14 votes

No one knows how much the government can borrow

27 comments

  1. [6]
    RNG
    Link
    Like clockwork, the larger discussion of "fiscal responsibility" and "deficit spending" comes around specifically when the GOP loses power, and the discussion dies the moment they gain power. I...

    Like clockwork, the larger discussion of "fiscal responsibility" and "deficit spending" comes around specifically when the GOP loses power, and the discussion dies the moment they gain power. I certainly don't blame the OP or even the writer of the article since this does appear to be a larger discussion (on time as always,) but the timing of the larger social discussion has the effect of causing the voter to view social programs and green initiatives as costly, while giving unimaginable trillions in tax cuts and military spending a lesser degree of scrutiny.

    It would be interesting to find out what specific catalysts exist for this cycle. This is only my own personal observation; it's possible the sources I follow may be skewed. I've seen more blogs and think pieces on deficit spending in the past month than I have seen the past two years.

    16 votes
    1. [3]
      skybrian
      Link Parent
      It sounds like you missed the debate over “modern monetary theory” that’s been going on for at least a couple of years now. Advocates say the government could be spending a lot more without ill...

      It sounds like you missed the debate over “modern monetary theory” that’s been going on for at least a couple of years now. Advocates say the government could be spending a lot more without ill effects. (Andrew Yang says that too.) So, I don’t think the timing really matches up, or at least it goes back to when things like UBI and the Green New Deal started to be discussed, and not when the GOP actually lost power.

      10 votes
      1. [2]
        NaraVara
        Link Parent
        Not quite. MMT doesn’t say you can spend a “lot” more without ill effects. It reconceptualizes what government spending actually means, with taxes as a way to draining money out of the economy and...

        Advocates say the government could be spending a lot more without ill effects.

        Not quite. MMT doesn’t say you can spend a “lot” more without ill effects. It reconceptualizes what government spending actually means, with taxes as a way to draining money out of the economy and spending as a way of pouring money in. The upshot of this is that the problem with excessive spending is not, as people think, anything about having to owe creditors or continue servicing debt. It’s that spending creates inflation, and sustainable budgeting isn’t about keeping the ledger balanced, but about being careful about balancing the value addition of your spending to counteract the dilution of your currency.

        In practice, it means the United States can get away with spending a ton more. This is because the US dollar’s status as a reserve currency means we have a ton of space to flood the economy with cash before it starts to lose value. This is not generalizable to other countries. The Eurozone and China may be able to do it too to some extent. But countries like Brazil or India are large economies with currencies that aren’t all that stable so it’s tougher for them.

        It also means that not all government spending is created equally. Spending on things that constitute durable, long-term investments in productive capacity are basically always going to be worth it in MMT land. This would be things like worthwhile infrastructure spending, education, a jobs guarantee, and healthcare since they all basically enable people to continue working. Spending on things that would count more as consumption than investment, though, would be problematic. This would be things like bureaucratic administration costs or cash transfers that end up going to consumption, etc. anything that increases the ratio of money to value of goods and services would need to be deprioritized.

        6 votes
        1. skybrian
          Link Parent
          Sure, I know conceptually how it’s supposed to work and I largely agree that the main thing to worry about is inflation. And that’s the question. How much more? How do we know when we’re...

          Sure, I know conceptually how it’s supposed to work and I largely agree that the main thing to worry about is inflation.

          In practice, it means the United States can get away with spending a ton more.

          And that’s the question. How much more? How do we know when we’re approaching a limit?

          We aren’t going to settle this ourselves, but it would be very useful if some economists came up with a way of understanding this, quantitively.

          4 votes
    2. [2]
      Good_Apollo
      Link Parent
      Yeah these articles never pop up talking about military waste spending (cutting the waste doesn’t cut the effectiveness) or other egregious expenditures (Like ridiculous Congress personal...

      Yeah these articles never pop up talking about military waste spending (cutting the waste doesn’t cut the effectiveness) or other egregious expenditures (Like ridiculous Congress personal expenses). It’s always social programs and environmental/public benefit departments that get called out.

      2 votes
      1. skybrian
        Link Parent
        It seems like wasteful military spending is being called out all the time? But the people doing the calling-out usually aren't in a position to do anything about it.

        It seems like wasteful military spending is being called out all the time? But the people doing the calling-out usually aren't in a position to do anything about it.

  2. [6]
    stu2b50
    Link
    I get what the piece is getting at. But I also think it's subtly dishonest in a few small ways that change the overall message, or at least the tone of it. First, this just bugged me as a I read...

    I get what the piece is getting at. But I also think it's subtly dishonest in a few small ways that change the overall message, or at least the tone of it. First, this just bugged me as a I read it

    Many people will tell you, very confidently, that they know the answer to this question, but don’t believe them.

    Are you not doing the same?

    Secondly, are more important, the idea of

    An infinite corridor with an invisible pit

    In the article, the author illustrates out the (fairly basic, I'd add) ways that the issuance of more and more debt can effect various figures in the economy. First, the normal buyers of debt will "eventually" demand higher interest rates or cease to be active buyers as the supply of bonds increase. Secondly, that having the Fed buy those bonds instead will "eventually" cause inflation.

    But the characterization of this as a "pit" is just out of the blue. And it's done in such a way that it assumes it is correct. But is there any reason to think that it is a pit, and not a slope? A slope wherein indicators like, y'know, the interest rate and the CPI, the two things you just talked about, would indicate where you are on the slope?

    And this matters, because the article has this super urgent tone. We gotta get more research (which is perfectly fine), maybe stop spending until we get that research (not so fine imo). And we gotta do that NOW because we're about to fall in that damn pit!

    But that's centered on the idea that it's a PIT, we keep issuing bonds, fed keeps buying them, BAM, suddenly we're Venezuela.

    Ok, but first wouldn't you see a drop in demand for bonds (and thus either a higher interest rate or a greater need for the Fed to buy them)? Wouldn't you then also have to see the CPI increase? Is there no continuality between "0.61% inflation (2020) -> 200% inflation (???)"?

    Currently, the interest rates are almost 0, the CPI is at all time low (naturally, we're in a recession), and the Fed is spending time buying corporate bonds to maintain liquidity in the private sector. I have a hard time believing that there is a pit, and I have a hard time believing we're far down enough on the slope that we should think about balancing the budget.

    3 votes
    1. [5]
      skybrian
      Link Parent
      Also, he does admit later that many countries do see high inflation for years before seeing hyperinflation. But on the other hand, there is a greater need for the Fed to buy treasuries. Fed...

      Also, he does admit later that many countries do see high inflation for years before seeing hyperinflation.

      But on the other hand, there is a greater need for the Fed to buy treasuries. Fed ownership of treasuries basically doubled in 2020. (See graph.) That seems bad? And relatively sudden panics and crashes do happen sometimes, not completely without warning, but often the significance of warnings is debated. Consider 2008.

      I don’t know enough about economics to confirm his confident assertion that nobody knows, but I’m sympathetic since I think ignorance is a good default. I think it actually is urgent for economists to work on (or point out work that’s already been done) because, if it’s okay to be spending a lot more money, resolving the uncertainty about this is really important and could result in a lot less unnecessary suffering.

      To talk about my favorite cause, a major reason for skepticism about UBI is the vague feeling that there’s no free lunch and it has to be paid for somehow. Our arguments that it’s really okay are too hand-wavy. Relying on gut feelings about whether it’s okay or not is part of the problem he’s pointing out.

      2 votes
      1. [4]
        stu2b50
        Link Parent
        There are many reasons the Fed has for buying bonds. In this case, they're buying them to inject liquid money into the economy. Banks and organizations hold bonds as assets that generate revenue,...

        But on the other hand, there is a greater need for the Fed to buy treasuries.

        There are many reasons the Fed has for buying bonds. In this case, they're buying them to inject liquid money into the economy. Banks and organizations hold bonds as assets that generate revenue, but what the Fed wants in a recession is more liquid money that flows through the economy, so they purchase bonds.

        In the scenario he lays out, note that it's high interest rates, or rather no demand for treasury bonds at an acceptable interest rates to the government, but this is far from the current reality. Just look at the current yield rates. Not only are they insanely low, but you can clearly see they're getting lower, not higher.

        People are MORE than happy to buy US bonds at pathetic interest rates.

        What I dislike about the assertion is that the whole point of the article is about bad priors - that the prior belief shouldn't be "well, it's probably fine", and you should require research and evidence to prove that it's okay, and then he just casually assumes as a prior that there's this weird nonlinear cliff we're about to hit.

        A hyperinflation event is very different from a economic bubble bursting, and he provides zero evidence why it would be the case that the movement towards the theoretical limit of US borrowing would not be gradual and have indicators.

        1 vote
        1. [3]
          skybrian
          Link Parent
          This is arguing over priors and it’s kind of tricky. My interpretation of this metaphor isn’t that he’s asserting that we definitely won’t get any warning, but rather making it vivid that we might...

          This is arguing over priors and it’s kind of tricky. My interpretation of this metaphor isn’t that he’s asserting that we definitely won’t get any warning, but rather making it vivid that we might not get any warning, and that’s why it’s important to think about. There are a lot of disasters you don’t get much warning about (like earthquakes) but we should still prepare for them.

          Saying that nonlinear effects are “weird” is an assumption and I don’t think that’s warranted? In finance, nonlinear things happen all the time. There are also external shocks to the system (like the pandemic) that you’re not going to predict by looking at macroeconomic trends.

          The author makes an assertion that economic knowledge is poor in this area and basically dares people to prove him wrong. He seems to have looked, though I don’t know how thoroughly.

          1 vote
          1. [2]
            stu2b50
            Link Parent
            No, it is weird. Specifically the "pit" aspect. If you were a (correct) doomer in 2006-7, for instance, you had a theory of the case as to why there was be a sudden downward spiral. MBSs were...

            Saying that nonlinear effects are “weird” is an assumption and I don’t think that’s warranted? In finance, nonlinear things happen all the time.

            No, it is weird. Specifically the "pit" aspect. If you were a (correct) doomer in 2006-7, for instance, you had a theory of the case as to why there was be a sudden downward spiral. MBSs were incorrectly rated to a fantastic level, and the realization of that would cause a chain reaction with the secondary market of CDOs on MBSs.

            What is the theory here? Increasing debt issuance drops demand, forcing the Fed to purchase bonds and causing inflation, no? What part of that is sudden and unexpected? Wouldn't you first have a stagflation style economic malaise first? I think that'd be a pretty good sign of "bad shit happening in the future".


            Of course I have no issue with the idea of more research on the subject - it's pretty hard to take the stance of "don't study" anything. But what I do take issue with is the casual FUD he throws on the stimulus packages. And the "pit" is a key part of that.

            Is 1.9 trillion a lot of money? Sure. Is it that big of a nudge? Not really. It would be a 7% increase in the national debt. It would still be under the Debt-to-GDP ratio that the US had post WW2, a notable time where babies boomed and idealized dreams were made.

            Is that any actual evidence that the 1.9 trillion is going to nudge us to Venezuela? No! And there's no time to wait - that money will save lives in both the current and future.

            2 votes
            1. skybrian
              Link Parent
              Yes, the article isn’t an argument in favor of any specific theory; it’s asserting ignorance.

              Yes, the article isn’t an argument in favor of any specific theory; it’s asserting ignorance.

              4 votes
  3. [7]
    citizenpremier
    Link
    I'm surprised that there's little mention of the velocity or general use of money. In a simple example, if a very corrupt government secretly prints a ton of money and gives it to a crony, that...

    I'm surprised that there's little mention of the velocity or general use of money. In a simple example, if a very corrupt government secretly prints a ton of money and gives it to a crony, that won't lead to inflation if the crony is smart enough to not spend the money suddenly and all at once. If the exchange is entirely in secret there might not be any inflation at all.

    We saw hyperinflation in Zimbabwe because the new funds were being used to pay for the military. I suspect in that case, Mugabe (or whoever else) knew that the loyalty of the military was paramount, and as inflation started to get out of control prioritized the relative wealth of the military.

    The US is a highly centralized economy, by which I mean, controlled by a relatively small elite, so a large output of currency into the economy is going to be absorbed by people who likely have the sense not to cause runaway inflation.

    3 votes
    1. skybrian
      Link Parent
      I think that’s because the article is focused on summarizing the state of economic literature rather than explaining it all. We could go into more detail about particular episodes of...

      I think that’s because the article is focused on summarizing the state of economic literature rather than explaining it all.

      We could go into more detail about particular episodes of hyperinflation. For example, I think Zimbabwe also had a supply collapse, which would cause prices to rise due to shortages, even without more money in circulation? This combination, people really needing to buy things, having money, and little being available to buy, seems especially likely to cause inflation.

      But I don’t think we’re going to settle this by talking about what we remember about whatever economic theory and history we learned. At best maybe we could find other interesting reading?

      2 votes
    2. [5]
      SantalBlush
      Link Parent
      Right, we can see M2 velocity in sharp decline, particularly over the past year during US fiscal and monetary expansions.

      Right, we can see M2 velocity in sharp decline, particularly over the past year during US fiscal and monetary expansions.

      1 vote
      1. [3]
        MimicSquid
        Link Parent
        But is that related to the expansion, or are they both related to a third thing like the pandemic?

        But is that related to the expansion, or are they both related to a third thing like the pandemic?

        1 vote
        1. [2]
          SantalBlush
          Link Parent
          They are both effects of the pandemic. The point is that in spite of these massive stimulus projects, inflation can be tempered by a decrease in money velocity, among other things.

          They are both effects of the pandemic. The point is that in spite of these massive stimulus projects, inflation can be tempered by a decrease in money velocity, among other things.

          1 vote
      2. skybrian
        Link Parent
        Reduced spending seems like an effect of the pandemic. The recovery period could be different.

        Reduced spending seems like an effect of the pandemic. The recovery period could be different.

  4. [2]
    Muffin
    Link
    I apologize for the off-topic, but can anyone add a tag to a post? This one is missing the USA tag and it's slipping by filters

    I apologize for the off-topic, but can anyone add a tag to a post? This one is missing the USA tag and it's slipping by filters

    3 votes
  5. [6]
    SantalBlush
    Link
    The very first paragraph in this article, is false. Which goes to show that you can fabricate almost anything about the field of economics on the internet, and people will not only believe it, but...

    The very first paragraph in this article,

    One of the most important questions in macroeconomics is one that economists have curiously chosen not to study. That question is: “How much can the government safely borrow?”

    is false. Which goes to show that you can fabricate almost anything about the field of economics on the internet, and people will not only believe it, but will spread it to unwitting readers.

    2 votes
    1. [5]
      skybrian
      Link Parent
      It’s an exaggerated opening as is too common these days, but if you read on, he does talk about some papers that economists have written, and has encouraged people to send him more. The...

      It’s an exaggerated opening as is too common these days, but if you read on, he does talk about some papers that economists have written, and has encouraged people to send him more. The non-exaggerated claim here is that it should be studied a lot more than it is.

      I’m wondering what you’ve read on the subject?

      2 votes
      1. [4]
        SantalBlush
        Link Parent
        I see references to work on hyperinflation, but I don't see the author referencing work on government borrowing, the main topic of the article. There is a large body of work on the limitations and...

        I see references to work on hyperinflation, but I don't see the author referencing work on government borrowing, the main topic of the article. There is a large body of work on the limitations and problems surrounding government borrowing, so it's a bad sign that the author didn't address any of it, and went so far as to (falsely) say it doesn't exist.

        So let’s talk a little about government borrowing constraints, and why we don’t know what they are, and why macroeconomists have been remiss in avoiding the topic.

        They haven't avoided the topic. Let's look at some other claims.

        Most macroeconomic models simply assume a government borrowing constraint. They assume that in the very long run, government debt as a percent of GDP trends toward zero (or perhaps some constant value).

        In the first part of this statement, the author links to what appears to be an undergrad econ textbook as evidence that "most" models assume a borrowing constraint. That's not evidence. The second link points to a single model in another blog by someone from the St. Louis Fed, which is better, but still not great. There are in fact common time series models that examine whether debt is constrained (stationary), and it is a well known issue in the actual literature.

        The general description of the banking system is decent, but much of the article is just complaining about macroeconomists, followed by some good-old-fashioned poisoning the well. Okay, suppose we shouldn't trust what macroeconomists say--but why, then, should we trust this person, Noah Smith? A smart person on the internet would scoff and say, "It's not about the person, it's about the merits of the argument." That sounds great, but the author didn't really address the merits of macroecon arguments in the first place, and instead opted to disparage the entire field with over-generalizations or straight up fabrications. Moreover, the author offers considerably less evidence for arguments in this article than we can find in a paper in any decent journal. So again, why do I believe the assertions in this article?

        This follows a common formula that I see on blogs, and it goes something like this:

        1. Point out some flaws in the existing literature of whatever sphere of knowledge I want to discuss (whether those flaws are real or made up doesn't matter).

        2. Use these flaws to suggest that the entire field is problematic.

        3. Conclude that since the entire field is problematic, then my opinions are now on equal footing with the opinions of experts.

        That's not how it works. I could make a decent list of problems I have with macroecon, but that doesn't mean the assertions here are worth their salt, especially with such weak evidence. I mean, the author doesn't even mention the role of money velocity when discussing inflation, which is pretty darn important.

        2 votes
        1. [3]
          skybrian
          Link Parent
          He’s done a bit of searching (I don’t know how much) and said he didn’t find anything. The best response would be for someone to point out some good research to learn from. Asserting that research...

          He’s done a bit of searching (I don’t know how much) and said he didn’t find anything. The best response would be for someone to point out some good research to learn from. Asserting that research exists without pointing it out doesn’t seem helpful since we’re left still not knowing anything?

          I’m certainly no expert, but the author of this article is an assistant professor of finance with a PhD in economics, so it seems like he has enough credentials to listen to? What really matters is familiarity with the literature, though.

          3 votes
          1. [2]
            SantalBlush
            Link Parent
            The point is that we should be applying the same level of scrutiny to these sorts of blog posts that we apply to, say, publications or other work, and I don't think that has been done here. And...

            The point is that we should be applying the same level of scrutiny to these sorts of blog posts that we apply to, say, publications or other work, and I don't think that has been done here.

            And I've seen this play out quite a few times: make a claim with little or weak evidence, then require someone else to put in more work and provide more sources if they wish to refute it. Finding the sort of paper I'm taking about is as simple as opening Google Scholar and searching "government borrowing limits". If someone tries that, they could immediately find a paper like "On the Limitations of Government Borrowing: A Framework for Empirical Testing," which is published in a high-quality journal. One version of the abstract I see:

            This paper seeks to distinguish empirically between two views on the limitations of government borrowing. According to one view, nothing precludes the government from running a permanent budget deficit, paying interest due on the growing debt load simply by issuing new debt, An alternative perspective holds that creditors would be unwilling to purchase government debt unless the government made a credible commitment to balance its budget in present value terms. We show that distinguishing between these possibilities is mathematically equivalent to testing whether a continuing currency inflation might be fueled by speculation alone or is instead driven solely by economic fundamentals. Empirical tests which have been developed for this economic question lead us to conclude that postwar U.S. deficits are largely consistent with the proposition that the government budget must be balanced in present-value terms.

            Looks pretty relevant to the blog post. You can look at the papers that cite this one and proceed from there. The author should have included this sort of work in the post. This will be my last comment. If you reply, I will read it.

            2 votes
            1. skybrian
              Link Parent
              Yeah, I'm not saying any of us need to do more work. A call for more research is inherently a call for specialists to do more work, though. Even if I were to decide to follow up, getting a handle...

              Yeah, I'm not saying any of us need to do more work. A call for more research is inherently a call for specialists to do more work, though.

              Even if I were to decide to follow up, getting a handle on current research means understanding it pretty well, and I'm not sure I can spot errors in an economics paper or tell a good one from a bad one without help from experts. The lazy way is to see how other economists respond to this blog post (if they do).

              3 votes