• Not enough debt?

    Mark Thoma with an interesting post on the U.S. debt level v. the trajectory discussion, quoting another post on the topic by David Andolfatto:

    Before I go on, I want to clear up a misguided analogy that I frequently hear repeated. The misguided analogy is the idea of the government behaving like a household running up a massive amount of credit card debt.

    If this is the way you like to think about things, let me ask you this: Which of your credit cards charge you 0% interest? I ask because that is the interest rate creditors around the world are willing to lend to the U.S. federal government. And what sort of credit card company starts to reduce the interest it charges on your debt as you become progressively more indebted (see the figure…)?

    Similarly, Jared Bernstein with a succinct post from last May on why the “family budget” is a terrible metaphor for the U.S. Government’s budget.

    We need a long range plan to reduce the size of our budget deficit (and therefore the rate at which our cumulative debt grows), and likely more focused government spending in the short run. Right now, we are stuck in policy no man’s land, and seem unable to act on either.

    • The Jared Bernstein post you referenced doesn’t give any reason why the “family budget” metaphor is wrong.

      His first point is that when families are tightening, governments should be spending. That doesn’t tell me why he thinks the family metaphor is wrong, it just presupposes the point.

      His second is that credit/borrowing does help families in some cases. I agree with that, but again it doesn’t tell me why he thinks the family budget metaphor is wrong. In fact, it leads us back to the family budget metaphor, since it reminds us that while borrowing can be very beneficial you might not be able to borrow for the important things — a house, education, response to unexpected shocks to your budget — if you have gotten in the habit of always borrowing to the limit for your routine expenditures.

      As far as I can see, if there is a reason that the family budget metaphor does not apply to U.S. debit it is that it has no analog of the role of USD as the world’s reserve currency.

      • @Doug Bonar
        Maybe more precise to say that because borrowing costs are so low, govt can finance in bad times, whereas if responded to downturn by contracting like a household might, then it would make things worse. I agree with you that there is some amount of debt that is too much and being pushed up against this level (what level that is remains unclear) limits options in the next emergency. I very much think we need a long range sustainable budget. Here is my version of why and how along with its relationship to short term problems

        • Don, You aren’t giving a reason why the family budget analogy is wrong either. You are also just stating that you believe that the government contracting its spending is wrong.

          Pretend that there is no government, but there is a well-intentioned aristocratic lord and most of us are his tenant farmers. It is certainly true that just because many of the farmers are having a bad year doesn’t mean that the lord must be having a bad year too. But the lord is still subject to the same family bodget logic even though his dining room table is larger.

          The only reason I commented was that it seems like saying the family budget metaphor is wrong just confuses the issues. What you and Mr. Bernstein mean is not that the metaphor is wrong, but that you don’t believe the lord has tapped out his own credit. Fair enough, but some people fear he has, and in any case, his tenants having a hard time certainly doesn’t make his finances any easier.

          • @Doug Bonar
            I guess you are correct. There is a point at which govt (or aristocratic lord) is tapped out and cannot borrow more, but we are not there now as shown by low interest rates. So, saying “lets tighten our govt belts in recession” as family kitchen table suggests is wrong use of analogy to guide policy. Saying there is no limit is also not correct, so there being some limit to borrowing capacity is correct. There is a constraint at some level of debt, we aren’t there yet, but it is unclear how close we are.

    • I agree that the economics of the US Federal government and a single-family household are quite different, and the analogy is not exact. But there is one way in which the comparison holds — you can’t indefinitely live beyond your means, and overall your income must at least match your expenses. In all fairness, that’s all that the analogy is supposed to illustrate.

      The argument about interest rates is irrelevant. Obviously it’s better that the US can borrow at 0% than at 7%, but even with no interest due we can still run up an unsustainable amount of debt. Of course it’s an open question as to what that level is, and how close we currently are to it, but the current interest rates have nothing to do with the fundamental observation that income must match expenses.

    • Don:

      The only reason that we’re able to borrow at such low rates (for now) is that the markets have rapidly been losing faith in the Eurozone’s capacity to service it’s sovereign debts and people are willing to forego yield for safety.

      We’re witnessing a massive deviation away from the normal statistical relationships that govern the interrelationships between yield, risk, and volume. It’s the bond-market equivalent of people hurling themselves into a lake full of pyranhas in order to escape a raging forest fire.

      Mean reversion is a powerful force, as the nations at the heart of the Eurocluster are learning every time they put another batch of bonds up for auction these days. Anyone who believes that the linkage between risk and yield will be indefintely suspended on our behalf is hoping for a miracle that’s unlikely to materialize.