obeisance to financial markets, and must once again actively and publicly commit to subordinate financial markets to the public authority of Spain’s regulatory democracy.

To do this, social democrats must regain and realize the potential power of public authority backed by taxpayers. Private financial markets are excessively dependent on public institutions such as central banks and governments for massive bailouts, QE, low borrowing costs, and ongoing taxpayer-backed guarantees against market failure. Recognising this private sector dependence on the public realm, social democrats should demand reciprocity: stringent terms and conditions applied in exchange for public sector largesse. Since the crisis, the private finance sector has not only benefitted from public sector bailouts and private debt subsidies, it has effectively looted government treasuries and totally abandoned so-called ‘free market’ theory. Bankers, private equity firms and other financiers have got away ‘scot-free’, and returned to their old, dangerously reckless speculative ways – this time backed by taxpayers. Most remain ‘too big to fail’ and ‘too big to jail’.  

Politicians continue to allow bankers to threaten the global economy with another grave financial crisis, even though today all global banks are effectively nationalised banks. Without the largesse of $500bn of QE every quarter (from the ECB, the Bank of England and the Bank of Japan) plus historically low borrowing costs, backed by government guarantees – they would be bankrupt. These are not private sector banks, battling so-called free market forces. Yet even with generous public backing, the private banking sector still fails to lend to firms active in the real Spanish economy at sustainable rates of interest.

Such one-sided generosity must end. It is time for Spanish bankers to be made to prioritise the interests of the Spanish economy, or be faced with the loss of the publicly-backed support gained via the Spanish Treasury, the ECB and other public institutions.

Second, all private bankers rely on taxpayer-backed institutions like the judicial and criminal justice systems, for the enforcement of contracts. Is it not time to insist that these taxpayer-funded institutions cannot be used for the enforcement of contracts, unless private bankers play their part in restoring the health of the Spanish economy?

Much can be done to challenge the apparent overwhelming dominance of the private finance sector. But first, Spanish social democrats must recognise and reinstate the power of a regulatory democracy. They must publicly elevate the interests of their own electorates above the interests of the private finance sector. They must pledge to restore public authority over private markets in money, labour and trade.

Only by so doing, will it be possible to regain public confidence, and with it political power.


Public Debt And Current Account Deficits, Part 2

Published by Anonymous (not verified) on Tue, 11/07/2017 - 10:21pm in

This is a continuation of a recent post at this blog, Public Debt And Current Account Deficits, in which I argued that the current account balance of payments affects the public debt.

A usual objection to the connection is that the two deficits—current account deficit and the budget deficit—although connected by an identity, don’t move together and in fact move in the opposite direction frequently. This point was raised by the blog Econbrower, yesterday.

The identity in question is:


where, NL is the private sector net lending, DEF is the government’s deficit and CAB is the current account balance of payments (and is to a zeroth order approximation, exports less imports).

This is not a behavioural hypothesis but still a useful tool to build a narrative. Also, the causality connecting the identities is domestic demand and output at home and abroad.

Imagine, initially that NL is a small positive relative to GDP (for example, NL/GDP = 2%), Also remember that,

NL = Private Income − Private Expenditure

Now assume that private expenditure rises relative to private income. This will lead to higher GDP, a higher national income and a rise in imports because of income effects and hence a lower CAB. It will also lead to higher taxes because of higher income and hence will reduce the budget deficit, DEF, ceteris paribus.

So if the current account balance is in deficit, it would mean that the budget deficit and the current account deficit move in opposite directions.

That’s the theoretical basis for the empirical relationship. But that in itself isn’t the whole story. This is because the other balance—net lending, NL—has a life of its own. As is the case in the United States and several western countries, it turned negative once or twice in the 1990s the 2000s, and when the private sector’s debt rose, it made a sharp U-turn into the positive territory. The blue line in this graph:

Click the graph to see it on FRED.

So, if net lending reverts to its mean of staying positive, one can then conclude that the cumulative budget deficit, or the public debt is affected by cumulative current account deficits.

At any rate, the public debt shouldn’t be the main object of study. What’s more important is the international investment position. And it’s an identity that:

NIIP = cumulative CAB + Revaluations

where, NIIP, is the net international investment position.

A nation which runs current account deficits can become indebted to the rest of the world. IIP is the position of assets and liabilities of resident sectors of a nation. So, the net debt (the negative of NIIP) is the nation’s debt.

The above linked Econbrowser post brings in the complication of revaluations to deny the relationship between CAB and NIIP. But revaluations can’t save you for long.

In short, both public debt and NIIP depend on current account deficits.

Finally a weak analogy: if you play in the rain, you might enjoy it as well. But then if you get sick, you can’t say, “I felt so good playing in rains, so playing in the rain didn’t make me sick”. Saying the two deficits (current account and budget) move in opposite directions is an argument like that.

Could a Labour government safely borrow to invest and spend?

Published by Anonymous (not verified) on Fri, 07/07/2017 - 3:48am in


public debt, UK

ONS Public Sector Finances, May 2017. 

ONS Public Sector Finances, May 2017. 

Britain's public debt has risen inexorably since the Great Financial Crisis. It has done so despite (or because of) austerity, spending cuts that butchered the public sector and local government services, and led amongst other tragedies, to the Grenfell Tower inferno. And because of the very determined efforts of both Labour, Coalition and Conservative governments to cut spending after the GFC - supposedly to reduce public debt - today Britain's public debt stands at close to 90% of GDP as the chart above from the Office for National Statistics reveals.  Under George Osborne's stewardship (2010-2016) Government debt increased by £555 billion. 

We were promised by George Osborne and Nick Clegg in 2010 that cuts to public spending were necessary, nay essential, to restore the public sector finances. We were told that Coalition cuts would reduce public debt to 70% of GDP.  Egged on by orthodox economists, shadow Chancellor Ed Balls joined in the consensus, and before the 2015 election promised that  Labour would not reverse billions of pounds of spending cuts to the police, hospitals, armed forces and local councils. 

Cuts in government spending would lead to a fall in public debt within five years we were told by the Chancellor of Her Majesty's Treasury. Five years became ten years, and still the public debt rose. Five years have now become fifteen years before we can expect the public finances to be restored to levels that existed before the Great Financial Crisis of 2007-9.

In the meantime not only were public services and welfare benefits slashed, both public and private sector workers suffered an unprecedented deterioration in their working conditions and wages. 

While the sheer brutality of the spending cuts may not have been predicted, the rise in public debt was utterly predictable. Indeed Prof. Victoria Chick, Dr. Geoff Tily and yours truly predicted the outcome back in our 2010 publication - The Economic Consequences of Mr. Osborne.  But anyone with common sense would have recognised (as the majority of the economics profession failed to do) that by contracting public spending and investment when the economy was (and remains) fragile damages the economy. And damaging the economy, or  transforming it into one based on corporate tax-cutting and a low-wage 'precariat' invariably leads to reductions in tax revenues.

Falling tax revenues in turn worsen the public finances. Its not rocket science. 

That is why Jeremy Corbyn's team are right to argue that austerity must end. Not just for the sake of the public sector. Not just for the sake of the private sector and the wider economy. But also for the sake of the public finances. 

Does this mean a future Labour government cannot borrow and begin to invest & spend? 

Okay so total public debt has risen, but does this mean that the British government cannot borrow any more? That increased spending financed by the issuance of government bonds or gilts, will worsen the public finances?  

My answer to that is No, No, No.  Here is why: 

First, while public debt has risen under the dogma of public spending cuts, it does not, I will argue, present a threat to financial stability. It will not deter foreign investors. Indeed there is extraordinarily high demand from investors for Britain's 'sovereign debt'. Even after the Brexit vote, demand for UK government gilts was high, as the FT reported here.  In trying to understand this, we must understand that a UK government bond or gilt or debt, is a valuable asset. For pension funds, for investors wanting a safe haven for their savings, UK government borrowing, or debt, is an asset they are keen to get their hands on, because they can safely trust that interest on that asset will be paid over the next one or two or three decades.  UK government debt/bonds/gilts are valuable largely because they are backed by a sound monetary and tax collection (fiscal) system.  That system is sound because the UK has about 31 million taxpayers - that's me and you, and a new taxpayer born every day.  The UK tax collection system - despite tax avoidance and cheating - is efficient and reliable - which means government debt owed to 'the public' - i.e. investors -  will get repaid. . 

But the second point is this: the public (including foreign investors) hold only about 64% of UK debt as a share of GDP. In other words, only 64% of Britain's debt is exposed to the wider 'public' - both domestic and foreign investors. 

25% of Britain's public debt (as a share of GDP) is borrowed from, and held by another government department. It is known as the Bank of England. (Readers will recollect that the Bank of England was nationalised in 1945, largely because of the disastrous part it played in enforcing austerity in the 1920s and 30s.) 

In other words, this is debt that the government in effect borrows from itself. Which is why that 89% number is not as scary as many would like us to think.  Unlike the UK, the United States recognises the distinction between debt owed by the government to 'the public' (i.e. investors domestic and foreign), and government debt owed to the Federal Reserve. If the two are lumped together US government debt amounts to around 106% of GDP. But if the share 'owed' to the Fed itself is excluded, total US public debt amounts to only 76% of GDP, as the Federal Reserve Bank of St. Louis makes clear in this chart.  (Note: US government debt at 76% of GDP is higher than UK debt at 64% of GDP). 

So, given that Britain's government debt exposure to public investors is only 64% of GDP, a future Labour government could safely borrow and spend without alarming said investors. Indeed it is highly likely that increased government investment and spending will revive the private sector, raise standards, improve skills and with it productivity and wages - and that those improvements will, in turn generate the tax revenues needed to stabilise the public finances.

And this more than anything else would please foreign investors. 

So yes, a Labour government could safely borrow to invest and spend. 




Public Debt And Current Account Deficits

Published by Anonymous (not verified) on Sat, 01/07/2017 - 10:39pm in

Yesterday, there was an article at Vox which takes issue with a statement from Donald Trump which connects the US public debt with current account deficits.

Trump ran his campaign on dividing people, is out to destroy health care and wants a regressive system of taxation and so should be resisted. At the same time, a blanket opposition is counterproductive, especially when it is an important matter.

Vox quotes Trump:

For many, many years the United States has suffered through massive trade deficits; that’s why we have $20 trillion in debt.

In response, Vox claims:

The US trade deficit refers to the fact that the US imports more from the world than it exports. The national debt is the result of the fact that the US government spends more revenue than it collects. There’s no direct relationship between the two.

The whole article is written to claim that there is no connection. But anyone who knows the sectoral balances identity will recognize that there is a connection.

So the sectoral balances identity is:


where, NL is the private sector net lending, DEF is the government’s deficit and CAB is the current account balance of payments (and is to a zeroth order approximation, exports less imports).

Of course, this is an identity and shouldn’t be confused for any behavioural hypothesis but it’s still useful in creating a narrative around a model (such as an SFC model) with behaviour for households, firms, the financial system, the government and the rest of the world.

On an average the private sector net lending is a small positive number relative to GDP (such as 2%), although it can fluctuate a lot. So for the U.S. economy, we saw that it was negative a lot in the 2000s and then reverted to a large positive just before and during the crisis.

One should of course keep in mind the correct causality connecting the three terms. What connects them is demand and output at home and abroad.

So the government’s deficit is affected by exports and imports. If there’s a large current account deficit, there’s a fall in demand and hence output and hence income and hence taxes leading to a higher government deficit than otherwise. Deficits in turn affects the public debt.

In other words, the U.S. public debt would have been lower, ceteris paribus, had the problem of the U.S. trade imbalance would have been addressed. This would have happened because of higher national income and higher taxes.

People don’t see the connection because they are comparing different nations. So for example, Japan has been successful in international trade and yet has a high public debt. In the other extreme, Australia has had large current account deficits over the years and public debt much lower than Japan (relative to GDP). But one should do a ceteris paribus comparison.

See Part 2 here: Public Debt And Current Account Deficits, Part 2

Greece has a Private Debt Crisis and We Can Blame the Troika

Published by Anonymous (not verified) on Sun, 04/06/2017 - 3:01am in

The Greek public debt debacle and the bailout received by the government from the European Central Bank (ECB), the European Commission (EC), and the International Monetary Fund (IMF) – referred to collectively as the “troika” – has been making headlines for years. However, very little attention has been paid to the debt crisis in the Greek private sector. An alarmingly high portion of private sector borrowers is behind on their debt payments, and the Greek banking system currently has one of the highest ratios of delinquent loans in the European Union.

Illustration by Heske van Doornen

This collapse of debt prepayments is a direct result the policies imposed by the Troika and threatens the future of Greek economic growth. After the Greek government required financial assistance from international creditors, it was forced to introduce draconic austerity measures to repay its debt. Cutbacks to state services, collapses in incomes, and an increasingly unstable economic environment contracted spending, therefore, eliminating future cash flows that private entities expected to use to repay their debt. The result has been a spiral of collapsing demand and shrinking growth.   

Greece’s accession to the Eurozone was followed by a largely ignored, rapid, and unsustainable build-up in private sector debt. Once the Greek government was forced to impose severe austerity measures and the economy collapsed, the private debt crisis followed. Now, the large ratio of delinquent loans held by Greek banks is adding to the factors hampering economic growth. For Greece to recover, its private debt problems need to urgently be addressed with an approach that offers relief to both borrowers and lenders.


This article was originally published by the Private Debt Project. Read the entire article here.


The full article highlights how the mismanagement of the Greek sovereign debt problems triggered the current private debt crisis. We show the rapid growth in private debt, document the macroeconomic context that pushed to Greece into a depression, and explain how these factors created a private debt crisis. Then, we discuss some of the existing proposals for addressing a large number of loan delinquencies and their limitations, and finally, propose other approaches to tackle this pressing problem.

The post Greece has a Private Debt Crisis and We Can Blame the Troika appeared first on The Minskys.

Brookings dance to Trump's tune on US government interest payments

Published by Anonymous (not verified) on Mon, 29/05/2017 - 5:28am in

I was looking at my Tweetdeck this morning when I came across this tweet from the Brookings Institution:

Now it is clearly a Good Thing in principle for the US Federal government’s budget to be explained in clear and simple ways, but why – I asked myself – do Brookings choose to concentrate today on interest payments (which form just 6% of outlays) rather than the programs that President Trump wants to cut to shreds?  I clicked on the link and found this in their explainer:

The government has borrowed a lot: The federal debt held by the public amounted to slightly over $14 trillion by the end of 2016, a sum equivalent to roughly 77 percent of the U.S. economy. This level of debt is very high by historical standards. The only previous experience with debt this high was at the end of World War II. As a result, a sizable part of the budget goes to pay interest on that debt—in 2016, interest consumed a little over 6 percent of all federal spending. This is more than what the federal government spent on unemployment benefits, higher education, food and nutrition assistance programs, and pollution control taken together.”

The last sentence may be arithmetically true, but clearly serves another purpose – to make the reader think that government debt and interest payments are a growing problem, “crowding out” other - more beneficial - spending.  The Trump White House makes this argument explicit in its recent draft 2018 budget plan:

“When debt levels keep increasing, more and more of the Nation’s resources are required to service that debt and are diverted away from Government services that citizens depend on. To help correct this and reach our budget goal in 10 years, the Budget includes $3.6 trillion in spending reductions over 10 years, the most ever proposed by any President in a Budget.” (My emphasis)

What the Brookings explainer fails to mention – and the Trump administration wish zealously to hide - is that Federal government interest payments as a percentage of GDP are no higher than they were in the 1960s and 1970s – and far lower than in the 1980s and early 1990s.  They are only a tad above the Eisenhower mid-1950s level! This chart from the St Louis Fed shows it clearly:

What is more, the percentage share of interest payments in the Federal budget is also close to a post-1945 low (table compiled by author from



That is to say, interest payments as a share of GDP, but also as a share of the Federal government budget, rose greatly under President Reagan’s administration. As Geoff Tily has shown in his PRIME series on interest rates, the 1980s was a time when real interest rates (i.e. the nominal rate less annual inflation rate) rose to levels not seen since the Great Depression post-1929 - neoliberalism unleashed!

US Treasuries followed a similar path:

 Crestmont Research

Source: Crestmont Research

And just in case it helps, Federal spending as a percentage of GDP was generally as high or higher under Presidents Reagan and Bush senior as it was in 2016!



Brookings is not on the far libertarian right of US economic think-tanks, but is rather the High Established Church for financial globalisation.  (Its President, Strobe Talbott, wrote in 1992 that "In the next century, nations as we know it will be obsolete; all states will recognize a single, global authority.” 25 years on, this is not looking a good call - instead, financial globalisation is endowing us with a bunch of Trumps, crooks and autocrats – not necessarily separate categories).  

Brookings’ Board of Trustees is jam-packed with representatives of giant global hedge funds, banks (Deutsche, Goldman Sachs..) and ‘consultancies’ (McKinsey).  They benefited from the high real rates of the 1980s and 90s, and have benefited 'hugely' from QE, despite/due to the low interest rates required after the crisis.  They are likely to have a very ambiguous attitude to the Trump economic agenda, wanting the tax cuts and (if ever..) infrastructure investment, but alarmed at other policies as well as the chaotic policy contradictions.

The Brookings' arm that produces the fiscal “explainers” is called the Hutchins Center on Fiscal and Monetary Policy; its Advisory Council's co-chairs are Greg Mankiw (who chaired Bush junior's Council of Economic Advisors) and Larry Summers, with Ben Bernanke among the advisers.  

Two years ago the Center’s director David Wessel (a long-time writer for the Wall Street Journal) wrote this in another “explainer” – and nothing has materially changed since:

“The U.S. government is able to borrow at very low interest rates on global financial markets, and there doesn’t appear to be much private-sector borrowing that is crowded out by U.S. Treasury borrowing right now.”

The US Federal Reserve, we should also remember, has a triple, not a double mandate for monetary policy:  

"The Federal Reserve Act states that the Board of Governors and the FOMC should conduct monetary policy 'so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.'" (My emphasis)

(Maybe trustee Ben Bernanke can advise...)

Brookings and its Hutchins Center really should do better than focus on debt interest payments (which are stable) at the very moment when when President Trump is trying to slash every Federal budget head that contributes towards a civilised society.  It is that budget, and its harsh impact and social consequences, that would be most likely to lead to fiscal problems downstream. 

Xmas Cheer: The Debt Is Not Our Biggest Problem

Published by Anonymous (not verified) on Sun, 01/01/2017 - 2:01pm in

Why do so many pundits and politicians, including the future director of the Office of Management and Budget, beat the debt drum so loudly and so often? It’s one of the most effective, and most abused, wedge issues in American politics.

by Kerry Pechter

The nomination of Mick Mulvaney—deficit hawk, three-term Republican congressman from South Carolina and founding member of the House “Freedom Caucus”—to the cabinet-level directorship of the Office of Management and Budget is not good news for the financial system.

Mulvaney has said (and perhaps even believes) that one of the “greatest dangers” we face as Americans is the annual budget deficit and the $20 trillion national debt. This notion is an effective political weapon, but it’s dangerously untrue. If it were true, the country would have failed long ago.

Debunking this canard should be a priority for anybody who cares about retirement security. As long as we believe in the debt bogeyman, we can’t productively solve the Social Security and Medicare funding problems, defend the tax expenditure for retirement savings, or even create a non-deflationary annual federal budget. Everything will look unaffordable.

Hamilton, the Broadway star

If you don’t believe me, believe Alexander Hamilton. In 1790, the new nation was awash in government IOUs but had little cash or coinage for daily commerce. Hamilton, the impetuous future Broadway subject, resolved the crisis with a simple argument. He reminded his fellow founders that debts are also assets, and that the most secure assets are those that yield a guaranteed income stream from a sovereign government with the power to tax.

At the time, according to Hamilton’s “First Report on the Public Credit,” the U.S. debt in 1790 stood at $54.1 million and change. In that document, the first Treasury Secretary laid out his plan—over the protests of deficit hawks—to restore the debt’s face value, secure the new nation’s credit rating, and put new money into circulation through interest payments on the debt, with revenue from taxes on imports.

The plan worked. With its par value established, U.S. debt became—and still is—the basis of the nation’s money supply. “In countries in which the national debt is properly funded, and an object of established confidence, it answers most of the purposes of money,” Hamilton wrote. “Transfers of stock or public debt are there equivalent to payments in specie; or, in other words, stock, in the principal transactions of business, passes current as specie.”

Not a burden on our backs

Since then, during times of doubt, others have re-explained all this. In 1984, many people were panicking that the federal budget deficit had reached $185 billion. That July, economic historian Robert Heilbroner, author of The Worldly Philosophers, explained in a New Yorker essay that their fear was based on a misconception.

“The public’s concerns about the debt and the deficit arises from our tendency to picture both in terms of a household’s finances,” Heilbroner wrote. “We see the government as a very large family and we all feel that the direction in which these deficits are driving us is one of household bankruptcy on a globe-shaking scale.”

That’s not so, he explained. The government is more like a bank, which lends by creating brand new liabilities. (You can also think of it as the cashier at a casino, who has an infinite number of chips at her disposal.) “As part of its function in the economy, the government usually runs deficits—not like a household experiencing a pinch but as a kind of national banking operation that adds to the flow of income that government siphons into households and businesses,” he wrote.

Robert Heilbroner

“The debt is not a vast burden borne on the backs of our citizenry but a varied portfolio of Treasury and other federal obligations, most of them held by American households and institutions, which consider them the safest and surest of their investments.”

‘Heterdox’ economic view

Over the past 30 years, however, as the national debt has become a political football, this common-sense explanation of it has been suppressed. You hardly ever hear it articulated. It is kept alive mainly by “heterodox economists” like Stephanie Kelton and L. Randall Wray.

In the 2015 edition of his book, Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, Wray explained the flaw in the idea that the deficit, the debt or the interest on the debt will eventually overwhelm us. It’s the kind of straight-line forecasting, he wrote, that ignores self-limiting factors or feedback mechanisms.

“If we are dealing with sovereign budget deficits we must first understand WHAT is not sustainable, and what is,” Wray wrote. “That requires that we need to do sensible exercises. The one that the deficit hysterians propose is not sensible.” He uses the analogy of Morgan Spurlock, the maker of the 2004 documentary Supersize Me, to illustrate his point.

In the movie, Spurlock wanted to discover the effects of consuming 5,000 calories worth of food at McDonald’s every day. Wray pointed out that, if you ignored certain facts about human metabolism, the 200-lb Spurlock would inevitably weigh 565 pounds after a year, 36,700 pounds after 100 years and 36.7 million pounds after 100,000 years. Of course, that can’t happen.

Randall Wray

“The trick used by deficit warriors is similar but with the inputs and outputs reversed,” according to Wray. “Rather than caloric inputs, we have GDP growth as the input; rather than burning calories, we pay interest; and rather than weight gain as the output we have budget deficits accumulating to government debt outstanding.

“To rig the little model to ensure it is not sustainable, all we have to do is to set the interest rate higher than the growth rate – just as we had Morgan’s caloric input at 5,000 calories and his burn rate at only 2,000 – and this will ensure that the debt ratio grows unsustainably (just as we ensured that Morgan’s waistline grew without limit).”

Fooling the people

Like any other threat, the debt’s scariness factor depends on how you frame it. The 2016 budget deficit was $587 billion, which sounds terrible. But that was just 3.3% of Gross Domestic Product. The U.S. debt reached $19.9 trillion in 2016, which also sounds terrible. But that is the amount accumulated since 1790. Our annual GDP is almost $18 trillion.

To enlarge the frame, we should include the whole “financial position” of the United States. According to Wikipedia, it “includes assets of at least $269.6 trillion and debts of $145.8 trillion. The current net worth of the U.S. in the first quarter of 2014 was an estimated $123.8 trillion.” In that context, neither the deficit nor the debt seem like terrible threats.

If you’re bent on making the math look scary, you can easily do it. As Wray noted above, “If the interest rate [i.e., costs] is above the growth rate [i.e., revenues], we get a rising debt ratio. If we carry this through eternity, that ratio gets big. Really big. OK, that sounds bad. And it is. Remember, that is a big part of the reason that the global financial crisis (GFC) hit: an over-indebted private sector whose income did not grow fast enough to keep up with interest payments.”

But the government doesn’t face the same constraints as the private sector (which is why it could bail out the private sector in 2008-2010). Once you recognize that U.S. assets are huge, that U.S. debts are also private wealth, and that the debt needs to be serviced but never zeroed out, then today’s debt shrinks into the manageable problem that it is and not a source of panic. (Paying down the national debt—in effect, deleveraging the government—would be disastrously deflationary; that’s a topic for another article.)

So why do so many pundits and politicians, including the future director of the Office of Management and Budget, beat the debt drum so loudly and so often? The answer is obvious. It provides an evergreen reason to delegitimize any and every type of government spending, regulation and taxation. It’s one of the most effective, and most abused, wedge issues in American politics.

Kerry Pechter is the founder and editor of the Retirement Income Journal. Reprinted with permission.

It's the demand, stupid! The role of weak demand on productivity growth

Published by Anonymous (not verified) on Mon, 06/10/2014 - 12:52pm in

I couldn't resist the title.

Last week I was invited to give a short talk on what I thought was the most pressing policy issue facing the world economy today.

So I presented the findings from a very interesting paper entitled "Explaining Slower Productivity Growth: The Role of Weak Demand Growth" by Someshwar Rao and Jiang Li.

The paper examines the link between demand and productivity growth in both Canada and OECD countries. This issue has been an interest of mine ever since I read these lines in a book by Alan Blinder several years ago:

Economic slack...discourages business investment because companies that cannot sell their wares see little reason to expand their capacity. In consequence, the nation gradually acquires a smaller, older, and less efficient capital stock. 

[A]lthough the state of the national is far from the only factor, who doubts that a booming economy provides a better atmosphere for inventiveness, innovation, and entrepreneurs than a stagnant one? As the cliché says, a rising tide raises all boats...From 1962 to 1973, our generally healthy economy experienced only one mild recession, an average unemployment rate of 4.7 percent, and productivity growth that averaged a brisk 2.6 percent per annum. [Between 1974 and the mid-1980s] the economy [was] frequently...out of sorts. We...suffered through two long recessions and one short one, with an average unemployment rate of 7.3 percent and a paltry average productivity growth rate of 1 percent. This association of high unemployment with low productivity growth is no coincidence. 

Surveying these concomitants of high unemployment -- lack of upward mobility for workers, sluggish investment, lackluster productivity growth -- suggests an ironic conclusion: the best way to practice supply-side economics may be to run the economy at peak levels of demand. (1986:36).

This still makes lots of sense to me.

Verdoorn's Law

During my talk I described the paper as lending support to the well-known findings of economist Petrus J. Verdoorn, who several decades ago published research showing a positive relationship between labour productivity growth and real output growth.

In retrospect, I probably shouldn't have discussed this since it led to a number of questions on Verdoorn and his research, which shifted the focus away from the paper and the real purpose of my talk, which was to drive home the point that there is considerable evidence that productivity growth shouldn't be viewed as solely a supply-side phenomenon.

Specifically, the paper supports the -- in my opinion, common sense -- view that a slowdown in domestic and external demand is detrimental to growth in labour productivity, real incomes and economic activity because of the negative impact of weaker demand on scale and scope of economies, formation of physical and human capital, innovation and entrepreneurial activity.

Here are the paper's main findings:

Our major findings is that 93 percent of the fall in average labour productivity growth between 1981-2000 and 2000-2012 can be attributed to the drop in real GDP growth between the two periods...In addition, our new empirical research shows that a slowdown in growth of domestic and external demand also impacts negatively some of the key drivers of productivity growth, such as, gross fixed capital formation, M&E investment (including ICTs) and R&D spending, thus leading to lower trend labour productivity. (2013:14)

I concluded my presentation by discussing some of the policy implications outlined by the paper's authors. At this point, I was hoping my comments would get the attention of the government policy analysts and economists in the audience.

First, I suggested that it would be prudent for governments to ensure that deficit and debt reduction measures are gradual in nature so that their negative impact on domestic demand would not be excessive.

Then, I explained that it's always a good idea for governments to spend on productivity-enhancing public investment, even during a period of economic slowdown, as it contributes to both today's demand as well as future productivity growth.


Blinder, A., Hard Heads, Soft Hearts, (Mass: Perseus Books)

Rao, Someshwar and Jiang Li, "Explaining Slower Productivity Growth: The Role of Weak Demand Growth", International Productivity Monitor, Spring 2013.

Anthony Atkinson on the public debt and intergenerational equity

Published by Anonymous (not verified) on Sun, 28/09/2014 - 11:05pm in

It's been a long time since my last post. Much of my spare time has been spent reading and thinking about the best way to think about the economy. In the end, I've come to the conclusion that it's the big picture that matters.

Take the question of the public debt. Much of the discussion in the popular press relating to the national debt focuses on the liabilities of the government and actuarial concerns (dealing with "how to pay it off"), but it rarely discusses the link between public debt and private wealth, wealth distribution and intergenerational equity.

Anthony Atkinson, I believe, summarized it best here:

Much of the rhetoric of fiscal consolidation is concerned with the national debt as a burden on future generations [...] One lesson of the public economics literature on the national debt is that we have to look at the full picture. We pass on to the next generations:
  • national debt, 
  • state pension liabilities, 
  • public financial assets, 
  • public infrastructure and real wealth, 
  • private wealth, 
  • state of the environment, and
  • stocks of natural resources.

We need to look at the overall balance sheet, where assets as well as liabilities are taken into account. This does not mean that the position is a healthy one. If we consider the difference between the assets of the state and the national debt, expressed as a percentage of the total national wealth, then in the 1950s the net worth of the [UK] state was negative, but it was becoming less negative, and turned positive in the 1960s [...]

The direction of change since the 1970s has however been in the wrong direction [...] In effect the process of privatisation, with the proceeds used largely to fund tax cuts, transferred wealth from the state to the personal sector. We saw that it was at the end of the 1970s that personal wealth began to rise faster than income. The worsening of the public balance sheet is the other side. Personal wealth has risen faster than national wealth since the 1970s because, in effect, assets have been transferred from the public to the private sector. We are passing on more privately to the next generation but less publicly.

Reversing this pattern can be achieved not only by reducing the national debt, but also by increasing public assets.

Now, to say that more wealth is being passed on privately rather than publicly does not mean that it's being passed on equitably.

For instance, when the government sells-off public sector assets such as parks and decommissioned military bases, the government can use the proceeds to pay down the debt, but the assets get transferred to the purchasers of those assets in the private sector, who, most of the time, don't have the same class and socio-economic profile as that of the whole population (i.e., the former "owners" of those assets).

So here's the bottom line: paying down the debt by selling off public assets to the financial interests has contributed immensely to the wealth inequality that is being discussed these days.

And the corollary to this statement is that there's still lots of wealth "out there" that could be used for public purposes and has the potential to be passed on to future generation in a more equitable manner. It hasn't disappeared, it's just changed hands.


Atkinson, A.B., "Public economics in an age of austerity", January 12, 2012

Moving past the 90 percent threshold: Focusing on growth

Published by Anonymous (not verified) on Tue, 23/04/2013 - 9:33pm in

Now that the proposition of a 90 percent threshold (of public debt-to-GDP above which countries' economic growth would significantly slow) associated with the work of Carmen Reinhart and Ken Rogoff has been refuted, it's important that the debate now turn to the critical issue of how best to achieve growth moving forward.

On this point, one important aspect to keep in mind is that the uses toward which public debt is directed and the composition of public debt tend to have a significant impact on a country's economic growth.

A recent study by the IMF entitled "Public Debt and Growth" appears to support this view. The study, which examined the public debt dynamics in over 30 countries, found that, although the elasticity of growth with respect to public debt is -0.02, the elasticity of other variables that positively impacts growth offsets this number. For instance, as Iyanatul Islam has noted, the study shows that the elasticity of growth to initial years of schooling is above 2.0.

In other words, it's quite likely that public debt directed toward productive uses has the effect of supporting growth by cancelling out some of the negative effects associated with high public debt that impede growth.

These are the sort of issues policymakers should be discussing moving forward. I think it would go a long way to help us get out of the economic doldrums we're facing today.


Manmohan and Jaejoon, Public Debt and Growth, IMF, July 2010