Are you older than debt relative to GDP?

I am.

On bringing down the debt-to-GDP ratio

 I quoted this recently. It is still on my mind:

... provided fiscal space remains ample, countries should not run larger budget surpluses to bring down the debt, but should instead allow growth to bring down debt-to-GDP ratios organically.

Countries should let economic growth "bring down debt-to-GDP ratios organically."

By "organically" I think they mean "naturally". Here's what I think they mean: Economic growth is the natural way to bring down the debt-to-GDP ratio, and that's what countries should do.

Two guys from the International Monetary Fund (IMF) wrote the thing I quoted. They must know what they are talking about, right? You'd think. 

But when has economic growth ever been rapid enough to bring down the debt-to-GDP ratio, and when has debt growth ever been slow enough to allow it?

Once, for about three years, beginning in 2009, something like that.

Benjamin Friedman (1986), page 21:

Indeed, a sufficient period of sustained rapid economic growth could readily shrink the economy's overall debt ratio back to its historical range, not by reducing the numerator but by enlarging the denominator.

Indeed, it could. But it doesn't. When are we gonna learn?

 

PS: Economic policy encourages the accumulation of debt. Maybe if we turn that around ...

I know, it's like sacrilege

Just a minor change of wording:

... let it be, let it be, let it be
Whisper words of wisdom, let it be

And when the broke and hungry people living in the world agree
There will be an answer, let it be
For though they may be parted, there is still a chance that they will see
There will be an answer, let it be

Let it be, let it be, let it be ...

 

Just a minor change. Otherwise, let it be.

 

 

Happy holidays

Economics by reflex

Out of context, from The risks of high public debt despite a low interest rate environment:

After the 2008 Global Crisis, the interest rate-growth differential (r-g) has turned negative in several economies and interest rates have remained low ever since (Teulings and Baldwin 2014). These two conditions offer strong arguments to pursue fiscal expansions to spur growth, as a negative long-run r-g implies a more sustainable public debt, and countercyclical fiscal policy is arguably more effective in a low rate environment (Blanchard 2019, Eggertsson and Summers 2016, Ubide 2016).

The article warns of problems with the view they express, which I refer to as "reflex".

Blanchard, Eggertsson, Summers, and Ubide could surely back up their reflex view.

My problem with it is that there must be something wrong with the thinking behind that view, because that same thinking has been getting us in trouble since, oh, since the 70s. 

Look at the two "strong arguments" that are presented:

• a negative long-run r-g implies a more sustainable public debt, and 
• countercyclical fiscal policy is arguably more effective in a low rate environment

Both of these are based on the assumption that "fiscal expansions to spur growth" are "effective". They are not.

After the financial crisis of 2007-08, economists paused to reflect and evaluate their thinking. That's nice. 

It seems they decided there was nothing wrong with their thinking. That's a problem. 

Their revaluation became an opportunity for them to reafffirm their views, take more entrenched positions, and expand the political divide that stretches between those positions.

If a disaster like 2007-08 doesn't cause more of a change in economic thinking than we have seen, there is little hope for improvement. And by the way, we are on the downhill slope. We need more than just a little improvement if we want any actual improvement.
 

Out of context, from  A Future with High Public Debt: Low-for-Long Is Not Low Forever:

... provided fiscal space remains ample, countries should not run larger budget surpluses to bring down the debt, but should instead allow growth to bring down debt-to-GDP ratios organically.

Yeah, absolutely, of course, sure. Except that plan no longer works. We don't get growth enough to bring down debt-to-GDP ratios. Fiscal expansion to spur growth is not effective.

Graph #1

The red line is an exponential curve -- a growth curve -- based on data for the years 1946 to 1974. The red line after 1974 shows how big the Federal debt would have been if the debt kept growing at that rate.

The blue line shows how big the Federal debt actually got. 2019 is the last year shown. The debt is even bigger now.

The plan was working in the 1950s and 60s and the early 70s.  But by the mid-70s we needed more and more and more debt. The plan became ineffective.

Graph #2

The red line on the second graph is also an exponential curve. It is based on Real GDP data for the years 1946 to 1974, same period as the first graph. The red line since 1975 shows how big Real GDP would have been if it kept growing at the rapid pace of 1946-1974. But it didn't keep up that pace. Economic growth fell behind.

The blue line shows how big Real GDP actually got. It falls behind the trend in the mid-70s. And it keeps falling farther and farther behind all the while the federal debt (shown on graph #1) is gaining on its 1946-1974 trend.

Now, Republicans tell you that the debt increase shown on graph #1 is the reason Real GDP keeps falling behind the trend. That's just bullshit. They don't know the reason. And their argument is that they could fix the problem but the other guys won't let them. That's pathetic.

And the other guys tell you that the debt increase shown on graph #1 was insufficient, and that we need the government to spend "whatever it takes" more to boost the economy. Bullshit. That plan no longer works. And they don't know the reason, either.

In fact, neither side is even looking for a reason. They're just going with what they think they know. A phrase comes to mind: When the facts change, I change my mind. I hear that phrase repeated too often. But nobody says it from the heart. They all want the "I" who changes his mind to be the other guy.

 
I'm not going to say I know, because I've not been to the future. I've not seen my plan enacted and successful. Instead of saying that, let me just say this:

Some of them think the problem is too much government debt. The rest of them think the problem is too little government debt. Between them, they consider only one thing: government debt.

The problem, however, is excessive private debt.

One more on Krippner

From the Harvard University Press, in their page on Krippner's 2012 book Capitalizing on Crisis:

In Capitalizing on Crisis, Greta Krippner traces the longer-term historical evolution that made the rise of finance possible, arguing that this development rested on a broader transformation of the U.S. economy than is suggested by the current preoccupation with financial speculation.

Krippner argues that state policies that created conditions conducive to financialization allowed the state to avoid a series of economic, social, and political dilemmas that confronted policymakers as postwar prosperity stalled beginning in the late 1960s and 1970s. In this regard, the financialization of the economy was not a deliberate outcome sought by policymakers, but rather an inadvertent result of the state’s attempts to solve other problems.

 

• "a broader transformation" -- Yes. So de-financialization will require more reversals of policy that anyone recognizes.
  
  
• "beginning in the late 1960s and 1970s" -- Sounds right to me. Except I think the slowing of prosperity in the late 1960s was itself a result of the expansion of finance in the 1950s and early '60s (and maybe since the Civil War, though I'm not ready to make that argument).
  
  
• "not a deliberate outcome sought by policymakers" -- I've not read the book, but I agree with this conclusion. These days everybody thinks of government as the bad guy. God, that's tiresome. What I think is that policy was  not effective (and had unintended consequences, per Krippner) because policymakers misunderstood (and continue to misunderstand) the problem. Vested interests interfere with understanding, and skew outcomes in unsustainable directions.
  

Krippner's Figure 6

Source: The financialization of the American economy by Greta R. Krippner

"Krippner mistakes a period of high interest rates for a reorientation of nonfinancial corporations to financial profits."

One more time, just quickly.

According to JW Mason, Krippner "mistakes a general rise in interest rates for a change in the activities of nonfinancial businesses."

So my question is: Does it look to you like the rise -- and the fall -- of interest rates explains the change in activities of nonfinancial business shown in blue on this graph?

Graph #1: Interest Received as a % of Interest Paid (NCB)
and the 10-year Treasury Rate

My answer: Hell no!