All Things Considered got things badly wrong in talking about the government debt last night. As most folks know, Donald Trump seemed to imply that he would threaten to default on the debt in order to force creditors to take write-downs on their bonds. He then clarified what he meant, saying that if interest rates rise, he would look to buy back government bonds at a discount.
For some reason, this left NPR befuddled:
“It’s not clear how that would work, though, since the cash-strapped government would have to borrow more money at rising interest rates to buy back its old debt. Holtz-Eakin was left scratching his head.”
It’s actually very clear how this would work. The government would borrow money at higher interest rates (it doesn’t matter if interest rates are rising), to buy back bonds whose market value is less than their nominal value. This is a very simple story, when interest rates rise, the market rise of bonds already issued falls. This would allow the government to reduce the nominal value of its outstanding debt, even if it doesn’t reduce its interest burden.
If it seems strange to people that the government would care about reducing the nominal value of its debt, then they haven’t been paying attention to policy debates in Washington over the last decade. There has been a huge amount of energy devoted to keeping down the debt-to-GDP ratio. In fact, there was a widely held view in policy circles that if the debt-to-GDP ratio exceeded 90 percent, then the economy would face a prolonged period of slow growth. This view was first espoused by Carmen Reinhart and Ken Rogoff, two prominent Harvard professors. It was frequently referenced in publications like the New York Times, Washington Post, and undoubtedly mentioned on NPR. It was also a main justification for the budget cuts put in place in 2011.
The numerator in this debt-to-GDP ratio is the nominal debt, the number that could be reduced by exactly the sort of financial engineering that Donald Trump proposed. For this reason it is difficult to understand why Trump’s proposal would have left Douglas Holtz-Eakin (a former head of the Congressional Budget Office and chief economist for George W. Bush) scratching his head.
Of course it is silly to be worried about the ratio of nominal debt to GDP, but that can’t erase the fact that this ratio has been a central concern in policy circles for some time. It doesn’t speak well of our media that they only recognize that the debt-to-GDP ratio doesn’t matter when the point is raised by Donald Trump, but not when it is raised by elite economists and top policy makers. (Erskine Bowles and Alan Simpson frequently made reference to the 90 percent figure when they chaired President Obama’s deficit commission.)
What matters much more than the ratio of debt to GDP is the ratio of interest payments to GDP. If we net out the interest refunded by the Federal Reserve Board, this ratio now stands at 0.8 percent of GDP. By comparison, it was more than 3.0 percent of GDP in the early 1990s. These numbers don’t fit the deficit crisis story widely preached in the media, but if we want to get serious, that would be the number to focus on.
Addendum:
In case you were wondering how anyone could be concerned about the ratio of nominal debt to GDP, here is NPR on the topic back in 2011.
All Things Considered got things badly wrong in talking about the government debt last night. As most folks know, Donald Trump seemed to imply that he would threaten to default on the debt in order to force creditors to take write-downs on their bonds. He then clarified what he meant, saying that if interest rates rise, he would look to buy back government bonds at a discount.
For some reason, this left NPR befuddled:
“It’s not clear how that would work, though, since the cash-strapped government would have to borrow more money at rising interest rates to buy back its old debt. Holtz-Eakin was left scratching his head.”
It’s actually very clear how this would work. The government would borrow money at higher interest rates (it doesn’t matter if interest rates are rising), to buy back bonds whose market value is less than their nominal value. This is a very simple story, when interest rates rise, the market rise of bonds already issued falls. This would allow the government to reduce the nominal value of its outstanding debt, even if it doesn’t reduce its interest burden.
If it seems strange to people that the government would care about reducing the nominal value of its debt, then they haven’t been paying attention to policy debates in Washington over the last decade. There has been a huge amount of energy devoted to keeping down the debt-to-GDP ratio. In fact, there was a widely held view in policy circles that if the debt-to-GDP ratio exceeded 90 percent, then the economy would face a prolonged period of slow growth. This view was first espoused by Carmen Reinhart and Ken Rogoff, two prominent Harvard professors. It was frequently referenced in publications like the New York Times, Washington Post, and undoubtedly mentioned on NPR. It was also a main justification for the budget cuts put in place in 2011.
The numerator in this debt-to-GDP ratio is the nominal debt, the number that could be reduced by exactly the sort of financial engineering that Donald Trump proposed. For this reason it is difficult to understand why Trump’s proposal would have left Douglas Holtz-Eakin (a former head of the Congressional Budget Office and chief economist for George W. Bush) scratching his head.
Of course it is silly to be worried about the ratio of nominal debt to GDP, but that can’t erase the fact that this ratio has been a central concern in policy circles for some time. It doesn’t speak well of our media that they only recognize that the debt-to-GDP ratio doesn’t matter when the point is raised by Donald Trump, but not when it is raised by elite economists and top policy makers. (Erskine Bowles and Alan Simpson frequently made reference to the 90 percent figure when they chaired President Obama’s deficit commission.)
What matters much more than the ratio of debt to GDP is the ratio of interest payments to GDP. If we net out the interest refunded by the Federal Reserve Board, this ratio now stands at 0.8 percent of GDP. By comparison, it was more than 3.0 percent of GDP in the early 1990s. These numbers don’t fit the deficit crisis story widely preached in the media, but if we want to get serious, that would be the number to focus on.
Addendum:
In case you were wondering how anyone could be concerned about the ratio of nominal debt to GDP, here is NPR on the topic back in 2011.
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It really is amazing what you can find in the Washington Post’s opinion pages. The latest is Robert Samuelson complaining that the problem with the weak recovery is that people are saving too much. This is amazing for two reasons: first, it is not true, and second if people saved less they would have even less money to support themselves in retirement.
Starting with the first point, the saving rate is actually quite low by historical standards. It is just over 5.0 percent. The only periods in which it was lower was when the wealth generated by the stock bubble in the 1990s and the housing bubble in the last decade pushed the saving rate somewhat lower. For most of the 1960s and 1970s it was over 10.0 percent. Even in the 1980s it averaged more than 7.0 percent. (No, there should not be a downward trend in saving rates, unless you think that people will eventually have zero money in retirement.)
If we want to see the origins of the economy’s shortfall of demand, the trade deficit is the obvious place to look. If the trade deficit was 1.0 percent of GDP, as opposed to its current 3.0 percent of GDP, this would have the same impact on demand as a drop in the savings rate of 2.5 percentage points. The standard route for getting a lower trade deficit is a lower valued dollar, but apparently no one is supposed to make this point in the Washington Post’s opinion pages. (The savings rate is likely overstated at present. There is a large gap between the income side measure of GDP and the output side. This likely reflects some amount of capital gains wrongly being recorded as ordinary income. If income is overstated, it would cause the reported savings rate to be higher than the true saving rate.)
The other reason why the complaint about excessive savings is bizarre is that Samuelson, like most of the rest of his colleagues in the opinion section, regularly calls for cutting Social Security and Medicare. So apparently Samuelson both wants retirees to have less personal savings to support themselves at the same time they have less support from public social insurance programs: only in the Washington Post.
It really is amazing what you can find in the Washington Post’s opinion pages. The latest is Robert Samuelson complaining that the problem with the weak recovery is that people are saving too much. This is amazing for two reasons: first, it is not true, and second if people saved less they would have even less money to support themselves in retirement.
Starting with the first point, the saving rate is actually quite low by historical standards. It is just over 5.0 percent. The only periods in which it was lower was when the wealth generated by the stock bubble in the 1990s and the housing bubble in the last decade pushed the saving rate somewhat lower. For most of the 1960s and 1970s it was over 10.0 percent. Even in the 1980s it averaged more than 7.0 percent. (No, there should not be a downward trend in saving rates, unless you think that people will eventually have zero money in retirement.)
If we want to see the origins of the economy’s shortfall of demand, the trade deficit is the obvious place to look. If the trade deficit was 1.0 percent of GDP, as opposed to its current 3.0 percent of GDP, this would have the same impact on demand as a drop in the savings rate of 2.5 percentage points. The standard route for getting a lower trade deficit is a lower valued dollar, but apparently no one is supposed to make this point in the Washington Post’s opinion pages. (The savings rate is likely overstated at present. There is a large gap between the income side measure of GDP and the output side. This likely reflects some amount of capital gains wrongly being recorded as ordinary income. If income is overstated, it would cause the reported savings rate to be higher than the true saving rate.)
The other reason why the complaint about excessive savings is bizarre is that Samuelson, like most of the rest of his colleagues in the opinion section, regularly calls for cutting Social Security and Medicare. So apparently Samuelson both wants retirees to have less personal savings to support themselves at the same time they have less support from public social insurance programs: only in the Washington Post.
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I guess we can get a pretty good sense of the priorities of the folks at ABC News from the headline of a piece on the costs of replacing the country’s lead water pipes. The headline noted the price for Flint and then warned of the “colossal price tag for a US-wide remedy.”
The piece gives two estimates of the cost. One puts the costs at between a few billion dollars and fifty billion dollars. The other puts it at $30 billion. If we take the latter figure and assume that the pipes will be replaced over the next decade, the cost would come to roughly 0.025 percent of GDP. (GDP will average roughly $20 trillion, in 2016 dollars, over the next decade.)
To give some points of comparison, we spend roughly 3.5 percent of GDP on the military. Patent protection for prescription drugs raise their cost by close to 2.0 percent of GDP. And, protected our doctors from international competition raises our annual health care bill by 0.5 percent of GDP.
Note: An earlier version wrongly put average GDP over the next decade at $20 billion.
I guess we can get a pretty good sense of the priorities of the folks at ABC News from the headline of a piece on the costs of replacing the country’s lead water pipes. The headline noted the price for Flint and then warned of the “colossal price tag for a US-wide remedy.”
The piece gives two estimates of the cost. One puts the costs at between a few billion dollars and fifty billion dollars. The other puts it at $30 billion. If we take the latter figure and assume that the pipes will be replaced over the next decade, the cost would come to roughly 0.025 percent of GDP. (GDP will average roughly $20 trillion, in 2016 dollars, over the next decade.)
To give some points of comparison, we spend roughly 3.5 percent of GDP on the military. Patent protection for prescription drugs raise their cost by close to 2.0 percent of GDP. And, protected our doctors from international competition raises our annual health care bill by 0.5 percent of GDP.
Note: An earlier version wrongly put average GDP over the next decade at $20 billion.
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As the media erupt in fury over Donald Trump’s comments on the debt, it is worth taking the opportunity to remind people that the interest burden on the national debt is near a post-World War II low. While the debt-to-GDP ratio rose sharply in the Great Recession, because interest rates are extremely low, we face an unusually low interest burden.
This fact has largely been missing from reporting on the issue. For example a Washington Post piece warning of the end of the world if Trump tried to negotiate on the debt, told readers that the government would pay roughly $255 billion this year in interest on the debt. This includes the $113 billion that the Federal Reserve Board will receive and refund back to the Treasury. That leaves a net interest burden of $142 billion, a bit less than 0.8 percent of GDP. By comparison, the interest burden was over 3.0 percent of GDP in the early 1990s.
It is also worth noting that we actually could buy back debt at a discount if interest rates rose. When interest rates rise, the market value of long-term debt falls. This means that the government could issue new debt, which would pay a higher interest rate, to buy back debt with a higher face value, thereby reducing its debt, but leaving its interest burden unchanged.
There is no economic reason to do this sort of financial engineering, but there are people who worry about debt to GDP ratios apart from the interest burden, like Harvard economics professors, the Washington Post editorial page writers, and Washington budget wonks. As a result, this sort of financial engineering may be a useful way to alleviate concerns on the debt and free up public money for productive uses.
As the media erupt in fury over Donald Trump’s comments on the debt, it is worth taking the opportunity to remind people that the interest burden on the national debt is near a post-World War II low. While the debt-to-GDP ratio rose sharply in the Great Recession, because interest rates are extremely low, we face an unusually low interest burden.
This fact has largely been missing from reporting on the issue. For example a Washington Post piece warning of the end of the world if Trump tried to negotiate on the debt, told readers that the government would pay roughly $255 billion this year in interest on the debt. This includes the $113 billion that the Federal Reserve Board will receive and refund back to the Treasury. That leaves a net interest burden of $142 billion, a bit less than 0.8 percent of GDP. By comparison, the interest burden was over 3.0 percent of GDP in the early 1990s.
It is also worth noting that we actually could buy back debt at a discount if interest rates rose. When interest rates rise, the market value of long-term debt falls. This means that the government could issue new debt, which would pay a higher interest rate, to buy back debt with a higher face value, thereby reducing its debt, but leaving its interest burden unchanged.
There is no economic reason to do this sort of financial engineering, but there are people who worry about debt to GDP ratios apart from the interest burden, like Harvard economics professors, the Washington Post editorial page writers, and Washington budget wonks. As a result, this sort of financial engineering may be a useful way to alleviate concerns on the debt and free up public money for productive uses.
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David Brooks used his column today to complain about Hillary Clinton’s lack of imagination. (She will face a candidate in the general election with considerable imagination.) One of his highlights is that she has no plan to deal with the problem faced by coal miners and their communities as a result of the loss of coal mining jobs. He tells readers:
“A few decades ago there were 175,000 coal jobs in the U.S. Now there are 57,000. That economic dislocation has hit local economies in the form of shuttered storefronts and abandoned bank buildings.”
While the numbers are accurate, readers may have been misled about timing. The vast majority of the job loss took place more than two decades ago and had nothing to do with recent measures to reduce greenhouse gas emissions.
Jobs in the Coal Mining Industry
Source: Bureau of Labor Statistics.
Of course this doesn’t change the seriousness of the problem for the workers and communities affected, but it is important that readers be clear on its cause. The effect of measures to reduce greenhouse gas emissions are a relatively minor part of this story.
David Brooks used his column today to complain about Hillary Clinton’s lack of imagination. (She will face a candidate in the general election with considerable imagination.) One of his highlights is that she has no plan to deal with the problem faced by coal miners and their communities as a result of the loss of coal mining jobs. He tells readers:
“A few decades ago there were 175,000 coal jobs in the U.S. Now there are 57,000. That economic dislocation has hit local economies in the form of shuttered storefronts and abandoned bank buildings.”
While the numbers are accurate, readers may have been misled about timing. The vast majority of the job loss took place more than two decades ago and had nothing to do with recent measures to reduce greenhouse gas emissions.
Jobs in the Coal Mining Industry
Source: Bureau of Labor Statistics.
Of course this doesn’t change the seriousness of the problem for the workers and communities affected, but it is important that readers be clear on its cause. The effect of measures to reduce greenhouse gas emissions are a relatively minor part of this story.
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The Washington Post had a piece noting that it is unlikely that the economy will produce the 1 million new jobs in manufacturing by 2016, as promised by President Obama in 2012. The piece is implies that this was an unrealistic promise that Obama should not have made. In fact, the economy had lost more than 2 million manufacturing jobs in the recession, so it was very reasonable to expect that it would get at least half of these jobs back, as it had in prior recoveries.
Jobs in Manufacturing
Source: Bureau of Labor Statistics.
The main reason why we did not recover more manufacturing jobs is that the non-oil trade deficit increased by more than 1 percent of GDP since 2012. If the deficit had remained constant as a share of GDP, then we would have easily exceeded the one million jobs target.
The piece also mentioned that President Obama had increased spending on community colleges by $2 billion over the last four years. This is a bit more than 0.01 percent of federal spending over this period.
Note:
As Ryan Denniston rightly points out in his comment, expressing the spending on community colleges as a share of the total budget is not very helpful. As a better point of reference, the American Association of Community Colleges put the number of people taking courses at community colleges at 12.8 million in the fall of 2012. This means that the $500 million in addition annual spending secured by President Obama would come to a bit less than $40 per student per year.
The Washington Post had a piece noting that it is unlikely that the economy will produce the 1 million new jobs in manufacturing by 2016, as promised by President Obama in 2012. The piece is implies that this was an unrealistic promise that Obama should not have made. In fact, the economy had lost more than 2 million manufacturing jobs in the recession, so it was very reasonable to expect that it would get at least half of these jobs back, as it had in prior recoveries.
Jobs in Manufacturing
Source: Bureau of Labor Statistics.
The main reason why we did not recover more manufacturing jobs is that the non-oil trade deficit increased by more than 1 percent of GDP since 2012. If the deficit had remained constant as a share of GDP, then we would have easily exceeded the one million jobs target.
The piece also mentioned that President Obama had increased spending on community colleges by $2 billion over the last four years. This is a bit more than 0.01 percent of federal spending over this period.
Note:
As Ryan Denniston rightly points out in his comment, expressing the spending on community colleges as a share of the total budget is not very helpful. As a better point of reference, the American Association of Community Colleges put the number of people taking courses at community colleges at 12.8 million in the fall of 2012. This means that the $500 million in addition annual spending secured by President Obama would come to a bit less than $40 per student per year.
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Paul Krugman complains that the media have not exposed the inconsistencies in Paul Ryan’s budgets. While there is some truth to that (Ryan never identifies any of the loopholes he would close to cover the cost of lower tax rates), it is more serious that it never reports what Ryan actually proposes.
Ryan’s budgets, as analyzed by the Congressional Budget Office under his direction, call for eliminating the whole of the federal government by 2050, except for Social Security, Medicare and Medicaid, and the military. This is implied by his reducing everything except Social Security, Medicare, and Medicaid to 3.5 percent of GDP, roughly the current size of the military budget. That leaves zero for the Justice Department, the State Department, the Food and Drug Administration, the National Institutes of Health, the Education Department, the National Park Service and everything else we think of as the federal government.
While Krugman is right in calling attention to proposals to pay for large tax cuts with the elimination of unnamed deductions, it seems more serious that Speaker Ryan is a person who wants to phase out the federal government. That is about as radical a position as you can find in D.C. and Ryan has repeated it many times. (He boasts how CBO scored his plan as eliminating the federal debt.)
Next to no one seems to know that Ryan is an abolitionist. It is difficult to see how someone espousing this view can be seen as a moderate conservative.
Paul Krugman complains that the media have not exposed the inconsistencies in Paul Ryan’s budgets. While there is some truth to that (Ryan never identifies any of the loopholes he would close to cover the cost of lower tax rates), it is more serious that it never reports what Ryan actually proposes.
Ryan’s budgets, as analyzed by the Congressional Budget Office under his direction, call for eliminating the whole of the federal government by 2050, except for Social Security, Medicare and Medicaid, and the military. This is implied by his reducing everything except Social Security, Medicare, and Medicaid to 3.5 percent of GDP, roughly the current size of the military budget. That leaves zero for the Justice Department, the State Department, the Food and Drug Administration, the National Institutes of Health, the Education Department, the National Park Service and everything else we think of as the federal government.
While Krugman is right in calling attention to proposals to pay for large tax cuts with the elimination of unnamed deductions, it seems more serious that Speaker Ryan is a person who wants to phase out the federal government. That is about as radical a position as you can find in D.C. and Ryan has repeated it many times. (He boasts how CBO scored his plan as eliminating the federal debt.)
Next to no one seems to know that Ryan is an abolitionist. It is difficult to see how someone espousing this view can be seen as a moderate conservative.
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It is bizarre how many people feel the need to claim that a large trade deficit in manufactured goods does not cost manufacturing jobs. You can argue all sorts of things about the merits of trade, and even make a story about how a trade deficit is good (pretty hard, when we’re below full employment), but it is almost impossible to tell a story that the explosion of the trade deficit between 1997 and 2006 did not cost manufacturing jobs.
Nonetheless that is the story the NYT gave its readers when discussing Indiana’s economy just before the primaries this week. It presents the views of Michael J. Hicks, director of the Center for Business and Economic Research at Ball State University in Muncie, Indiana:
“Factory jobs have declined, he added, but not because of trade deals with other countries as Mr. Trump and Mr. Sanders assert, but because Indiana factories are increasingly efficient and fewer workers are needed.
“‘Manufacturing employment peaked in 1973,’ he said, adding that since then the productivity of Indiana factory workers has climbed 250 percent. ‘We need far fewer workers, and a very different type of worker, too.'”
In the country as whole manufacturing employment peaked in the early 1970s, but then remained more or less constant, while falling as a share of total employment since the labor force grew. However employment fell sharply in the years from 2000 to 2006. While there was productivity growth in manufacturing over the years 2000 to 2006, that was also true for the years 1973 to 2000. The difference in the years 2000 to 2006 was the sharp rise in the trade deficit.
This was also the story in manufacturing employment in Indiana, as can be seen in the graph below.
Manufacturing Employment in Indiana
Source: Bureau of Labor Statistics.
As can be seen, manufacturing employment had been rising through the 1990s recovery. It peaked in December of 1999 at 672,200 and then fell to 556,700 by December of 2006, a drop of almost 20 percent. Employment fell further during the 2008-2009 recession, although it has recovered the ground lost. Anyhow, the data certainly seems to support the case that Indiana lost a large number of jobs due to trade in the years 1999-2006, it’s not clear why the NYT would want to deny this fact.
It is bizarre how many people feel the need to claim that a large trade deficit in manufactured goods does not cost manufacturing jobs. You can argue all sorts of things about the merits of trade, and even make a story about how a trade deficit is good (pretty hard, when we’re below full employment), but it is almost impossible to tell a story that the explosion of the trade deficit between 1997 and 2006 did not cost manufacturing jobs.
Nonetheless that is the story the NYT gave its readers when discussing Indiana’s economy just before the primaries this week. It presents the views of Michael J. Hicks, director of the Center for Business and Economic Research at Ball State University in Muncie, Indiana:
“Factory jobs have declined, he added, but not because of trade deals with other countries as Mr. Trump and Mr. Sanders assert, but because Indiana factories are increasingly efficient and fewer workers are needed.
“‘Manufacturing employment peaked in 1973,’ he said, adding that since then the productivity of Indiana factory workers has climbed 250 percent. ‘We need far fewer workers, and a very different type of worker, too.'”
In the country as whole manufacturing employment peaked in the early 1970s, but then remained more or less constant, while falling as a share of total employment since the labor force grew. However employment fell sharply in the years from 2000 to 2006. While there was productivity growth in manufacturing over the years 2000 to 2006, that was also true for the years 1973 to 2000. The difference in the years 2000 to 2006 was the sharp rise in the trade deficit.
This was also the story in manufacturing employment in Indiana, as can be seen in the graph below.
Manufacturing Employment in Indiana
Source: Bureau of Labor Statistics.
As can be seen, manufacturing employment had been rising through the 1990s recovery. It peaked in December of 1999 at 672,200 and then fell to 556,700 by December of 2006, a drop of almost 20 percent. Employment fell further during the 2008-2009 recession, although it has recovered the ground lost. Anyhow, the data certainly seems to support the case that Indiana lost a large number of jobs due to trade in the years 1999-2006, it’s not clear why the NYT would want to deny this fact.
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