The U.S. Government is NOT a household or a business

Gold bug in the garden of eden on a perfectly flat earth.

I’ve noticed the high level of economic illiteracy in the country since the day I started seriously studying economics.  I’ve also noticed that faith-based economics rules the thought processes of many politicians.  It always reminds me of those folks that believe in a literal garden of eden and a 7 day creation story over the facts that science hands us day-in and day-out. Molecular Biology has pretty much trumped their views but they persist in sticking their fingers in their ears and going la la la la la.

A variety of misguided notions have taken up residence in the brains of the same people, so I suppose it’s not surprising that the same groups that scream war on christmas also think the US will go bankrupt if we don’t up the debt ceiling or some such nonsense.  The problem is that anti-intellectual flat earthers control a political party in this country. That problem extends to people who now sit as chairs of congressional committees that deal with the real world and real people.  Then, there’s the fact that the other political party doesn’t really fight for the truth.  It’s just all very distressing to me.

There are two stories today that I’d like to use as evidence to point to the incredible amount of lunacy floating around today’s Republican Party.  The first comes from Paul Krugman.  The second from The Economist.   Krugman talks about the persistence of gold buggery. (Yes, I’m using a double entendre.)   The Economist about the persistence of federal deficit and debt myths.  They write on the number of people that don’t seem to understand what it takes for the US to ‘default’.  Both myths need airing.

Paul Krugman writes political op-ed as well as information on economics.  Economists are trained to separate the two. We even have two names for the circumstances. It’s called discussing  positive and normative economics.  You teach principles of economics students how to distinguish between the two on the very first day of class.  Some times I think Dr. Krugman forgets that most people and politicians are economic illiterates.  You see and hear constant confusion on his writings.  People don’t seem to distinguish between his op-ed with the liberal bent (normative) and when he’s actually talking economic theory (positive).  His op-ed today talks about the fact that there are many issues in politics today that are so polarizing that there is no third way or middle ground.  I don’t want to point to that, but his blog post ‘Monetary Morality’ that takes this notion of no compromising with idiots which points to the absurdity of gold buggery or something he called paleomonetarism in an early post.

In those two posts, he points out that there is a narrative out there–mostly preached by the Pauls–that the Fed is evil and we need to be hung on a cross of gold (with apologies to William Jennings Bryan).  If you read the two posts you’ll see that this issues isn’t a conversation or liberal issue at all.  Economists have a shared understanding of theory that doesn’t include the Paul money narrative.  The Paul monetary narrative is not about economics, it’s about some idea that the government and a central bank is some how confiscating something from you.  It’s a philosophy of paranoia more than an economic statement.

You see, if you’re the kind of person who views being taxed to pay for social insurance programs as tyranny, you’re also going to be the kind of person who sees the printing of fiat money by a government-sponsored central bank as confiscation. You may try to produce evidence about the terrible things that happen under fiat currencies; you may insist that hyperinflation is just around the corner; but ultimately the facts don’t matter, it’s the immorality of activist monetary policy that you hate.

And this is also why politically conservative economists arguing for something like nominal GDP targeting, and pleading with their perceived political allies to stop talking nonsense, are going to be disappointed. If you’re in the intellectual universe where monetary policy is to be evaluated by results, you’re already out of the true believers’ moral universe. At a fundamental level, Milton Friedman and John Maynard Keynes are on one side; Ron Paul is on the other. And it’s not a debate in which evidence really matters.

The Pauls–and others–dwell in the land (Kentucky, I think) where you can create a theme park and put Neanderthals and all sorts of Dinosaurs that lived millions of years apart with modern animals in the Garden of Eden.  All that’s needed in these narratives is the idea that the sun revolves around the earth or the earth is flat.  It’s not science, it’s not data based, it’s just you wanting to believe your little view of the world is the correct one for no other reason than it appeals to your outlook on life.

Similarly confused people think that American will ‘default’ if the debt ceiling isn’t raised this spring and that the US will go ‘bankrupt’.  This is so unbelievably ignorant and misinformed as to be distressing.   First, let me just give you some definitions so we’ll share some basic understanding on the federal debt is and the federal deficit.

federal deficit:  an excess of the federal government’s spending over its revenue

Federal debt: The total amount of money that the United States federal government owes to creditors. The government’s creditors include all individuals, businesses, governments and other organizations that own U.S. government debt securities. The federal debt exists as a result of federal government shortfalls, or deficit budgets in which the government’s expenses exceed its revenues. The federal debt does not include any debts in the name of individuals, corporations and state or municipal governments.

or:  Federal Debt: The current dollar sum of obligations equal to the accumulated past deficits minus surpluses of the United States government.

(That last link comes from Journalist’s Guide to Economic Terms. It’s a good resource that you may want to bookmark if you don’t have bookshelves full of books on this stuff like me.)

So, each year we can run up a deficit that must be financed that adds to the Debt or we run a balanced budget that has a neutral impact on the Debt or we run a surplus which decreases the Debt.  As you know, the last surpluses which was really the few surpluses we’ve had for ages occurred during the Clinton years.  The Debt has been there since the Dutch gave the thumbs up to John Adams.

There’s one other item that I should point out.  Economists only look at debt and the deficit in terms of their relation to that year’s GDP. That’s because inflation and growth of the economy has made all things bigger over time.  It’s the only way to get a ‘relative’ sense of what’s going on.

Okay, so now on to the article in The Economist.

ALMOST everyone takes it for granted that a failure to raise the debt ceiling will eventually force the United States to default on its Treasury debt. This notion is superficially puzzling. The question is addressed in this week’s issue of The Economist. I’ll dig into it a bit more here.

A default would result from failure to pay principal or interest. The debt ceiling doesn’t bar either. Treasury can roll over maturing issues so long as the overall stock of outstanding debt doesn’t rise. (A caveat: Treasury must invest surplus Social Security and Medicare taxes by issuing non-marketable debt to the plans’ trust funds, which erodes the remaining capacity for marketable debt.) As for interest, even in today’s straightened circumstances, revenue is more than enough to cover interest charges.

This analysis is based on knowledge of economics and of the agents that exist in an economy.   Households are formed by individuals that die and when they die, all their debt comes due.  Households can go bankrupt for a variety of reasons but mostly having to do with not having enough money to cover their obligations.  The same goes with businesses.  They even have the option of strategic bankruptcy where they can restructure their debt obligations.  Businesses can close their doors and never open again.  Households are gone when the people that head that household die.

The U.S. government isn’t like that at all.  First, they act in perpetuity.  Right now, they formed in 1776 and have been going on since then.  Believe me, there were times when the U.S. government had worse financial problems than right now.  I’ll give you two examples.  That would be the revolutionary war and the civil war.  It took huge amounts of debt to run the Second World War too. Second, the US Government can print money. If a business or a household does that it’s against the law.  Third, everything the US government does is backed up by a huge economy that needs currency to transact business.  As long as the currency and the debt instruments are accepted by the economy, there are no problems.  The only countries that really have issues are the countries that do not have viable economies and that have completely unstable governments.  So far, we don’t fall into that category.  All you have to do is look at the functioning of the world wide currency markets and US Treasury Bills and Bonds markets to determine that the no once considers the immediate demise of the US to be probable.

Our state governments are struggling.  You can see this in both California and Illinois, but they still have more credibility than Zimbabwe and they don’t even have the luxury of printing money.  They do have the luxury of getting help from some one who can, however.  The US has never defaulted.  Think about that in context of both the Revolutionary War–when we finally earned enough respect from the Dutch via John Adams to get funded–and the Civil War.  During the civil war, the country had basically split in half at that time.  Both the confederates and the federals could borrow from other governments and from people at that time and they both printed money.

Also, remember we have some experience at this during the Clinton years.  Remember, the congress didn’t take chances on missing Social Security payments and acted to fund those even when the government was technically ‘shut down’.  We’re also at war in two countries.  You can’t defund wars and soldiers either.  I can’t imagine that even the wackiest of the wacky current crop of Republicans is stupid enough to defund soldiers on a battle field.

There’s some interesting points and discussion on these things at  The Economist including some strategies that Treasury Secretary Geithner could employ. This would lessen the impact of the ‘shut down’ in a way similar to the ‘shut down’ that happened during the Clinton years.

Thus, it seems to me that if Tim Geithner has to make a choice, he can, and should, prioritise bond interest. To be sure, failure to pay Social Security cheques or any other payment on time would cause hardship for recipients, provoke a public backlash against the administration, Congress or both, and embarrassment for the United States; after all, how can the world’s most powerful economy not pay its bills on time? But even a brief default on Treasury debt would be unprecedented, with widespread systemic ramifications. Would banks around the world have to classify Treasury holdings as non-performing? Would money-market mutual funds break the buck? Would all federal entities lose their AAA-credit rating? Would the Federal Deposit Insurance Corporation’s ability to backstop the nation’s banks come into question? Would foreign central banks start to shift out of dollars? Since no one doubts the ability of Treasury to pay once the debt ceiling is lifted, it’s conceivable the damage would be containable; but why take the risk?

I would like to say that the ‘shut down’ that happened during the Clinton years was in a good economy.  This is not a good economy.  I found it reprehensible and deplorable that people like Allan Simpson and others consider it a gleeful event and something to look forward to in this economy.  It’s not exactly grave dancing but it’s close.   We are in an economic recovery that isn’t like any recovery we’ve seen in ages.  It’s a recovery by a technical definition alone.  As I predicted years ago, we’re scuttling along the trough at best.  It would be an unfortunate event if these nuts whose economic philosophy is not based in economics but in some philosophical pirate story would do that to the millions of people in the United States that need a stable and growing society.  We need people in government that don’t play at putting dinosaurs in some mythical garden of eden.