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Deficit Spending

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Yglesias is making a lot of sense here. With interest rates this low, the nation should just borrow the money to rebuild its infrastructure and not worry about some existential need to pay off the debt. Of course, that no one can say this in the political realm is a sign of just how drastically Republicans have changed the debate in the 40 years, to the point that even as our freeway overpasses are collapsing beneath us and subway systems shutting down, we can’t even begin to talk about these issues without detailed plans on paying back the big, bad, evil debt. Instead, we should just build it and figure it out later if necessary.

The debate we ought to be having about federal infrastructure spending right now is whether we have a way to channel money into useful projects — not how to “pay for” the spending.

America is not currently experiencing a shortfall of financing options. On the contrary, global financial markets are practically begging us to go borrow some more money. The interest rates available are so outlandishly low that virtually anything that was useful at all (i.e., not a mixed-traffic streetcar or a relocation of a bus terminal to a less convenient location) would have a rate of return higher than the cost of funds.

Under the circumstances, there’s no good reason to try to finance projects with taxes rather than debt. Doing so is only going to increase political opposition to your plan — no tax reform, no matter how cleverly designed, can fail to offend a powerful interest group or two — and make it less likely that the project will get done.

And global markets, again, are telling us not that America’s taxes are too low but that we’re not borrowing enough money. There’s a global shortage of American debt. Indeed, a 2014 International Monetary Fund analysis concluded that in rich countries like the US, “public investment that is financed by issuing debt has larger output effects than when it is financed by raising taxes or cutting other spending.”

It’s better, in other words, to just build the projects than to fuss about paying for them. We need a good dose of irresponsibility.

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  • N__B

    Re the picture: the new Tappan Zee Bridge. Feh. Cuomo torpedoed any possibility of adding rail.

    • I know, I know. But I find it fascinating to see it grow when I drive over it every 6 weeks or so.

      • N__B

        In Dante’s Purgatory you just had your skin ripped off. What sins got you the Tappan Zee every six weeks?

        • It’s less painful in driving from Rhode Island to Pennsylvania than the GW.

          • N__B

            If only the Central New England Railroad could give you an alternate…

            • I’ve walked that several times. It’s in in-law country.

              • KadeKo

                We have to get there; we’re closer than you are.

              • Hogan

                Which is the next county over from outlaw country.

                • Like going from Barbara Mandrell to Waylon

          • wjts

            Have you considered going via Hartford and crossing the Hudson on I-84? That’s the route I always took driving to and from CT/MA from and to PA.

            • I do go that way sometimes. But I always get stuck in traffic through Waterbury and getting to 84 from Providence or from URI, depending on when I’m leaving, takes some maneuvering through towns at 20 mph or through backroads. May or may not be worth it in the end.

              • Rob in CT

                Route 6 to 384 to 84, yeah. Alternate would be to Route 2 and take that in to Hartford to 84, but Route 2 sucks.

                84 in Waterbury is terrible, it’s true.

                I guess it all depends on where in PA you’re going.

                When I used to visit family in OH and NC, I’d pretty much always take the 84 route (to 90 for OH and 85 for NC), even when I lived with my parents down in southern CT. Scranton Wilkes Barre was often a mess but other than that it was usually the best choice.

          • efgoldman

            It’s less painful in driving from Rhode Island to Pennsylvania than the GW.

            Absolutely. Adds a few miles, subtracts from the blood pressure.

          • Marek

            Harrumph!

      • Thom

        You have a six-week visitation schedule? Sounds like prison. Though the drive sounds like hell, so obviously you can’t win.

        • 9 1/2 hours, if I’m lucky.

          It’s more like a 3 week visitation schedule in total.

        • efgoldman

          the drive sounds like hell

          I-95 from the RI border through CT, usually to well beyond New Haven, is hell.

  • DAS

    Speaking of debt, I heard the most bizarre argument yesterday: increasing the federal debt is absolutely the worst thing we can do because our current economic crisis is fundamentally a debt crisis, so borrowing more money will only make it worse.

    • tsam

      Wow. That’s a well thought out argument.

      • DAS

        The person making this argument has been reading Rogoff’s and Reinhart’s book This Time is Different and this argument is based on his understanding the book.

        • LosGatosCA

          R&R didn’t even understand their own data, excuse me, their own Excel workbook.

          So readers should not be relying on the book in the least.

          It does prove though that you can influence economic policy on the international level without learning algebra, simple arithmetic, or how to build a FUCKING Excel workbook that provides accurate data. So there’s that.

          Proving the Faux News theory that you can be a Harvard book publishing economist without really understanding what the hell you are doing, never mind algebra.

          http://www.bloomberg.com/news/articles/2013-04-18/faq-reinhart-rogoff-and-the-excel-error-that-changed-history

          • The Excel workbook wasn’t for This Time is Different (which argues that the economy grows more slowly after the collapse of a debt-driven bubble) but for Growth in a Time of Debt, which argues that the economy grows more slowly when the government (as opposed to private actors) takes on debt. This is important, because This Time is Different has been used by left-leaning economists to show that the economy growing slowly under President Obama is probably not his fault.

            Second, the Excel error didn’t qualitatively affect the result. Without it, the conclusion would have been the same as R&R reported initially, but of a smaller magnitude. The real problem is that they used a bizarre weighting scheme in which 1 year of high debt and low growth for one country was weighted exactly the same as 17 consecutive years of high debt and low growth in another country. Without the Excel error, R&R would have reported the same result, but I don’t think anyone would have paid attention because somehow a minor Excel error is more obviously wrong than an absolutely outlandish weighting scheme.

            • There was also the fact that they selectively chose different starting dates for different countries. It looks like the Excel error actually made this a non-issue in the case of Canada and Australia, leaving New Zealand as the only country affected. But it’s a pretty stark example.

              The UK had 19 consecutive years of a 90%+ debt/GDP ratio from 1946–1964, with an average growth rate of 2.4%. By R&R’s methodology, this is a single data point. New Zealand had a debt/GDP ratio of over 90% for the years 1946–1951, with a growth rate of 2.58%. But R&R use only the final year, when the rate of growth was -7.6%. So, 19 years averaging 2.4% growth in the UK and 7 years averaging 2.58% in New Zealand, combine for two data points with an average of -2.6% growth.

              Source: http://rooseveltinstitute.org/researchers-finally-replicated-reinhart-rogoff-and-there-are-serious-problems/

  • Murc

    And if you do need an argument for how you’ll pay for stuff, the answer is “Taxes. We’re wealthier as a nation now than we’ve ever been; in fact, the last thirty years have witnessed our national wealth grow in staggering leaps and bounds. So we’re gonna tax that wealth, and use it to do awesome shit.”

    • Borrowing at low interest rates to build essential infrastructure is actually not a difficult argument for a lot of the country to accept. But you won’t see a single Republican on the federal side support it if it’s for anywhere except his district. This is not a case where Republicans have changed the debate for the country, it’s where Republicans have made responsibility a taboo within the GOP.

      • JG

        I disagree, I think it’s fundamentally difficult to get people to accept this argument. However, it seems that more people are waking up to the fact that our infrastructure sucks (not hard to do when you can’t get to work because the subway is down or the bridge is literally collapsing beneath your feet). For all his obvious and terrible faults it’s a good sign that the leading GOP candidate spends a lot of time talking about infrastructure.

        • tsam

          People vote for school bond levies, by and large. Of course that’s not the federal level, where peoples’ views of how it works gets a little batshit.

          • njorl

            They’re much harder to pass than they used to be.

        • BobBobNewhartNewhartSpecial

          it’s a good sign that the leading GOP candidate spends a lot of time talking about infrastructure

          It’s been my theory from the start that his main interest in the presidency is in the ability it would give him to build even bigger things with his name on them.

  • I see they’re building a replacement for the Goethels Bridge.

    I only know this because it’s right under final approach for Newark if they’re landing on 04L or 04R.

    • TribalistMeathead

      And they also torpedoed plans for rail transit over that bridge.

  • People are litteraly begging the U.S. to take their money almost interest free. The fact that the Republicans fail to do so is fiscal irresponsibility to a level almost criminal. But then again, debt is only a concern when the president is a Democrat.

    • LosGatosCA

      Beyond criminal – it’s nihilistic negligence at a morally reprehensible level. Conscienceless.

      Less evil people would have trouble sleeping at night, looking themselves in the mirror, etc. That’s why it’s so important for them to invoke religious bigotry: I’m not a heartless greedy racist – I go to church all the time.

      Party before country, their money above all.

      • Party before country, their money above all.

        Worse: for most of them, (some) other peoples’ money above all.

    • efgoldman

      People are litteraly begging the U.S. to take their money almost interest free.

      And this is nothing new, even if MattY is just discovering it. Krugman and others have been pounding it since after the first stimulus bill.

      The fact that the Republicans fail to do so is fiscal irresponsibility to a level almost criminal.

      And the kraziest of the krazy kaukus RWNJ TeaHadis won’t even support projects in their own districts. Weeping Cheetoh made a lot of errors, but perhaps the worst was doing away with earmarks, which allows the kinds of horse trading that gets things built.

      ETA: And then the sequester….

      • JG

        Yiggy has always been a full-blooded Keynsian

    • Sebastian_h

      That isn’t true, Krugman was a very loud deficit hawk until Obama won the election.

      Anyway, I’m usually contrarian, but this post is right on.

      • Hogan

        Until Obama won, or until the great crash?

        • Manju

          Obama won. We had a stimulus. And then we had a great crash. Yeah, that’s the ticket.

      • howard

        no, krugman was a deficit hawk when circumstances called for deficit hawkery.

        when circumstances called for a massive deficit, he was pro massive deficit.

  • Brett

    The Republicans are doing this anyways with the “ratchet” strategy, so we might as well do it in reverse – and unlike Republicans, we’ll at least get some good infrastructure and jobs out of it until somebody lands with the bill.

  • Mike G

    Republicans only want to borrow money for vastly unproductive things like occupying Iraq. Because the chaotic non-oversight of war spending is much more lucrative for their donors.

    • Richard Gadsden

      I wonder if construction contractors could donate enough to enough GOP candidates to change that.

  • Denverite

    Is there any way we can pull a bait-and-switch on Republicans and make them think we’re borrowing money to blow shit up abroad, but then switch at the last minute and build things here?

    Of course, given our likely next president, that might be a risky strategy going in.

    • NonyNony

      Honestly I wish we could fool them into thinking that major improvements to our Interstate and rail systems are necessary to be prepared in the event of a terrorist attack.

      I know that this is an argument that could work on certain Republicans I know (who are willing to spend amazing amounts of money if you can figure out how to scare them with the “but terrorists” card) if I could figure out how to make it properly.

      • tsam

        Just do it loud with a really concerned look on your face. That’s how Fox has done it, and I’d call the job they’re doing of scaring bucket heads at least respectable.

      • BubbaDave

        “Under President Eisenhower, a Republican who knew how to win wars, the US built the Interstate Highway system to be able to move troops throughout our nation to respond to a Russian invasion. But today out feckless so-called President and his RINO enablers have let this essential homeland defense component crumble to the point that when Putin sends his armored divisions down through Canada while his ISIS allies (why won’t Obama admit we’re under assault by IslamoCommunist terrorism?!?!?) invade north through Mexico, our heroic troops will be unable to reach position to repel the invasion. We cannot allow a pavement gap!”

      • Matt McIrvin

        You want to imitate that Commie rat-bastard Dwight D. Eisenhower?!

    • UserGoogol

      No. The way this works is that the spending comes first: the treasury is authorized to borrow money to cover expenditures in excess of cash on hand (up to the dreaded debt limit). Although in principle we could tell the Treasury to borrow a bunch of money in excess of those needs, the Constitution specifically requires congressional authorization for spending, so that wouldn’t make the political job any easier.

      In principle, Congress could authorize a bunch of spending without specifying for what, but that could easily backfire.

  • dh

    I would argue it has less to do with low interest rates and more to do with the economy’s productive capacity. As long as there is slack in our economy, it makes no sense to not devote unused resources to building things like infrastructure. In my opinion, the MMT school of economic thought that says Federal taxes don’t technically “pay for” Federal spending is a more useful way of thinking about the purpose of Federal taxes and spending. It’s not necessary to look at Federal taxes and spending in that way, but to my mind it offers a better argument than the one used by Yglesias here.

    • cgordon

      The idea that taxes don’t pay for Federal spending is much older than MMT. See former New York Fed President Beardsley Ruml’s short and readable 1946 paper “Taxes for Revenue Are Obsolete” or see Keynes in 1929: “The Conservative belief that there is some law of nature which prevents men from being employed, that it is “rash” to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years.”

      • dh

        Right. So is Abba Lerner’s theory of functional finance. In my experience, it is primarily MMT advocates who explain contemporary issues in these terms. John Harvey and Frank Newman are two I’ve come across who discuss deficit spending in similar terms but aren’t MMT adherents. I’m sure there are others, but I haven’t come across their work.

    • Bill Murray

      except that paying currently unemployed people to build infrastructure will put money into the economy causing the slack to go away

      • dh

        That would be the point.

  • Vance Maverick

    Maybe if the grownups at the Republican convention can draft Zombie Dwight Eisenhower as the nominee? Ah, who am I kidding, not even he could herd those cats in this productive direction.

    • efgoldman

      Maybe if the grownups at the Republican convention….

      I have heard of these mythical beings, but none has been spotted in the wild since the 1980s.
      Perhaps you have them confused with the elephant/unicorn hybrid, the elephorn.

  • Thom

    Krugman has made the same point over and over for the last several years.

    • howard

      actually, this point goes back to the stimulus package and how large it needed to be.

      there has been no moment in the last 7.5 years when the deficit has been as large as it should have been.

      meanwhile, we are public sector investment starved, and as i’ve had more than one occasion to say, the failure to spend on infrastructure is a triple betrayal: it betrays the people of the past who in a much poorer society still were willing to invest in the common good, it betrays the present where we could use the jobs and efficiency and environmental enhancements, and it’s a betrayal of the future, since they will still have to spend on infrastructure on less favorable terms.

      • Thom

        That puts the problem, and the stupidity, very clearly.

        • Steve LaBonne

          It’s been a missed opportunity of historic, and tragic, proportions.

          • It’s been a missed opportunity of historic, and tragic, proportions.

            So it will be farcical the next time around?

            • howard

              sadly, this time is the farce. keynes told us all we needed to know, we saw keynes in action during world war ii, and we proceeded to act as though it were all meaningless.

              • efgoldman

                keynes told us all we needed to know, we saw keynes in action during world war ii

                The problem is, both history and math have a liberal bias.

                • N__B

                  There is safety in numbers
                  and people and things and in big wads of money
                  and great big platinum rings
                  And no one will ever get near me again
                  There is safety in numbers
                  in numbers my friend

          • AndersH

            You think that’s a tragedy? Sir, let me introduce you to The European Union.

            • Sev

              From austerity and depression to fascism and war to unity, prosperity and elite complacency, back to austerity, disunity, fasc… working on it.

    • Srsly Dad Y

      And Brad DeLong has generalized the argument even further, arguing that the world economy in the next century will demand larger government debt (safe assets) and bigger government to address the collective action problems and externalities that the 20th century left for us (health, income supports in globalized economy, environment/climate, etc.).

      • howard

        the market is crying out for public investment, and the supposed parties of the market throughout the west refuse to hear.

  • Dilan Esper

    The real reason to insist on pay as you go is that politicians and activists of both parties will always call for deficit spending because it is a free lunch and that can lead to an inflationary spiral when conditions are different.

    Also, the contractionary effect of surpluses is highly overrated. See the 1950’s and 1990’s. It turns out that surpluses reduce the cost of private sector borrowing which produces a second order stimulus effect.

    The Scandanavian nations I admire tax the heck out of the middle class and have big public works spending. That’s the best model.

    • Steve LaBonne

      Not when you’re in a liquidity trap it isn’t.

    • Srsly Dad Y

      Yeah, Dilan, it depends hugely on what part of the business cycle you’re in. In the trough, with interest rates near zero, fiscal policy trumps monetary policy and you can and should spend freely.

      • Dilan Esper

        Except I don’t trust politicians and activists to read the business cycle correctly.

        • Steve LaBonne

          Indeed they didn’t since 2008, but their error was precisely the opposite of the one you’re worried about (and much more damaging).

        • LosGatosCA

          Good for you – that’s the kind of thinking that leads to Tea Party wins in 2010 and 2014.

        • Sev

          And as Krugman has long been pointing out as well, this is a myth. WW2 debt- paid off/ depreciated. Reagan debt- paid off by blow-job Bill.

  • Gregor Sansa

    I wonder if Hillary or Bernie would be better on this issue?

    • djw

      As Yglesias notes, they both play the “find the money first” game in their infrastructure proposals. Whether they adhere to that standard in their proposals or not, I’m very skeptical of the prospect that either of them will have much of an opportunity to increase infrastructure spending significantly, pay-as-you-go or not. (In the unlikely event that such an opportunity were to arise, it’s not obvious to me that one or the other would be more or less likely to seize it.)

      • Srsly Dad Y

        I fully realize that this is a moot point because Sanders won’t win, but — Really? You truly think Clinton’s advisers won’t be Wall Street people screaming about debt and inflation. Surely Bernie would be more likely (even if not likely) to back a massive infrastructure debt float.

        • howard

          the whole point here though is that wall street (in the form of markets) is screaming not about debt and inflation but about the absence of debt and low inflation reflecting low growth prospects.

          in short, wall street objectively (whatever the subjective mentality of its princes) wants deficit-financed infrastructure.

          • Srsly Dad Y

            That’s a clever point but it’s not what the politicos believe. They believe what’s called “mediamacro,” which holds that we are like Brazil and the size of the deficit measures the health of the economy, and inflation is always around the corner.

            If anyone could break from this consensus, it be Bernie not HRC.

        • Steve LaBonne

          I actually know of no evidence that Bernie understands Keynesian macroeconomics.

          • Gregor Sansa

            I’ve heard he has some MMT-sympathetic advisors. (This was from an MMT kook on Dkos, though, so I’m not sure I trust it entirely.)

            According to this rumor, it was specifically MMT, not just Keynesianism. Which is a step too far, but more importantly, starts out in the right direction.

            • Redwood Rhiadra

              His primary economic advisor appears to be Dr Kelton, one of the leading advocates of MMT.

              (Was the MMT kook Ronald Gaspard by any chance? He’s the major MMT fanatic among my acquaintances, and I think he’s on Kos.)

          • dh

            In December of 2014, he picked Stephanie Kelton, an outspoken MMT economist, to be the Chief Democratic Economist on the Senate Budget Committee. She is now an economic advisor for his presidential campaign. To me, this implies he’s at least sympathetic to the idea of running Federal deficits instead of raising taxes.

            • Redwood Rhiadra

              MMT isn’t about running deficits instead of raising taxes – that’s Keynesianism. MMT is about printing money to finance spending instead of issuing debt or collecting taxes.

              (MMT believes the issuance of government debt is merely an accounting trick and should be abolished.)

        • djw

          In addition to the extremely obvious point that Howard makes, the implication that Clinton will automatically, uncritically, does whatever her “Wall Street people” demand of her, even on issues only tangentially related to their core concerns, is a useful trope for a Bernie Sanders stump speech, but it doesn’t really stand up to scrutiny.

          • Srsly Dad Y

            Good thing no argued that then.

            While we’re insulting people about what’s extremely obvious, maybe you could glance up and recall that the issue under discussion is what’s “more likely” versus less likely. I am not a Berniebot.

            • djw

              “You truly think Clinton’s advisers won’t be Wall Street people screaming about debt and inflation”

              The suggestion here is clear enough, you’re saying it’s likely that Clinton’s “Wall Street people” advisors will tell her not to spend money on infrastructure, therefore she won’t do it. I’m not sure what else we were supposed to take from that.

          • DocAmazing

            Hillary Clinton is not her husband. Now that we’ve gotten that out of the way, she was an active part of her husband’s administration–the one that helped hang a huge privatization yoke on Russia. If Secretary Clinton steps up and says something that resembles “to hell with Summers and Rubin, we need a different approach”, I’m all ears, but her history is not reassuring.

            • N__B

              Hillary Clinton is not her husband.

              Do we have proof? Photographic proof? Maybe all the times I’ve seen them together it’s been fancy split-screen tv technology.

  • tsam

    I would have gone with this picture, which highlights the actual urgency of the issue http://www.mikeontraffic.com/wp-content/uploads/2015/07/I-35W-Mississippi-River-Bridge-Collapse-8-1-2007.jpg

    • efgoldman

      I would have gone with this picture, which highlights the actual urgency of the issue

      It happened nine years ago. Doesn’t seem to have penetrated the Republiklown RWNJ hive mind quite yet. Maybe a hurricane or some flooding…..
      Naah, what am I thinking.

    • N__B

      FWIW, the old Tappan Zee bridge was headed toward that same fate, mostly from 1970s-80s deferred maintenance. So the picture makes the same point, less dramatically.

      • tsam

        Ah-didn’t know that. Glad it’s getting rebuilt before it kills a bunch of people.

        • N__B

          Completely replaced. The thing on the left is entirely new; the usable bridge on the right is the old one.

          That’s why it’s so fucking annoying that Cuomo killed the rail plan.

  • JG

    The really frustrating thing is that a lot of leftists don’t really seem to “get” this either. KILL THE RICH might sound comforting to some people but it’s a lot easier to just do deficit spending.

    • DocAmazing

      We can kill the rich and do deficit spending…

      • That’s what I was thinking!

        • JG

          Yes, I suppose we could!

          But from my experience many Kill the Rich people still don’t really understand that deficit spending works. There are lots of lefties out there who think Bush’s greatest crime was increasing the deficit (the horror!) rather than what that deficit was used for.

          • tsam

            I think you’re confused. People who campaign on “fiscal responsibility” shouldn’t cut taxes the mostly benefit the rich and start wars. It was less about deficits as it was about ruining the system that had been working to that point to make his rich friends richer.

            Also, the reasons deficits exist matter.

  • AB

    Is usury still supposed to be a sin when rates are negative? From the lender’s point of view, it’s no longer Aristotle’s unnatural growth of an inorganic thing, it’s shrinkage.

  • paul.c.klos

    Its a good Ideal – but we missed the real sweet spot a while back when the Euro looked like it might collapse.

    Some tax increases should happen but for different reasons. I agree worrying about bad projects is silly. but a fair chunk of debt should also go to trust funds for ongoing maintenance (something often ignored in original financing). Perhaps maintained at the Federal level and applied by States, Municipalities or Schools etc like NIH grants.

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