Talking about public debt: dumb, dumber and dumbest

As austerity is all the rage among policy making elites I thought it would be a good time to talk about ways of measuring public debt.  Here I will deal with the dumb way, the dumber way and dumbest way to talk about debt.

The usual way to talk about public debt is to express it as a ratio of debt to GDP.  The first problem wit this metric, however, is that there is no agreement between economists on what is a stable level of debt to GDP.  There does seem to be some agreement that sovereign governments (currency sovereigns) with their own nationally issued currency do not face any hard boundary on the debt to GDP ratio.  They may be output constrained, but they are never money (debt) constrained.  It is also generally agreed that subservient governments (those without central banks and their own currency, i.e., a province, a state, a member of the EMU) are money (debt) constrained.  Although, even here, there is no agreement on debt to GDP ratios.  the EU and IMF have chosen 120% as the health threshold for Greece.  None of the Canadian provinces are  even close to that level even if you throw in federal debt.  But then why would you throw in federal debt?  The federal government can always honour its Canadian dollar denominated debt obligations.

Lastly, when talking about GDP it can be measured quarterly, yearly or by the decade.  If I measured Canada’s debt to quarterly GDP I would, by definition, quadruple the ratio.  Similarly, if I measured debt as a percent of GDP per decade, I could reduce the ratio by more than a factor of ten (assuming the economy grows).

So which one do we choose?  If we think of GDP as an income stream it probably makes more sense to measure debt as ratio of GDP over 10 to 20 years (or maybe based on the term structure of the public debt).

Think about it.  When you go to bank for a mortgage they try to figure out what your income will likely be over the amortization period not one year, or one quarter.  So debt to annual GDP ratios are a pretty dumb way to talk about public debt.

Take heart though, there even dumber ways to talk about public debt.  Unfortunately for Newfoundland and Labrador, their premier has decided to have the dumber conversation.  The Globe reports that:

She [ms Dunderdale] also wants to bring down per capita debt – the highest in Canada – to the national average within 10 years.

I appreciate it is hard to sell soft-austerity to what was once a have-not province, that went without for a generation or more, only to be swamped by a tsunami of oil and gas profits.  Nonetheless, talking about debt per capita while not the dumbest conversation to have is dumber than it ought to be.

Measuring debt per capita is even more meaningless than debt per annual GDP.  Here is why.  First, demographic composition.  As Lana Payne, head of the Newfoundland and Labrador Federation of Labour, has pointed out, population increases can be driven by a growth in the economically inactive population.  Your debt per capita ratio goes down but your debt per economically active has gone-up.

Second, and somewhat linked to first, debt per capita says nothing about income.  What matters in Newfoundland (or anywhere else) is debt as a percent of GDP (subject to the limits discussed above).  Dunderdale is acting as though that when a family makes a mortgage application it is accepted or declined based on the size of the family and not household income.  This is disingenuous.  Ms Dunderdale knows better and so does her finance minister and so do the economists working for them.

The only dumber way, the dumbest way, is to talk about absolute public debt in nominal terms.

The real issue about public debt and budget deficits is what they are being used for and the capacity of the economy to absorb those investments.  The federal government, Ontario and Newfoundland and Labrador should be having that conversation.  Instead they are rehearsing respectable dogma.

Gordon V Jackson: the corporate tax cut myth

Apparently Stephen Gordon is having a hard time figuring out where Andrew Jackson, the chief economist for the CLC, got the bizarre idea that:

The argument for corporate income tax cuts has been that increased after-tax corporate profits would be re-invested in company operations, boosting economic growth, productivity, and jobs.

Stephen replies in the comments section:

No. That’s not the argument. At least, I’ve never heard anyone make it.

No one, ever, anywhere, has insinuated or made that argument.  Really?  To continue reading and comment click.

Debt Refinancing, the Federal Government and the Provinces

Ok this post is in the form of a naive question.  And it goes like this:  If the Federal Government can borrow (MMTers don’t vide your back-end here, I know they do not have to go to the bond markets) at around 3% and the provinces are stuck borrowing at around 4- 4.5 % on new issues and at an average rate of around 6 – 6.5% if not higher; then why does not the Federal government use its good name and do a massive bond issue at 3% use the proceeds to buy out the provinces’ debt at say 3.5% and net o.5+% on the deal?

To simplify the question.  What stops the federal government from using its good name to act as an intermediary and capture a revenue stream while cutting the servicing costs of the provinces?

NB the 6- 6.5% was a guess based on the structure of outstanding debt not the average present rate.  (HT Andrew for the clarification)

The Circus of Greed: the Political Economy of Ratings Agencies

Would be hard not to know by today that the S&P downgraded the US .  What is less well known is why it is further evidence of the circus of greed that is the American financial and political system.  First, read this post by Bill Mitchell, S&P decision is irrelevant.  If you are pressed for time just scroll down to where he talks about Japan’s experience with the ratings agencies.  Next go read this excellent post over at Naked Capitalism, Matt Stoller: S&P’s Predatory Policy Agenda.

Now remind yourself how poorly the ratings agencies did at rating the TBTF financial institutions in the walk up to the crisis.  Now ask yourself why ratings are not being done by competent, independent, and a not for profit third party.

The Right Wing Commentariat is getting Desperate

Just go read Terence Corcoran’s latest in the National Post.  Never mind that the world was plunged into economic crisis by unregulated financial institutions and near fully captured regulators; never mind that by most accounts the financial regulatory reform that has taken place since has been mild and the regulators are still, for the most part, in the hostage room.  Terence tell us that one of the central reasons for the continuation of the slump is:

Banks are being regulated to an extent never seen before, forcing the world’s core providers of credit for business expansion to curb their appetite for risk. Confusion reigns as global and trans-national regulators blunder their way to impose ill-conceived rules and policies. The hard reality of new rules, ­especially new capital requirements, is that it forces banks to accumulate risk-free liabilities while curbing risk-taking loans.

For the right it is always the same villain: the government.  During the crisis they blamed the government because…wait for it…they did not regulate properly and the crisis was therefore evidence of state not market failure.  Now, as then, it is the state that is failing, not markets.

To wit, Terence finishes with:

Similar government interventions, bolstered by constant calls for more spending and taxes, are the norm through most of the G20 membership. To end the many debt crises, the first step should be to abandon growth-killing policies. With growth, even debts cease to be a problem.

Just where is Terence getting his information from?  The G20 is busy doing austerity across the advanced capitalist zone and not in the form of tax increases.  Does he even read his colleagues blogs?

Just who are Paul Krugman’s people? And a side dish of MMT

I know Paul thought he was just being relaxed. Moses knows we all have a right to relax de temps en temps but it is a really remarkable slippage. In his latest post he writes:

So: I basically think of asset prices in a Tobin-type stock equilibrium framework (pdf). People make portfolio choices, allocating their wealth among bonds, stocks, etc.. Asset prices – including the famous “q” – rise and fall to match these portfolio choices to the actual asset supplies (emphasis added).

I have never been able to get past the basic misrepresentations of reality that are hard wired into (liberal: both reform and conservative) economists heads. How can a social science do such a violent abstraction? People in general do not allocate their assets into portfolios. I imagine Paul does, as I imagine some retires who do not have retirement plans but nonetheless who have saved must. But these are fleetingly small group of asset allocators. The vast majority of asset allocation is done by a special class of people who work in the FIRE sector for large institutions which in turn attempt to maximize (beat/achieve the average) by any and all means necessary. If there is a mismatch between assets demanded and assets supplied it has nothing much to do with people.

Now none of this really has much to do with Krugman’s post. But it is still incredibly annoying.

At the end of his post Krugman drops this bomb:

Update: Also, if you think that US interest rates are being held down by the fact that in some sense the Treasury hasn’t had to go to the market lately, since the Fed is buying debt — although the Fed isn’t actually buying it direct from Treasury — consider the case of Greeece (sic). Greece isn’t going to the market at all these days, since it’s getting all its funding from the bailout package. That hasn’t stopped the 10-year interest rate on its outstanding debt from reflecting investors’ perception of its underlying solvency:

This is just weird. Paul himself has noted that you just can’t compare Greece to the US–EVER–period. The Greeks do not have currency sovereignty. For all intents and purposes Greece is a province of the EMU. California can go broke the US can’t. Now politically the US federal government can be forced to go marked to market and normally they are but they do not have to as it is a self imposed constraint. That is not to say that there are not consequences to refusing to abide by this solemn constraint it is just to say the US ain’t Greece no matter how many e’s you put in it.

Update: Yes PK is of course right even if the analogy is bad. The point of my post was that loose talk and poorly thought out analogies lead people to think un-rigorously. Specific type of people do asset allocation. California and Greece cand be compared because they are both wards of a larger monetary union. The point is crucial because the discourse on deficits is completely confused at this point and just down right wacky in the US.

Corporate tax cuts, employmnent and aggregate demand

I was busy trying to write something all day on the issue. But the good citizens over at the Progressive Economics Forum pumped out one serious post after another. So all I can say is go read the posts. Oh and shop the comments for Stephen Gordon’s rebuttal.

Can we please now get back to employment. You know like the thing that actually moves investment.

Taken together, these two pieces of evidence seem to suggest that in Canada a more likely channel for bringing about higher investment is via lowering the unemployment rate.

And Since Gordon has already confessed corporate income tax rates have nothing really to with jobs then we might just well ask what does?

It aggregate demand stupid.

The campaign the BC NDP did not fight

Not that it was totally inexplicable it is just that it was incredibly short-sighted. I am of course talking about the BC NDPs decision to join the populist attack on the HST. The fact is that it is almost impossible to get elected on a platform of raising taxes (corporate taxes to the side because they won’t do the fiscal heavy lifting).

The BC NDP could have staked out a position which changed the conversation from the HST to increasing equality and the fair sharing of the tax burden. That is, they could have built a campaign around a modest increase in corporate income taxes taking up some of the space left by the federal CIT cuts by the successive liberal and conservative governments while promising a full revamp of income transfer programs so that families with incomes below 50,000$ would be better off, families between 50,000-70,000 untouched with progressively higher rates from there.

That of course was the strategy not taken. So now the fiscal discourse if snookered. If the NDP were to get elected it is not clear how they are going to raise the money to remain in fiscal balance and feed their core constituencies.

Perhaps the Carbon tax is where they are looking. Good luck with that.

Krugman pins the tail on the Elephant

Krugman gets it right in both the pith and the substance of the matter on the overcompensated public sector workers in Wisconsin.  Short of it: they are not.  This is a must read.

The Contribution Scam

David Cay Johnston has a terrific piece up about the nonsense of comparing government workers to private-sector counterparts by claiming that the government pays for more of their benefits. As he says,

It is official: austerity “works”

As many predicted the highly contractionary budget of the coalition government would in fact cause a contraction of the UK economy.  The revised numbers indicate that the UK economy contracted by 0.6 percent in the last quarter of 2010.  Which is pretty stunning as the bulk of the cuts have yet to come down. Indeed government spending was up 0.7%.

First quarter 2011 numbers will therefore be crucial as two consecutive quarters of negative growth will indicate a recession. The likely timing of government cuts will almost guarantee negative growth in QII 2011.