Writing in today’s Washington Post, former Obama economist Larry Summers put forth the strange hypothesis that more red ink would improve the federal government’s long-run fiscal position.
This sounds like an excuse for more Keynesian spending as part of another so-called stimulus plan, but Summers claims to have a much more modest goal of prudent financial management.
And if we assume there’s no hidden agenda, what he’s proposing isn’t unreasonable.
But before floating his idea, Summers starts with some skepticism about more easy-money policy from the Fed.
Many in the United States and Europe are arguing for further quantitative easing to bring down longer-term interest rates. …However, one has to wonder how much investment businesses are unwilling to undertake at extraordinarily low interest rates that they would be willing to undertake with rates reduced by yet another 25 or 50 basis points. It is also worth querying the quality of projects that businesses judge unprofitable at a -60 basis point real interest rate but choose to undertake at a still more negative rate. There is also the question of whether extremely low, safe, real interest rates promote bubbles of various kinds.
This is intuitively appealing. I try to stay away from monetary policy issues, but whenever I get sucked into a discussion with an advocate of easy money/quantitative easing, I always ask for a common-sense explanation of how dumping more liquidity into the economy is going to help.
Maybe it’s possible to push interest rates even lower, but it certainly doesn’t seem like there’s any evidence showing that the economy is being held back because today’s interest rates are too high.
Moreover, what’s the point of “pushing on a string” with easy money if it just means more reserves sitting at the Fed?
After suggesting that monetary policy isn’t the answer, Summers then proposes to utilize government borrowing. But he’s proposing more debt for management purposes, not Keynesian stimulus.
Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more, not less, and investing in improving their future fiscal position, even assuming no positive demand stimulus effects of a kind likely to materialize with negative real rates. They should accelerate any necessary maintenance projects — issuing debt leaves the state richer not poorer, assuming that maintenance costs rise at or above the general inflation rate. …Similarly, government decisions to issue debt, and then buy space that is currently being leased, will improve the government’s financial position as long as the interest rate on debt is less than the ratio of rents to building values — a condition almost certain to be met in a world with government borrowing rates below 2 percent. These examples are the place to begin because they involve what is in effect an arbitrage, whereby the government uses its credit to deliver essentially the same bundle of services at a lower cost. …countries regarded as havens that can borrow long term at a very low cost should be rushing to take advantage of the opportunity.
Much of this seems reasonable, sort of like a homeowner taking advantage of low interest rates to refinance a mortgage.
But before embracing this idea, we have to move from the dream world of theory to the real world of politics. And to his credit, Summers offers the critical caveat that his idea only makes sense if politicians use their borrowing authority for the right reasons.
There is, of course, still the question of whether more borrowing will increase anxiety about a government’s creditworthiness. It should not, as long as the proceeds of borrowing are used either to reduce future spending or raise future incomes.
At the risk of being the wet-blanket curmudgeon who ruins the party by removing the punch bowl, I have zero faith that politicians would make sound decisions about financial management.
I wrote last month that eurobonds would be “the fiscal version of co-signing a loan for your unemployed alcoholic cousin who has a gambling addiction.”
Well, giving politicians more borrowing authority in hopes they’ll do a bit of prudent refinancing is akin to giving a bunch of money to your drug-addict brother-in-law in hopes that he’ll refinance his credit card debt rather than wind up in a crack house.
Considering that we just saw big bipartisan votes to expand the Export-Import Bank’s corporate welfare and we’re now witnessing both parties working on a bloated farm bill, good luck with that.
What needs to happen is what voters detest, i.e. reverting to the more natural, steeper effort-reward curves – and thus refraining from degenerating the western world into a pitchfork democracy. So, in short, there is no hope. Only a few small breakaway western world states will be saved from being dragged down the self-made, voter-made, decline.
Government spending flattens the effort-reward curves as it essentially amounts to redistribution – and an inefficient one at that. A minority pays for most of the government spending and a majority enjoys whatever inefficiently produced goods the government builds and distributes…. For a while. Because eventually the government monster that was built using a minority’s “fair share” will inevitably come after the ninety percent. That is why the main difference in taxation between the US and Europe (where the monster is already feeding on the ninety percent) is not how much tax the rich pay (high income earners are already into strong Laffer curve effect territory in both continents) but how much tax the middle and lower class pays. In Europe, the next step – the step facing Americans — has already happened and the middle class and poor have already been dragged into the tax collection system with rates of 30% starting at the lowest incomes (in the form of VAT, other excise taxes, and top marginal tax rates kicking in at a mere two-three times median income) — not to mention the taxes paid by employers who are really paid by employees, since shareholders with international choices will not accept sub-par returns (who, after all, wants to not spend their money and save it instead if there is no real post-inflation interest rate that will compensate for delayed gratification?).
The story of American decline will read something like this: Early 21st century: The American middle class, a group of privileged people enjoying prosperity in the top fifteen percent worldwide declares war on the top one percent – and the once great prosperous empire folds.
So, having run out of the traditional short-term, form-over-substance, macro-economic gimmicks — with which to appease a majority of voters seeking perpetual motion machines of prosperity which after the initial push offer prosperity with less effort — Larry Summers, and the western world electorate itself, are now inventing new gimmicks to further flatten the effort-reward curves, something that will inevitably appeal to western world voter lemmings.
In essence, the western world is now entering the age of desperation. There is so much momentum in the wrong direction that not only is decline inevitable but this decline may actually even lack the usual periods of reprieve and relative calm that characterize a typical decline.
If western world voters think that flatter effort-reward curves are what is needed to compete with an emerging world tsunami of three billion newly awakened people, then western voter lemmings will deserve the fate that awaits them. They will simply run out of other people’s money, and, in the ensuing desperation, will be utterly unable to pull out of the hole they dug themselves in. And Genghis Khan, after having been mocked for centuries by a prosperous and arrogant west, is in no mood to take prisoners. Prepare for the ride down to worldwide averagedom. The point of no return has passed, western world privileged status has crossed the event horizon – it was probably that O-ring in the 2008 campaign. That was the point where the vicious cycle of decline got cemented — the point where Americans chose Obama to fix Bush’s statist mistakes.
[…] Will More Federal Debt Improve the U.S. Government’s Creditworthiness? « International Liberty. Share this:TwitterRedditFacebookEmailPrintDiggStumbleUponLike this:LikeBe the first to like this post. This entry was posted in Uncategorized. Bookmark the permalink. ← No Joke by Andrew Klavan, City Journal Spring 2012 […]
We had a surplus in 2000. Why is it so hard to believe we can have one again? The GOP is saying they are reformed “borrow & spenders”, and the Democrats don’t dare being labeled “tax & spend”. So I don’t understand your fear? Summer’s argument makes sense to me.
The key here is the will of politicians to do it right – fat chance. Rather, they will use such a proposal as a political football…there is no end to their shenanigans. They have earned no respect or trust from my corner.
“It should not, as long as the proceeds of borrowing are used either to reduce future spending or raise future incomes.” – a huge “as long as”…any history to support the possibility?