FQ.07.08: Favorite Quote for This Week

For every borrower there must be a lender.  The public deficit is the private sector’s surplus.  When the government runs a deficit, it is giving the private sector, by its spending, more than it is taking away in taxes.  It is hence adding to the private sector’s disposable income—what it has available for consumption expenditures.
—Robert Eisner

Comments

[ilsm]

Fiscal stimulus explained.

The government gives?

Quite Keynesian!

[Steve]

Yes, Eisner was a Keynesian. (I don't consider myself one, and I'd like to avoid being pigeonholed.) My disagreements with the Keynesians are primarily about how the government should spend money, and why. They tend to think that government spending, on anything, drives growth; but I think government spending should primarily be confined to Adam Smith's imperatives (defense, justice, infrastructure, and education), thereby providing a secure crucible for the private sector to drive growth. It's a long story; I should probably queue that up as a future article.

But when it comes to the meaning and mechanics of both fiscal and monetary economics, Eisner's understanding and explanations are difficult to refute. Our fiat money system isn't widely understood; most people, esp. politicians, still think in terms of a commodity-based money system, and that's the root of a lot of misunderstanding. They should read more Eisner.

[gunthestops]

With all due respect, lets examine some facts before declaring victory in Iraq, strike that, I mean victory over debt and deficits. First, I believe that you cannot use the words of the esteemed Robert Eisner in today’s debt and deficit environment. At the time of his death in 1988 the national debt was about 2.8 trillion. This year the national debt will top 9.1 trillion. That is a 12.5% annual growth rate in the national debt since his death compared to a 3.5% GDP growth rate. I don’t think that is what Mr. Robert Eisner envisioned in his dissertations on debt and deficits.

Second, as to your prior post of increasing tax revenues, it has its roots in strong corporate earning driven by several factors. Low interest rates and increased availability of credit, increased productivity, massive deficit spending, and lower tax rates. The real question is can corporations keep turning in double-digit earnings that drive employment, growth and higher tax revenues? Only if you believe in SANTA CLAUS! The average S&P500 company’s return is historically about 6.5%, it appears after many quarters of good earnings we have started to revert to the mean. Reversion to the mean is part of the normal business cycle, unless you believe that some how this time is different. That means when this cycle moves back it is very likely to continue to move through the mean and down to between 0% and 3% earnings growth. If that occurs no doubt that will mean a lot less tax revenues and bigger deficits, thus the upward trend will continue.

Third, we are addicted to debt and credit. The national debt and current account deficit is growing exponentially. The idea that we are doing people a favor by going farther into debt only feeds into the new paradigm that financial responsibility is bad, and debt is good and massive debts are better. I do not believe our current trend of bigger debts and deficits will change until we hit the financial wall, of massive inflation, default, and currency failure. Then a new paradigm will be born, but I will be long gone before that happens.

[Syphax]

"At the time of his death in 1988 the national debt was about 2.8 trillion. This year the national debt will top 9.1 trillion."

Yes, the debt was 2.8 trillion... and almost exactly as big as it is now as % of GDP at 65.1%(I get that number from 1989 OECD data so it's a LITTLE off).

"That is a 12.5% annual growth rate in the national debt since his death compared to a 3.5% GDP growth rate."

the 12.5% annual debt growth rate is nominal while the 3.5% GDP growth is real. This comparison is therefore unfair. As I said, the debt is almost EXACTLY the same as it was in 1988. Considering the falling deficit, the debt as % of the GDP is likely going to start falling.

"I do not believe our current trend of bigger debts and deficits will change until we hit the financial wall, of massive inflation, default, and currency failure."

You sound like someone in the 80's, when many predicted the huge deficits(and doubling of the national debt AS PERCENTAGE OF GDP!) would lead to inflation, higher interest rates, default or currency failure... none of these things happened at all. Inflation dropped dramatically, the dollar was strong and interest rates stayed moderate. As a result many economists ditched the ideas that deficits led to those things.

Heres a great article about the massive turn-around in how deficits are viewed by economists:

http://tinyurl.com/28by7b

[gunthestops]

Syphax

Your right, my mistake. Real GDP grew at about 8.8% Vs debt growth of 12.5%----point remains that is still a large spread and a bad trend.

[ilsm]

Steve,

Thanks.

I am as libertarian as I am a leftie.

I observe that a lot of defense is parasitic, rather than productive.

A first hand perspective.

[ilsm]

gunthestops,

You are too kind to syphax.

Eyeballing my handy fed debt to GDP chart from WW II; debt was not yet to 65% in 88, it rose from 40% in 1980.

[Jon Thompson]

Regardless, the debt to GDP ratio was well over 40% when Eisner wrote that, and is now much less than 70%. This is hardly a qualitative difference.

[Syphax]

"Eyeballing my handy fed debt to GDP chart from WW II; debt was not yet to 65% in 88, it rose from 40% in 1980."

I pointed out that I got the number from the OECD website and it was from 1989. A link(This one actually has 1988 and it says 64.1).

http://tinyurl.com/2b4dnj

Oddly, today the OECD website has a slightly lower figure for 1989 today than it did in the old chart at 61.4. Surprising that they would change such an old piece of data... I apologize for that mistake.

http://tinyurl.com/2d426d

Regardless, as Thompson said, the debt was much closer to today's 65% than the post-WW2 low of 32.5%.

Also, as I said in the end of my post, Eisner would probably be MORE likely to believe debt is not bad after 1980(when debt doubled and nothing happened).

[Syphax]

Hmm, I just realized according to that data 2006's debt is only 60.8%. Apparently the OECD made some changes between now and 2 years ago in how they measure either debt or GDP.

[caveat bettor]

Syphax, there is gross debt vs. net debt. For example, the treasuries held in the social security fund--offsetting asset and liability between 2 govt accounts.

[ilsm]

Syphax,

Thanks for the links.

[Steve]

Jon,

Eisner's point is still valid: If debt is supposed to cause inflation and/or high interest rates, then where's the inflation and/or high interest rates? I believe both are at lower levels than at the time Eisner wrote that.

[Jim Glass]

"When the government runs a deficit, it is giving the private sector, by its spending, more than it is taking away in taxes. "

True enough in that initial time period. But in later periods the government's "giving" is over, while the tax cost of financing the increase in the debt remains, maybe forever. And taxes impose a real deadweight cost on the economy.

"Eisner's point is still valid: If debt is supposed to cause inflation and/or high interest rates, then where's the inflation and/or high interest rates? "

Debt doesn't cause inflation unless the government monetizes it by printing money to carry it, to avoid the pain of raising taxes to do so.

Whether a debt increase causes interest rates to rise notably depends on the availability of funds in the market to finance it, and the perceived will of the gov't to raise taxes as needed to carry the debt (the govt's credit rating). For some smaller countries it surely has.

But the supply of US dollars is *vast and deep*, and the total tax cost of the debt to the gov't has always been modest.

On the scale of debt levels that the US has experienced to date, any interest rate effects from changes in the size of the national debt have been so small as to be swamped by other factors (like business cycle effects and inflation expectations). There's no noticeable such effect for the deficits we're running today.

So Eisner was right as to interest rates, as far as that goes.

Of course, when the extra $50 trillion of "implicit" debt for entitlements becomes real and must be fincanced with real taxes, starting about a decade from now, the US debt will move to an entirely new level. Then we shall see what we shall see.