Today, I’d like to offer the first of three commentary posts on Bruce Bartlett’s recent testimony before the Senate Budget Committee. Bruce Bartlett is a long-time veteran of the fiscal policy wars. He initially became known as a supply-side free market economist working for Ron Paul and then Jack Kemp in the 1970s. Later, he served as a senior policy analyst in the Reagan Administration, and then in the Bush 41 Administration as the deputy assistant secretary for economic policy at the Treasury Department. Since then he’s worked at conservative think tanks and as a well-known writer on economic policy and politics, becoming increasingly critical, first of the Bush 43 Administration and then of the increasingly rightward trend of the Republican Party. Today I think Bruce Bartlett is best characterized as a fiercely independent voice still respected in conservative circles, and also, among progressives such as Jamie Galbraith and Stephanie Kelton, but never afraid to call balls and strikes on any Administration or Congress as he sees them.
With that brief introduction completed, I’d like to turn now to a commentary on his testimony to the Senate Budget Committee from my own, individual, but Modern Money Theory -informed point of view. This post will discuss the first four points covered in Bruce Bartlett’s testimony.
Thank you for the opportunity to testify this morning on “The Coming Crisis: America’s Dangerous Debt.”
I should state up front that I don’t necessarily agree with the premise of this hearing. I don’t think there is a debt crisis looming in the near or medium term on the basis of present or foreseeable policies, or that the national debt is per se dangerous.”
Let me briefly make a few points about the debt that I seldom see in popular discussions of this topic.
Joe: So, right off he makes clear that he doesn’t think there is any “debt crisis.” Of course, I completely agree, since the very term “crisis” implies that there is not much time available to deal with some identified problem, but I also add that I don’t think there is any economic or financial debt level problem at all, provided only that the United States retains its present monetary regime of a non-convertible fiat currency, with a floating exchange rate, and no debts owed in any foreign currency. That’s because for such a currency issuer, whatever debt level exists and falls due at any point, that debt can always be repaid because it is denominated in the currency the debtor nation can issue at will. All repayment takes then is the willingness of the issuer to issue the money needed and to use it to repay the debt due.
1. The nominal debt is irrelevant. By this I mean the dollar figure, which, as this is written, is $18,138,459,241,907.59. That’s a lot of money and it scares people. It makes them accept policies that may not only be unnecessary, but harmful. Cutting spending in a recession is clearly counterproductive and I think that the cuts that have been enacted over the last several years were unwise and slowed growth in the economy. The fact that the U.S. economy is doing marginally better than some in Europe is because they cut spending even more than we did.
Joe: I agree with most of what Bruce Bartlett is saying here. But his meaning should not be overstated.
He isn’t taking the Modern Money Theory (MMT) position that the level of debt is irrelevant to the US Government’s capacity to repay it. But, I think he is saying instead, that whether or not a nation’s debt level is a problem depends on what the liability’s context is. This becomes more clear as he continues.
2. The debt is a stock, not a flow. To determine whether the debt is “excessive” we have to compare it to something that approximates ability to pay. Typically, we look at the debt as a share of the gross domestic product. But this is not a proper comparison; we are comparing apples and oranges. To get an apples-to-apples comparison, we should compare the debt to the federal government’s assets. The comparable figure to GDP would be interest on the debt. Presently, net interest is 1.3 percent of GDP, well down from 3.2 percent in 1992. CBO currently estimates that this percentage will rise in coming years to 3 percent of GDP in 2025. This is due primarily to a projected rise in interest rates, rather than a rise in debt. This problem could be mitigated if the Treasury issued more long-term debt now while interest rates are low.
Joe: Bruce Bartlett is right to say that comparing the debt to GDP isn’t a proper comparison because the debt is a stock and GDP is a flow and that we need to compare the level of debt of the federal government to the government’s assets. But then, I think he goes off the track by getting into a discussion of flows, a discussion which is irrelevant from the point of view of whether there is or is not “a debt burden” in the sense that repaying the debt due at any time need burden anyone. By moving into the discussion of flow he is implying that some flow ratio is relevant to the US capacity to repay, which isn’t so. Let me explain
The government has many valuable assets, and among them the most valuable financial asset is its constitutional authority to create money whose financial value it can specify at will (which under present legislation is delegated to the Federal Reserve System and its member banks, and to the Treasury). Now, how much is that asset worth compared to whatever level of debt is in question?
What is the value of the correct comparison ratio, the federal money debt to federal money asset ratio, when the denominator of that ratio, is, in effect, infinity? From where I sit that value always = zero, whatever the level of debt may be at some point, and that is all she wrote, as they say in the sports pages.
So, there can never be any diminution or increase in the capacity of a fiat sovereign government like the US government to repay its debt instruments regardless how small or large the principal value of those debt instruments is. Whether that value is $50 million or $50 quadrillion the value of the federal money asset ratio is still zero.
When Bruce Bartlett digresses to the issue of the proper comparison of some quantity to GDP (a flow), and identifies interest on the debt as the proper numerator, he implies that the ratio of interest on the debt to GDP during some time period is somehow related to the government’s ability to repay debt. And so he mentions CBO’s projection of a rise in this ratio from its current 1.3% of GDP value to a projected 3% of GDP in 2025, as a possible problem unless the Treasury issues more long-term debt at the low current rates and in this way lowers the projected ratio.
But, apart from the fact, that CBOs 10 year projection record is absolutely abysmal, and that they have no way of knowing what the interest rates on the public debt might be in 2025, because their models make contradictory assumptions and cannot take account of changes in policy variables, such as for example, whether the United States will even be issuing debt instruments in 10 years, or even if it does whether the Federal Reserve will push up Treasury interest rates by raising the Federal Fund Rate (FFR), there is also the much more important and decisive consideration, that the value of the interest to GDP ratio has no impact at all on the ability of the Federal Government to issue whatever reserves it might need to repay the debt due. So, as long as the US remains a fiat sovereign, the level of the interest due to GDP ratio is irrelevant for assessing the government’s ability to repay.
3. . . . Budget conventions grossly overstate the interest cost. The reason is that the budget treats the Federal Reserve as part of the public rather than part of the government. Presently, the Fed owns $2.5 trillion of Treasury securities, on which it receives interest from the Treasury. . . . But the Fed pays almost all of it back to the Treasury. In 2014, Treasury paid the Fed $116 billion in interest. After subtracting various costs, the Fed returned $99 billion to the Treasury. . . This amount should be subtracted from the federal government’s interest expense, just as we do with interest paid on trust funds. Instead, the Fed’s payment to the Treasury is treated as a miscellaneous receipt. . . .
Joe: This is certainly a well-taken point, if one thinks the interest to GDP ratio in some way determines or is an indicator of the ability to repay. But as I’ve argued just above, that ratio has nothing to do with that capacity when one is a fiat sovereign.
4. Tax cuts increase the debt. This may seem like an obvious point, but some of my conservative friends often act as though this is not the case. According to the Congressional Budget Office, tax cuts enacted between 2001 and 2011 added close to $3 trillion to the national debt. . .
Joe: Of course, this is true as long as the tax cuts are not accompanied by sources of revenue other than borrowing. But, as many people know by now, Bruce Bartlett, among them, I believe, revenues lost through tax cuts may also be augmented by money creation to repay debts, including, in the US, using High Value Platinum Coin Seignorage (HVPCS). So, this point has been true, in the past, but is overstated in asserting simply that: “Tax cuts increase the debt.”
More generally, the first four points in Bruce Bartlett’s testimony to the Senate Budget Committee provide many reasons why the “debt crisis” notion should be viewed as seriously overblown. But all overlook the importance of the fiat sovereignty of the United States in rendering the level of debt or the level of the debt to GDP ratio no problem at all. This is very important because the failure to explain this to the Budget Committee perpetuates the idea that the debt and the debt to GDP ratio are still numbers we need to keep its eye on, and that perhaps fiscal responsibility still demands a fiscal plan that will make sure we avoid a “debt crisis” at some time in the future.
On the other hand, the view that the United States can never experience an involuntary debt crisis threatening its solvency, clearly implies that the Budget Committee and the Government must develop an alternative notion of fiscal responsibility that has nothing to do with the view that it must avoid a financial crisis created by excessive debt. This, of course, does not mean that the debt subject to the limit should not be repaid. We may want to repay it and become debt free for political reasons, or because we don’t consider it good public policy to pay unearned interest to creditors providing unneeded funds to the Federal Government on a risk-free basis. But reasons like these have nothing to do financial need or with the non-existent incapacity of the Federal Government to repay its debt instruments.
(Cross-posted from New Economic Perspectives.)