In the 1990s, voters understood that the federal budget deficit was costing them, personally. That economic situation has returned, but awareness hasn't.
This sentence is so true: "The truth about those European welfare states is they’re financed by broad-based, double-digit value-added taxes that fall broadly on the middle class, and Democrats dare not even propose that kind of tax policy." I for one would pay higher taxes if it meant significantly reducing or eliminating my health insurance premiums, significantly reducing out-of-pocket costs for healthcare, and not paying $2k+ per month for daycare (and we only have one child!). I'd almost certainly come out better budget-wise. Why we can't get this message across to voters -- "yes, you'd spend more on taxes, but you'd likely come out ahead in the end!!" -- is a mystery to me. It's not a scenario of paying more taxes on top of what we already spend, it's a trade, and it's so strange to me that this is seemingly so hard to convey to people.
What you say isn't wrong, but I also think you're missing a key factor: a decade of "very serious people" claiming there was a debt crisis when there wasn't, as a smokescreen for cutting popular programs, notably Social Security and Medicare. I believe that the situation is different now but I also think that people are more likely to put up with taxes with evident benefits, e.g., increasing the FICA cap to better fund that same SS and Medicare.
We could also ditch billions in military pork that the military doesn't want but that's a separate argument.
Actually, not really. I cited Keynes and some Keynesian economists. "Crowding out" was disproven well before MMT became a thing. For the record, there are many aspects of MMT that I disagree with. Unlimited government spending in the wrong hands can be a major political, as well as economic problem. And for the record, I do think government spending should be wound back now, as I am concerned about potential inflationary pressures.
But your description of how government crowds out private spending is factually incorrect, that's all. We can have a sensible discussion about that without resorting to name-calling.
Thanks, Josh. You've answered *how* to make voters care again, but I want to read a bit more about *why* they don't seem to care in the first place. Maybe people haven't felt it in their pocketbooks enough yet? To what extent don't people care because of a boy-cried-wolf situation where many politicians have wailed -- often very shrilly with attendant government shutdowns in the case of Republicans -- about the deficit for decades? Are there other compelling explanations?
The "crowding out" thesis (i.e. too much government borrowing crowds out private investment) was discredited by Keynes over 70 years ago! The basis of the "crowding out" claim is that such government spending causes interest rates to rise, and investment to fall. In other words, too much government borrowing "crowds out" private investment. Because investment is important for long-run economic growth, government budget deficits reduce the economy's growth rate.
This argument reflects a complete misunderstanding of government spending. Increases in the federal deficit tend to decrease, rather than increase, interest rates. In reality, fiscal policy actions are those which alter the non-government sector's holdings of net financial assets. This is because deficit spending leads to a net injection of reserves into the banking system. (And big deficits imply big injections of reserves.) When the banking system is flush with reserves, the price of those reserves -- in the U.S. the federal funds rate -- is driven to zero in the absence of countervailing measures (such as bond sales). Unless a zero-bid is consistent with Fed policy, the central bank will begin selling bonds in order to drain excess reserves. The bond sales continue until the fed funds rate falls within the Fed's target band.
That's not to suggest that I think deficits don't matter. They do. Given spare capacity, public expenditures are not only productive but also foster additional activity in the private sector. In a study of a century of UK macroeconomic statistics, Professor Vicky Chick and Ann Pettifor provide very compelling evidence illustrating that active fiscal policy promoted economic growth and helped to REDUCE the UK's public debt to GDP ratio. By contrast, periods during which the single-minded focus on debt and deficit reduction became the main focus on policy, economic growth slowed and the UK's debt to GDP ratio rose.
This study validates one of Keynes's central conclusions: "For the proposition that supply creates its own demand, I shall substitute the proposition that expenditure creates its own income" (Collected Writings, Volume XXIX, p. 81). That being said, excessive government spending when the economy is running hot is likely to create inflation and in that sense can be economically disruptive. I would agree that this is the case today, and Biden should wind down gov't spending. But again, context matters.
Maybe this is just the other side of the same coin, but doesn't monetary policy control interest rates?
It seems to me that the high interest rates of the '80s were caused by Paul Volker, not by government borrowing.
Now, you can argue (and I think you basically *are* arguing) that stimulative fiscal policy (i.e. deficits) in an economy that is already at its productive capacity will lead to inflation, and then monetary authorities will raise interest rates to combat inflation, so deficits can induce higher interest rates through that channel.
But the "crowding out" shortcut never made sense to me.
I fear that there is an underlying shift in attitude that makes it near impossible for either party to really care as long as they feel that any benefits accrue to the other party.
Currently, I think both parties fear that any reduction in the deficit will just be used by the other party when they gain control.
I agree with most of Josh's case here. What I would be interested in hearing is how Democrats can make this a favorable issue for them? The people in my personal life that complain about the debt are essentially all Republicans. They are like Republican politicians though in the sense that they complain about the debt but think that budgets should always be balanced on the back of spending - if anything, they think taxes should be lower. My larger point is I don't see how making the debt more salient isn't just going to advantage Republicans. Neither party has been particularly fiscally responsible in my lifetime (I turn 40 in August) but I would argue the Dems have been less crazy. That being said, the debt obsessed voters seem to be very right leaning. How do Dems begin to change that?
In the last Australian election, policies like increased childcare spending were argued to free up more women to join the workforce, increasing productivity and offsetting the inflationary pressure.
I think it's also fairly intuitive that some government spending *could* be more efficient than private spending, making it worth competing for borrowing, but it's all very speculative.
Still, if a party can make that argument, even in a roundabout way, it goes a long way to reducing the pushback they get for debt.
There Is also a bit of MMT talk going around. The takes I've heard are that politicians won't mention it directly but there's an increasing view that, with some qualifiers about 'good' spending, debt doesn't matter.
That said, the government has been careful to deliver repeated surpluses, so after the election at least they've managed to avoid the debate.
I'm no economist, but I'm surprised at the notion that it's only deficit spending that would cause inflation. Like, if the government found $1 trillion worth of gold at the bottom of the Potomac and immediately spent it, surely that would be too many dollars chasing too few goods and services in the same way as if they had financed the spending by borrowing? But maybe that's too contrived an example and irl if they were able to spend more without borrowing that means they've raised taxes (in which case the public spending replaces what otherwise would have been private spending) or something?
Not to go down too deep a rabbit hole, but the budget rules congress follows, specifically pay go, appear to incentivize leaving spending levels as-is and not cutting spending when you can, instead saving it to be a “pay for” for some other bill.
If Congress instead could effectively “bank” cuts or taxes early and then spend from them during the remainder of the Congress maybe there wouldn’t be so many zombie government programs out there needing to be axed.
Or maybe it’s all screwed up because Congress is itself dysfunctional and they need some statutory limit on spending.
It’s like a spiral, “ Inflations eating away at wages so we must increase benefits that increase the deficit. And with margins so slim in Congress, nobody’s willing to propose any serious plans to address it. It feels like dark days are ahead…..
This sentence is so true: "The truth about those European welfare states is they’re financed by broad-based, double-digit value-added taxes that fall broadly on the middle class, and Democrats dare not even propose that kind of tax policy." I for one would pay higher taxes if it meant significantly reducing or eliminating my health insurance premiums, significantly reducing out-of-pocket costs for healthcare, and not paying $2k+ per month for daycare (and we only have one child!). I'd almost certainly come out better budget-wise. Why we can't get this message across to voters -- "yes, you'd spend more on taxes, but you'd likely come out ahead in the end!!" -- is a mystery to me. It's not a scenario of paying more taxes on top of what we already spend, it's a trade, and it's so strange to me that this is seemingly so hard to convey to people.
What you say isn't wrong, but I also think you're missing a key factor: a decade of "very serious people" claiming there was a debt crisis when there wasn't, as a smokescreen for cutting popular programs, notably Social Security and Medicare. I believe that the situation is different now but I also think that people are more likely to put up with taxes with evident benefits, e.g., increasing the FICA cap to better fund that same SS and Medicare.
We could also ditch billions in military pork that the military doesn't want but that's a separate argument.
Actually, not really. I cited Keynes and some Keynesian economists. "Crowding out" was disproven well before MMT became a thing. For the record, there are many aspects of MMT that I disagree with. Unlimited government spending in the wrong hands can be a major political, as well as economic problem. And for the record, I do think government spending should be wound back now, as I am concerned about potential inflationary pressures.
But your description of how government crowds out private spending is factually incorrect, that's all. We can have a sensible discussion about that without resorting to name-calling.
Thanks, Josh. You've answered *how* to make voters care again, but I want to read a bit more about *why* they don't seem to care in the first place. Maybe people haven't felt it in their pocketbooks enough yet? To what extent don't people care because of a boy-cried-wolf situation where many politicians have wailed -- often very shrilly with attendant government shutdowns in the case of Republicans -- about the deficit for decades? Are there other compelling explanations?
The "crowding out" thesis (i.e. too much government borrowing crowds out private investment) was discredited by Keynes over 70 years ago! The basis of the "crowding out" claim is that such government spending causes interest rates to rise, and investment to fall. In other words, too much government borrowing "crowds out" private investment. Because investment is important for long-run economic growth, government budget deficits reduce the economy's growth rate.
This argument reflects a complete misunderstanding of government spending. Increases in the federal deficit tend to decrease, rather than increase, interest rates. In reality, fiscal policy actions are those which alter the non-government sector's holdings of net financial assets. This is because deficit spending leads to a net injection of reserves into the banking system. (And big deficits imply big injections of reserves.) When the banking system is flush with reserves, the price of those reserves -- in the U.S. the federal funds rate -- is driven to zero in the absence of countervailing measures (such as bond sales). Unless a zero-bid is consistent with Fed policy, the central bank will begin selling bonds in order to drain excess reserves. The bond sales continue until the fed funds rate falls within the Fed's target band.
That's not to suggest that I think deficits don't matter. They do. Given spare capacity, public expenditures are not only productive but also foster additional activity in the private sector. In a study of a century of UK macroeconomic statistics, Professor Vicky Chick and Ann Pettifor provide very compelling evidence illustrating that active fiscal policy promoted economic growth and helped to REDUCE the UK's public debt to GDP ratio. By contrast, periods during which the single-minded focus on debt and deficit reduction became the main focus on policy, economic growth slowed and the UK's debt to GDP ratio rose.
This study validates one of Keynes's central conclusions: "For the proposition that supply creates its own demand, I shall substitute the proposition that expenditure creates its own income" (Collected Writings, Volume XXIX, p. 81). That being said, excessive government spending when the economy is running hot is likely to create inflation and in that sense can be economically disruptive. I would agree that this is the case today, and Biden should wind down gov't spending. But again, context matters.
Maybe this is just the other side of the same coin, but doesn't monetary policy control interest rates?
It seems to me that the high interest rates of the '80s were caused by Paul Volker, not by government borrowing.
Now, you can argue (and I think you basically *are* arguing) that stimulative fiscal policy (i.e. deficits) in an economy that is already at its productive capacity will lead to inflation, and then monetary authorities will raise interest rates to combat inflation, so deficits can induce higher interest rates through that channel.
But the "crowding out" shortcut never made sense to me.
I fear that there is an underlying shift in attitude that makes it near impossible for either party to really care as long as they feel that any benefits accrue to the other party.
Currently, I think both parties fear that any reduction in the deficit will just be used by the other party when they gain control.
I agree with most of Josh's case here. What I would be interested in hearing is how Democrats can make this a favorable issue for them? The people in my personal life that complain about the debt are essentially all Republicans. They are like Republican politicians though in the sense that they complain about the debt but think that budgets should always be balanced on the back of spending - if anything, they think taxes should be lower. My larger point is I don't see how making the debt more salient isn't just going to advantage Republicans. Neither party has been particularly fiscally responsible in my lifetime (I turn 40 in August) but I would argue the Dems have been less crazy. That being said, the debt obsessed voters seem to be very right leaning. How do Dems begin to change that?
In the last Australian election, policies like increased childcare spending were argued to free up more women to join the workforce, increasing productivity and offsetting the inflationary pressure.
I think it's also fairly intuitive that some government spending *could* be more efficient than private spending, making it worth competing for borrowing, but it's all very speculative.
Still, if a party can make that argument, even in a roundabout way, it goes a long way to reducing the pushback they get for debt.
There Is also a bit of MMT talk going around. The takes I've heard are that politicians won't mention it directly but there's an increasing view that, with some qualifiers about 'good' spending, debt doesn't matter.
That said, the government has been careful to deliver repeated surpluses, so after the election at least they've managed to avoid the debate.
I'm no economist, but I'm surprised at the notion that it's only deficit spending that would cause inflation. Like, if the government found $1 trillion worth of gold at the bottom of the Potomac and immediately spent it, surely that would be too many dollars chasing too few goods and services in the same way as if they had financed the spending by borrowing? But maybe that's too contrived an example and irl if they were able to spend more without borrowing that means they've raised taxes (in which case the public spending replaces what otherwise would have been private spending) or something?
Not to go down too deep a rabbit hole, but the budget rules congress follows, specifically pay go, appear to incentivize leaving spending levels as-is and not cutting spending when you can, instead saving it to be a “pay for” for some other bill.
If Congress instead could effectively “bank” cuts or taxes early and then spend from them during the remainder of the Congress maybe there wouldn’t be so many zombie government programs out there needing to be axed.
Or maybe it’s all screwed up because Congress is itself dysfunctional and they need some statutory limit on spending.
It’s like a spiral, “ Inflations eating away at wages so we must increase benefits that increase the deficit. And with margins so slim in Congress, nobody’s willing to propose any serious plans to address it. It feels like dark days are ahead…..