Let's talk about this debt limit thing.
How many other countries have such a thing?
One, Denmark.

From a legal and legislative point of view, the US and Danish debt ceilings are similar. Both countries require legislative action to raise the ceiling. However, the Danish approach to this process is very different.

The current Danish debt ceiling is fixed at 115 percent of 2010 GDP. Since the outstanding gross general government debt in Denmark is below 40 percent of GDP and is 34 percent of the debt ceiling limit. In other words, the Danish debt ceiling is almost three times the level of actual outstanding gross debt and of no practical relevance for government budget making or debt management.

It is as if Congress set the limit at $50 Trillion and said, Go away and don't bother us for awhile.

Now, why do we have a debt ceiling at all? Can we do away with it? Not really because of two quirks in our Constitution.

The Constitution gives the Congress the primary responsibility for authorizing a bond issue while giving the Executive (Treasury) the responsibility for issuing bonds. In 1917 the various financial burdens (Panama Canal, etc.)  meant the the Treasury kept going to Congress for individual bond issues. Remember, we were on the gold standard so the covering of the deficit with bonds was important and necessary.

The Constitution does not allow the various branches of government to delegate authority without clear goals and limits. It also separates the functions of budget, allocation, and debt acquisition; this is unlike most other countries, except, of course, Denmark. :=))

So Congress set a high debt limit, $11.5 billion, to cover the run up to our entry into WWI and said, go away and don't bother us for a while.

So, what was the debt pattern at the time? In 1911 it was $2,709,000,000. (That's $2.7 billion for those of us that can't count zeros fast.) In 1921 it was $24,965,000,000 ($25 billion is close enough.)

Oh dear, kind of popped through that limit thing? Well, not really. Let's see what Congress did about that debt limit. (With, apparently, little drama.)

In December 1919 it raised the limit to $43 billion. Note, that is just short of double the debt hit in 1921.

For anyone curious I put in three more changes in the debt limit.
December 1939 - $45 billion (20 years?)
June 1940 - $49 billion
February 1941 - $65 billion
(February 1941??? Odd. I wonder what did they see coming?)

I leave it as an exercise for the student to look up the actual debts during those years.

(http://illuminations.nctm.org/lessons/NatDebt/NatDebt-AS-Solutions.pdf) (You didn't think I'd leave you hanging, did you?)

But it is interesting that, much like Denmark, they took care to stay well ahead of the economic needs and did not engage in silly games.

The difference now, with the US debt ceiling, is it has become an excuse to enable members to politically grandstand and vent empty rhetoric about fiscal sustain-ability.

This is half of the problem with the bond indebtedness. (Remember, with a fiat currency, bond revenue doesn't pay for anything.)

By law the Treasury is required to balance the deficit with tax and bond revenue. To be short and to the point: This law became a complete non-sequitur on Aug 15, 1971.

But it is still in force.

Consider this question: On the government spread sheet, the cell containing the outlays of money is negative. It's a negative number, you know, a minus (-) sign in front.

And who cares?

It's a negative number; the government issues a check and subtracts the amount from that negative number so that it's a little more negative. Is there a bank or business that will refuse the government check because "it is overdrawn"?

Will a government check ever "bounce"?

As bond and tax revenues come in they will move that number in a positive direction.

But who cares?

Taxes give money value and control demand to curb inflation. They also move a number a little more positive but no one really cares.

Bonds provide a safe savings account for the public. They provide a means for foreign companies and governments to conduct business here in US currency. They provide a means of controlling interest rates on bank reserve accounts.

Oh! And their revenue moves a number on a spread sheet in a positive direction. And no one should care.

A government check in a fiat currency will never, ever, bounce regardless if that number is plus or minus.

There are a lot of numbers that indicate the health of the economy and of the citizens, the debt is not one of them. Not even close.

One could do well to study the economists in the group self labeled as Deficit Owls, a group including: Stephanie Kelton, Warren Mosler,  L. Randall Wray, James K. Galbraith, and Bill Mitchell.
(Note: JAMES K. Galbraith is the son of JOHN K. Galbraith, lest there be confusion.)

This will be your opportunity, nay, duty, to ask questions about the crazy things I have said.

The government can never go broke.
Taxes are important but don't pay for anything.
Bonds are important but the revenue does not pay for anything.
There is no need to balance the deficit with revenue.

There are Deficit Hawks that claim deficits are bad and must be eliminated.
There are Deficit Doves that claim deficits are not important and we must look elsewhere.
A Deficit Owl says: That spending is a measure of how hard we are pushing the economic gas pedal. Taxes are how hard we are pushing the economic brake.

We must watch the inflation, unemployment, percent of production capacity in use and use these numbers balance the two (control the deficit).

I hope this passes for a correct attribution.
The following is excerpted from a Facebook entry (https://www.facebook.com/photo.php?fbid=600696526636505&set=a.433295386709954.96727.433288343377325&type=1) by Tom Joad (https://www.facebook.com/TomJoadLives).

This story is less politics and more economics. ... [Many are ] feeling the strain of what the Republicans are doing to the country right now. They (John Andrew Boehner (R-OH), the 61st and current Speaker of the United States House of Representatives - and Eric Ivan Cantor (R-VA), House Majority Leader) stood up again today and did what psychologists call "projection," and political commentators call "spin."
 This current crisis and the resulting financial strain and pain and domino effect into the financial markets and private companies that do work for the government - belongs to about eighty morons in the House of Representatives. What's frustrating (for me) is listening to relatively smart people in the media trying desperately NOT to tell the truth about it, because saying that John is lying to us paints them with "the L word" - even if it's an accurate statement.
[...]
. YES, this is - to a degree - a bit of political theater, but more than that - it's folks who need money trying to figure a way around the roadblocks that eighty guys with an axe to grind in the House threw up between them and paying their mortgage at the beginning of next month. Period. This isn't about a difference of opinion. This is about 80 House Republicans throwing a hissy fit because they have no Constitutional remedy over the bitter pill of having the government cut off the gravy train for those in the disease management industry - who have tripled our costs over the past decade. They did that - and "Obamacare" wasn't even on the table. Costs will now flatten out - the party's over - and they are PISSED off.
[...]
[T]he fear of universal/socialized medicine is, in my mind, the driving force behind the hoopla (discounting racial and other party platform divides, the usual suspects). The AMA is a powerful organization and they aren't interested in giving up an inch of their hard won turf. And their hands are in enough DC pockets to make sure this never happens.
...
[I] believe a thriving society needs to care for its members, healthcare being one necessity.
[...]
 But I still want to know--is there anything the POTUS can do to stop this crap? Anything written anywhere? I grew up in an era where people read. Thankfully most folks I know still do.
[...]
 To the best of my knowledge: no. Congress controls the pursestrings - on purpose (that whole separation of powers thing the founders thought was a good idea). The Republicans WILL be violating their Constitutional oath of office if they allow the nation to default (which is why the Speaker is floating the idea of a short-term fix)
[...]
 Many people have floated the idea that the president has the Constitutional authority (granted by the Civil War Reconstruction-era 14th Amendment [which sought to limit the ability of the former slave states from doing what these morons are doing right now]) to direct Treasury to issue bonds to cover any shortfall. I'd like to believe that he would follow that course
[..]
 The Speaker wants to kick the can down the road for six weeks because he doesn't want to go down in history as the guy responsible for a global financial meltdown. He wants Americans to believe (and is getting the press to parrot his nonsense) that this band-aid (which leaves 800,000 people out of job
[...]
 and untold billions in losses by regular folks nervously watching their IRAs shrink) - as meeting the president "half-way."
[...]

From: Mike Norman Economics

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Tuesday, September 24, 2013

This (f*%#ing) Town

It seems like a cruel irony to me that as a society, we have never been more advanced technologically. We can now pay bills and connect to billions of other human beings on a cell phone in nanoseconds, from the middle of nowhere. Every day, scientists are making breakthroughs that make us healthier and happier. But when it comes to economics, we are still neanderthals. As a resident of Washington DC, the caveman level understanding of economics on and around the Hill is amazingly sad. The entire institutional bias of this city is about deficit reduction and the various schemes to achieve it. To say nothing of the Republicans, who are simply insane, it is clear from his public statements that President Obama is utterly clueless on macro issues. His various speeches on the subject have been very muddled and riddled with half truths and contradictions, which he and his staff are seemingly incapable of realizing. What further amazes me is the lack of intellectual curiosity and creativity. It is seen as an absolute given, in circles left and right, that deficit reduction is necessary very soon, if not now. As we know, none of these strategies will do anything to improve the lives of the vast majority of Americans.Very few even dare to think that widespread prosperity is possible.

Meanwhile, it is sickening to me how detached Washington is. If you read Mark Leibovich's This Town you got a glimpse into how people at the highest levels think, but they are hardly the only clowns in the show. Many thousands of people in this town live in $500,000 condos, drive luxury sedans, and do all their grocery shopping at Whole Foods. (Dont get me wrong- I like Whole Foods, but I like to call it Whole-yshitthatsexpensive Foods. Most people could never afford to buy most groceries there.) Between the daily happy hours and weekend bar/club binging, people spend hundreds, if not thousands of dollars a month on alcohol and restaurant meals. It is no surprise that the rest of the country is outraged out how people in DC behave. Unfortunately, a great many of the Tea Party idiots, who I really do want to sympathize with, have focused their rage in entirely the wrong places and have made these problems worse.  They have focused their anger on the civil servants, who I want to clearly state are not  the problem. Most government employees are honest, hard working people who continue to serve the public, despite poor pay and constant abuse from Congress and the public. It is the para-government that is the real problem. The massive army of lobbyists, public relations specialists (aka professional bullshitters), media-morons, boot-licking congressmen, and the rentiers that control all of them that are the real problem.

I would add congressional staff to this list, except as a former staffer it is clear to me that most of staff have good intentions; they only turn to lobbying because staffer pay is so ridiculously low that to live decently in Washington basically requires "selling out." This to me is one of the absolute dumbest things that Washington does. Congress, which is the issuer of the currency, is so stupid that it doesn't think that it can afford to invest in having its own top quality staff. It could easily decide to double staffer salaries tomorrow; instead the self-flagellation has gotten so bad that some Republican Senators have even proposed eliminating healthcare premium support from compensation packages. How the staffers in these member's offices haven't gotten up and walked the hell out is beyond me. Its no wonder then that turnover is so high and no one wants to risk proposing new ideas, such as MMT, at risk of being shunned from the established money.


I have no way in hell of knowing how we can change this.

2 comments:

Dan Kervick said...

    Well, I'll just offer my opinion again that these guys aren't dumb. Most of them have bosses, and they serve the interests of their bosses. Their bosses are the tiny fraction of Americans who own most of the country. Others, the ideologues, represent the stridently white part of America, and their agenda is to help the white part secede, socially and economically, from the non-white part.

    It's about interests. Apart from a few wonks and some of their staffers, politicians aren't making economic decisions on the basis of "macroeconomics." That's an irrelevant ivory tower pursuit from the standpoint of the interests they serve.

    September 24, 2013 at 2:00 PM
Michael Norman said...

    Dan,

    Yes and no. I've run into many of their "bosses" in my years working for Fox and I can tell you that while they do have an agenda and it's an agenda solely designed to suit them and nobody else, they are ideological zealots and most of them are quite dumb.

    September 24, 2013 at 2:47 PM