Bill Gross: America’s debt is not its biggest problem

http://www.washingtonpost.com/opinions/americas-debt-is-not-its-biggest-problem/2011/08/10/gIQAgYvE7I_story.html

by inshane • 15 years ago

12 16 15 years ago

He's right. Balancing a budget once, while already neck deep in debt won't fix all the problems, but accelerating jobs and consumption, in such a way that creates more profits, would eventually help balance the budget and put the economy back on track.

nl2• 15 years ago

The president and Congress must recognize that an AA-plus country, to remain AA-plus, must focus on growth, not debt reduction, in the short term.

I tweeted this a month ago: Dear America: A lack of growth, NOT spending caused your debt problem. Please Fix ASAP KTHX.[1]

That's a little simplistic (the joys of 140 chars). Of course spending caused problems, but it wasn't spending alone - it was spending combined with a lack of growth (and indeed negative growth at times).

What is more (and isn't explicitly called out in this article) is that economic growth can go a huge way to fixing the debt problem.

Growth->lower unemployment->less spending on welfare

Growth->higher tax receipts->increased debt repayment

[1] http://twitter.com/#!/nlothian/status/94266497513426944

nl2• 15 years ago

based on the downvotes, I guess my logic must be highly faulty..

joelhaus• 15 years ago

No. You're exactly correct. Wrote a comment, directly related, on Google+ the other day in this thread: https://plus.google.com/107033731246200681024/posts/LHVVz5e3...

Here it is (can't figure out how to link directly to a comment):

--------------------------------------------------------------

I sort of blame this on shoddy journalism. There is actually broad bi-partisan consensus from economists and business on what policy steps need to be taken.

There is an important ratio that is largely being ignored:

Debt-to-GDP

  ~ This is a fundamental measurement for determining credit risk.

  ~ Economists agree this ratio will grow too high in the future.

  ~ Economists agree we must spark GDP growth in the present.

  ~ There are two ways to improve this ratio:

    (i) Shrink the debt (cut spending &/or raise taxes)

    (ii) Grow GDP (invest in economy &/or cut redtape for business)

Both long and short-term concerns can be addressed by investing & tax breaks now, and legislating cuts & revenue for later. The question is how these should be balanced, but they will all help.

Planet Money probably does a better job of explaining sovereign debt to GDP ratios in this recent podcast: http://www.npr.org/blogs/money/2011/07/20/138518262/the-tues...

RuadhanMc3• 15 years ago

To a certain extent debt is the problem. If the US and other Governments didn't have so much debt when the shit hit the fan in 2008 then they would have had more means to deal with the growth issues. US public debt is 100% debt to GDP, so there isn't a whole lot of room to move.

nhaehnle5• 15 years ago

Empirically, the case of Japan contradicts your claim that there isn't a whole lot of room to move. To remind you, Japan has long at close to and above a 200% debt-to-GDP ratio without any financing difficulty in sight.

The underlying reason for that is plain and simple: both the Japanese and the US governments are currency issuers. By definition, they are able to spend as much money in their respective currencies as they like. In that sense, they always have an infinite amount of room to move.

The only question can therefore be: How much of this maneuvering room should be used?

The answer to that question does not lie in financial data alone, but must take into account the state of the economy at large and whether additional spending might hit an inflation barrier. In the current situation, spending directed towards job-creation is unlikely to hit such a barrier, while handing out more money to the rich could drive speculation on resource markets (the money will be "invested" somewhere, after all) that can cause price increases and thus inflation.

hollerith• 15 years ago

I do not claim to know if this thesis is true or false, but I do know that it is a very convenient thing for inside-the-beltway types to believe.

WalterSear2• 15 years ago

If deficits don't matter, then why isn't the government borrowing money and just paying for everything that its citizens desire? Why tax at all? Why not send >us< money?

Deficits matter. They just matter in ways more complicated than we are used to, if you have the borrowing power of a first world nation behind you. Or rather, they don't matter until they do. Ask Greece or Italy. Or check the rate of return on Greek treasury bills.

Growth is not the answer. Building your society on the concept of perpetual, unceasing, unpausing growth - that's the problem. The mentality of people who's only solution to financial incompetence, graft, greed and waste is 'throw some more furniture on the fire' - that's the problem.

colindoc84• 15 years ago

'Deficits dont matter' is a huge strawman. No where in the article does it imply this, it suggests that the government can mobilise resources and increase demand. In other words, it can organise people to produce more instead of sitting around, and use the surplus of that production to pay off who they owe. Having people sit around is bad, and adding to those people is worse. The government can get them to do something and that adds to the economy.

Also, you used the example of Greece or Italy. I assume you put Spain in the same category, so its interesting to note that Spain was running a surplus in the years leading up to the crisis.

Budget deficits are not the be all-end all of government finance. Deficits matter, but relative to other metrics.

nhaehnle5• 15 years ago

Your questions are neatly answered by Modern Monetary Theory, see e.g. the overview here: http://pragcap.com/resources/understanding-modern-monetary-s...

If deficits don't matter, then why isn't the government borrowing money and just paying for everything that its citizens desire? Why tax at all? Why not send >us< money?

The government is definitely capable of doing that, but think about the consequences. If the government were to spend without any limits at all, it would push aggregate demand to the point where the economy cannot grow quickly enough to satisfy the demand. The result will be inflation.

So taxation is necessary to take spending power away from private citizens and enterprises, to open up supply capacities that the government can then buy with its own spending, to fulfill whatever mandates are given to it, hopefully via a democratic process.

This is the obvious part. The more interesting question is: How much taxation is needed?

The answer to that is more subtle, but the key observation is that when private citizens and enterprises voluntarily refrain from using all their spending power, e.g. by paying down debt, saving, or simply hoarding cash (all of these things are happening these days), then obviously the amount of money removed from the private sector via taxation should be less than the amount of money that the government gives to the private sector via spending.

In fact, MMT economists argue that in the current situation, the budget deficit actually needs to become larger if the unemployment problem is to be resolved.

Finally, MMT tells you that the cases of the Italian and Greek governments are fundamentally different from the case of the US federal government.

It is clear that the US federal government will always be capable of paying back its debt, because it is the currency issuer of the US$, and its debts are only denominated in US$ (so the fact that almost a third of the debts are held by foreign owners is irrelevant). The only possibility is that the government might become unwilling to pay back its debt, but since congress is full of rich people who own a lot of government bonds, that scenario is quite unlikely.

This is very different from Italy and Greece, both of which do not have their own currency. Their governments are currency users like you and me, and they can become incapable of paying back their debt.

WalterSear2• 15 years ago

"The government is definitely capable of doing that, but think about the consequences. If the government were to spend without any limits at all, it would push aggregate demand to the point where the economy cannot grow quickly enough to satisfy the demand. The result will be inflation."

In other words, deficits [can] matter. Where do you think we are right now?

Bill Gross: America’s debt is not its biggest problem

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