The National Debt

The government recently announced that the national debt reached $30 trillion.  It now stands at 128% of the economy. Yes, our national debt is larger than what we earn each year. Wow. You would think that they would be so ashamed that they would somehow hide that obscene accomplishment. I guess its hard to hide such things. That debt amounts to about $90,000 for each person and $240,000 per tax payer.

Equally troubling is that the $30 trillion announcement had almost no effect. If Biden burps at the dinner table the stock market falls.  If the inflation rate rises by a tenth of a point, interest rates skyrocket. But debt reaches $30 trillion. Ho hum, honey pass the mustard please. 

I read several articles announcing this new debt number and came away from that experience with a tummy ache. Lots of angles here and its not really an all-good or all-evil story. 

Take for example, the idea that the debt is $240,000 per tax payer. My first reaction is wow -- huge. But that reaction stems from the illogic of comparing a stock with a flow. The debt is a stock, an accumulation of what we owe. The flow is what we earn each year. We have a lot of years, if we so chose, to earn income and pay off the debt. 

We do that as households every day. We borrow a ton of money for our nice new house or our sleek cool Jaguar and then we spend 30 years paying it off. We might only make $50k per year but in 30 years we can pay off a pretty big chunk of debt. If our national debt is $240,000 per taxpayer, note that we have a lot of years to pay. 

Maybe that's good or not good. Take the case of the house purchase. Hoot might buy a really cool house and doesn't mind paying a big chunk of his income every year. Kiltie might buy a less worthy house and feel like he got scammed. It's the same with the national debt. What are we doing with all that debt? Are we throwing it down a hole or are we using it to our great advantage?

Hmm. Answering that question is full of politics.  It all depends on what you think the government ought to do with our money. Danny wants us to spend it all on national defense and infrastructure. Jason wants us to make incomes more equal. Nolan wants more spending on Kraft macaroni and cheese. 

It also depends on the realities of the impacts. If we spend it on national defense and we lose the next war, then it seems like we could have used that money better. If we spend it on welfare and poverty worsens, then we wonder if we are wasting the people's money. 

Government always has the choice as to spend the money on donuts or steel. Donuts are a consumption item. You spend the money, you eat the donut, you get a sugar high, and then that's about it. The government could instead buy steel. Steel is an example of a capital good. The essential characteristic of the steel is that it lasts and it can lead to even more output. The extra steel lets you build a building. The building might house a donut machine and produce donuts for years to come. Steel or donuts? Consumption or investment?

Finally, regardless the above points, there must be a limit to what is prudential to borrow. Even if you use the proceeds for good things -- one can still borrow too much. Recall that you have to pay it back. If I buy a $10 million dollar house and I live off my Social Security benefit, that is not going to work. 

Surely the above does not cover the whole waterfront. But it does support what I said at the outset. How much national debt we can tolerate is not any easy question. Some debt is good. Other debt is not. Knowing what is the right amount is complicated. But I will stick my neck out and say that we could live in the USA with a national debt less than $30 trillion. 

Paul Krugman, Inflation, and Gentle Tightening

This was Krugman's latest headline. The Fed Should Raise Interest Rates, but Gently. Tightening is obviously necessary but getting it right calls for caution, flexibility and humility.

This is like telling your kids that you are going to lose weight but only one pound per week. Your kids know you and they realize that (a) this is a total lie, (b) this is impossible, or (3) you are in a food coma and don't know what you are saying.

Why do I say this? Largely because I never lose weight for more than a day, and because Paul Krugman doesn't care a wit about inflation -- if it means we might have to trade off some employment/output to reduce the rate of inflation.

It sounds like a cruel thing to say but history proves the point.  I have lost weight at times but apparently I care more about eating that 16 ounce T-bone than about moving down to a size 36. As for Krugman it sounds really good to stand against rising inflation but the truth is that he cares more about other things -- things that reliably pump up the government's budget, aggregate demand and ultimately inflation. 

Look at the title and read some of the article. He uses the word gently. Then he uses words like caution, flexibility, and humility.

Really? What do those modifiers mean to you? Honey -- go on a diet again and this time do it gently. Really?  Have great humility as you try to shed that half of a pound today. Come on folks -- the words tell the truth. If the slightest thing starts to go wrong as we apply pressure against inflation -- GAME OVER. Be more gentle honey. 

Welcome to the real world. You sit on the sea saw and your friend moves up. You get off and your friend moves down. Period. Unless you have a rubber sea saw.

Please ask Professor Krugman for all the episodes -- anywhere in the world -- where policymakers have been able to gently, gradually, and with caution, flexibility and humility been able to reduce the inflation rate. Then ask him how many times governments have waited while inflation soared and then created a recession with their too much too late policies. 

Why does it usually work out this way? The answer is simple.

Waiting is often better than doing. Honey, I am pretty sure my leg is not broken. Let's wait a while before I have the doctor look at it. You know that if the doctor thinks you have a broken bone he is going to give you pain and suffering. Put it off a while. So what if you can't walk. Maybe it will feel better tomorrow. 

Krugman is the head cheerleader for the liberal progressive wing. He knows that the right policy will be painful right away. He knows that the reason for the inflation is probably because our friends in the government spent too much of our money. Maybe they spent too much on defense. Maybe too much on poverty. Maybe too much on whatever. 

If government spending too much on these things and the Fed monetizing these debts is the cause -- then the solution is to reverse them. Ouch. Higher taxes? Lower spending? 

Krugman wants to sound reasonable with his words. But he knows that if a hammer to the head causes a headache -- then you should remove the hammer. That's it. Words like gentle, caution, and humility only are meant to put things off. Go ahead and hit yourself in the head with hammer -- but do it more gently. 

The Fed is Raising Interest Rates

Sometimes I forget when reading articles about the Fed and monetary policy that I spent years figuring out Fedspeak. Lately the news has been about reports that the Fed will soon raise interest rates. I imagined the Fed telling each bank to raise its rate on savings accounts. But that's not really how it goes. So I decided I would put on my teacher hat and explain what I think all this means.

What is the Fed? Why do we expect them to raise interest rates? What are they doing? How are they doing it? Why are they doing it?  How will it work out? How does all this affect the stock market? Whew. Lots of questions. 

The Fed is short for Federal Reserve. The Fed is an organization that is part of the government's national policy making institutions. These policy decisions come out of the Fed's Open Market Committee. That policy making committee consists of the Governors of the Fed and the Presidents of the Fed district banks. Those folks meet regularly to decide on Fed policy.

Fed policy in the real world has two basic goals. The first is to keep the economy humming or at least keep it out of recessions. The second is to create a stable inflationary environment with the inflation rate of goods and services rising at around 2% per year. It has a hard time with these two goals because sometimes making progress on one automatically causes problems with the other. So they have to walk a fine path so as to make economic growth strong enough and inflation low and stable. 

Often the Fed's decisions and its goals are framed using words like money growth and interest rates. Notice I used the word "goals".  On a day to day basis, the Fed does not set interest rates. It is more proper to say that they try to influence interest rates. There is much confusion when people imagine the Fed moving a dial for interest rates. Or telling bankers what interest rate to charge.

This might sound crazy, but the Fed influences interest rates because they buy and sell government bonds. They do not write down an interest rate on a bond. The US Treasury does that. What the Fed really does is to trade government bonds in bond markets as a way to change the market value of these bonds.. 

When the Fed decides to buy a lot of government bonds, they buy the bonds with newly created money. Boring. Create money. Really? Yes they create it at will. Wowee -- makes me think of Scrooge McDuck playing in his vault.

Anyway, back at the vault. The Fed creates money and then uses it to buy bonds. If they create enough demand for bonds, this causes the price of the bonds to rise and the interest rate on those bonds to fall. Aha. The interest rate on the bonds is written in ink -- but if the market prices the bonds higher, then the rate expressed as a percent of the market price of bonds falls. Suppose the bond says 4% on it. The more you pay for that bond and for the stated 4%, the lower return you get. 

Don't moan. The Fed does not tell banks what interest rate to charge. But the Fed does influence a broad swatch of interest rates as it buys and sells government bonds. 

This gets us back to the Fed's goal. If they want a stronger economy they will buy bonds as a means to reduce interest rates and to persuade people to buy more goods and services at those lower rates. If the Fed wants to reduce the inflation rate, then it does the opposite. It will sell bonds as a means to raise interest rates and persuade people to purchase less goods and services. 

I see you are starting to nod off. I did my best to write about a tough topic. I hope it helped you understand the Fed and monetary policy a little better. If not, there is always a sweet walk by the lake with your honey.  

Janet and the Wizard of Oz

This stuff gets funnier all the time. Janet Yellen reminds me of the Wizard of Oz. 

Remember the good old days when words had meaning? For example, government policies could be of several kinds. 

Aggregate demand policy was all about stimulating people's desire to spend. Poverty policy was aimed at reducing poverty. Energy policy was all about promoting more energy while environmental policy attempted to undo harm to the environment. Supply-side policy attempted to shift the nation's supply curve, usually through lower tax rates that created more incentive for people to work and innovate. 

It was all pretty clear. And then the Wizard, I mean Janet Yellen comes along and obscures everything. The title of the article in the Wall Street Journal was Janet Yellen Views Biden Policies as Modernized Supply-Side Economics: In a Speech to the World Economic Forum, Treasury Secretary says the White House is aiming to increase labor supply and boost worker productivity. 

Modernized supply-side economics? What does "modernized" mean? Is it not enough to say they are trying supply-side policy? Maybe not. That would be misleading. The Biden/Yellen supply-side policies have as much to do with supply-side as I have to do with dancing tights. If what they are trying to say is that their supply-side policies are different than the past ones -- then for sure that fits. Their modern supply-side policies are a very long way from what we tried in the 1970s. 

Consider what they include under the umbrella of supply-side. 

    Social programs such as paid family leave, child care, education, and infrastructure.

    Programs for climate change. 

    A global corporate minimum tax. 

The common phrase employed by Yellen for these programs is that they increase labor supply, and or raise productivity while reducing inequality. 

Old style programs that reduced taxes on capital and/or deregulated industries are old fashioned and don't work, according to Yellen. What she really means is that if they worked they might have tilted the distribution of income and therefore they are not part of her modern approach. 

Clearly the bottom line for Yellen is not that they are supply-side policies. The bottom line is that they are part of a plan to redistribute income. I agree that some of the programs she mentions might have supply-side effects, but clearly they are not thought of in those terms and there is little to no historical data or experience to suggest that they do. 

Infrastructure sounds like typical supply-side policy. But even with that one -- she is very clear it has to be infrastructure that makes incomes more equal. Let's build a new subway. But make sure we build it in such a way that incomes are made more equal. No equality -- no subway! Maybe subway builders can't do that. After all, they succeed by making good subways. Not by making incomes more equal. 

It sounds good to say that subsidizing childcare is going to make it easier for the family to provide more labor hours to the economy. But why not tell the truth? We don't know. What Yellen does know is that this is a typical welfare transfer to help people at the low end of the income distribution. Maybe she thinks it sounds cool to pretend that she cares about the supply-side of the economy. But we all know the truth. She is what she always was. She is a part of the Biden administration whose goals are driven by global warming and income distribution. Tell it like it is Janet.