Tuesday, October 1, 2013

Red over red: vessel not under command

So.  Much of the federal government is now closed, and the rest is on borrowed time.  A lot of people have been furloughed.  Again.  Others are working but may not get a paycheck on time.

Has it not occurred to the Tea Party caucus in the House that if the tactics they use today are successful those same or similar tactics will be used against them in some future conflict when they are in the majority?  Do you think that's impossible?  Remember that only a couple of decades back filibusters were extremely rare.  Now they are standard, and nearly every bill in the Senate needs 60 votes to pass.  What will the future look like when every budget bill, and every continuing resolution, and every debt ceiling increase, is seen as an opportunity for some disgruntled minority to overturn laws that a majority of Congress has already passed?

Oh...wait...that's what it's like now.

Sunday, September 29, 2013

What Republicans should do…

Of course I have no standing whatever to advise anyone about how they should conduct their politics, or how they should pursue their political goals.  But the current course on which Ted Cruz and his acolytes---or maybe his victims---in the house are set seems to me, and to almost everyone, as dangerous to the country, to the economy of course, and drastically dangerous to themselves.  They disagree.  We’ll see, I guess.

But I really don’t want to write about the House Republicans or Obamacare; they will do what they will do, and no amount of warning will slow them down.  The Washington Post this morning quoted Michelle Bachmann saying that this threat to the Government of the United States (the budget issue), and later in the month to the economy of the world (the debt ceiling issue), is exactly what the Tea Party conservatives wanted to do, and that they have arrived exactly where they wanted to be. 

Ok.  Maybe.  And there is nothing I can do or say that will change the next month.  But in a longer sense, beyond the present turmoil, there is a nit I need to pick. 

I live in a blue state, and in a very blue district in that state.  We aren’t frozen in a fixed party devotion; our representative in Congress for many years---8 terms---was a Republican named Connie Morella, but she was a moderate, and in fact a charming moderate.   People here voted for her at the same time that they were voting for Democrats for every Senate seat, for Governor, for President.   She was a brand of Republican that is currently extinct.  That is not just my opinion.  That is Connie Morella’s opinion. 

So of course, at the last Labor Day parade through Kensington, the town where I live, dozens of Democratic politicians who hold office or want to hold office drove by, walked by, waved themselves by, threw candy to the children, and generally behaved like politicians in a safe town.  And there was also one Republican running for office who carried a sign that read, if I’m remembering it right:

“Fiscal Responsibility, Low Taxes”. 

Yes.  That seems to be the Republican stand on the issues.  But in this blue district in this cobalt blue state, where the majority of the people vote for Democrats most of the time, I doubt if I could find a single person who disagrees with that slogan.  I wanted to do a quick poll, asking each person I met whether they favored fiscal irresponsibility, or taxes that are high just for the sake of having high taxes. 

So my nit is this: the slogan above has no bearing on the distinction between Republican stands on issues and Democratic stands on issues.  No matter which side you ask, they will tell you that they are being as fiscally responsible as it is possible to be while still meeting the proper responsibilities of government.  And they will tell you that they are trying to keep taxes as low as they can keep them while still being fiscally responsible. 

Republicans need a much more substantive slogan if they want to get votes from people with even moderate views: they need a slogan that distinguishes them from Democrats.  They have to tell us what they mean by “fiscal responsibility”, and why the policies that Democrats are proposing don’t meet that test.   And they have to tell us how they plan to lower taxes and still maintain enough revenue to run the government, and meet all of the government’s responsibilities, without huge deficits.   

But much more is riding on this than the votes of moderates.  Because right now we are butting heads over issues on which I think we may all substantially, or at least partially, agree in principle.  For example, you don’t want people taking welfare, or food stamps, or unemployment insurance, from the government---meaning from those of us who still have jobs---if they are healthy, able, and simply choose not to work.  Guess what?  Neither do I.  If people are able to contribute and have that opportunity, they should contribute.  On that the difference between us is our belief about the facts, not our underlying principle:  my facts are that the great majority of people on foodstamps come from households in which at least one person is working (for a very low wage), and most recipients are off the program within a year.  You may have different facts you want to bring to bear: but if we can recognize an underlying agreement about framework, and make this a discussion about the facts, we may get somewhere. 

So, House Republicans: I get that this confrontation and its consequences are the product of the elections that took you into office, and that the wreckage of a government shutdown and a default on debt is something that right now it’s hard for you to avoid.  But let’s start talking about real ideas, real facts, and real underlying principles, starting right now.  Default is truly a catastrophic result: the dollar is the currency on which the world depends, and Treasury notes are the safe refuge to which international money turns when the world is uncertain.  If those two lose the world’s trust, the 2007-2008 financial panic will seem mild by comparison.

So let’s talk, not in silly slogans and fake distinctions, but in real fact and real principle.  Maybe, if we’re all still standing after we clear the rubble from this fall’s unavoidable confrontation, we can maintain a discussion that avoids the next nation-threatening, global-economy-threatening showdown, or the one after that, or after that.  We can’t keep doing this, we can’t keep governing by showdowns at high noon, even if we always find last-minute escapes, without courting true disaster.  Eventually this drama will wear the world’s credulity too thin to bear the weight of the vast structure of international finance.   

And when that snaps we come to a very painful place.  

Sunday, September 22, 2013

What, again? Debt ceiling again?? Really?? Come on. I don't have the patience to stress out about this right now.

For a thousand reasons, it’s been far too long since I sat down here to write.  It’s true that my day job has interfered, which will happen from time to time---too many deadlines and not enough time to meet them---and it’s also true that a variety of health issues, mine and others, have distracted me.  But the big reason is just that the last time I wrote I had huge math formatting problems, and I got hung up trying to resolve them, and the truth is that when you are in the habit of writing you write, and when you aren’t you don’t. 

Example random health problem:  a number of weeks ago, while cleaning out a garage, I dropped myself on my head from a significant height.  I was standing on a table putting something on a high shelf when the table more or less disintegrated under me.  I know that because I found it scattered in pieces all around me; I don’t remember the fall at all.

This event had a number of immediate effects.  It caused a substantial delay in the task I was doing, for one thing.   And it provided a good opportunity to exercise an opulence of verbal expression that is usually beyond my means.  And it enabled me to examine the inside of the Sibley Hospital emergency room, and to experience a CAT scan, and to enjoy the benefit of numerous stitches in my scalp.  For a while I thought it had caused a loss of about 30 IQ points too, but I’m pretty sure those were all still in there, they were just temporarily resistant to vigorous use.  (Even so I hadn’t disabled enough IQ points to believe in Ricardian equivalence.  I know, I checked.  I thought about it in the emergency room just to be sure, and it still seemed the height of absurdity even after a whack on the head.  Although IQ doesn’t really seem to have anything to do with it; some very smart people do believe in it, God knows how or why.)

But I think I did discover what happened to the IQ points in question, about two days later.  They were jarred loose and tossed randomly about, and soon started skittering around inside my head like marbles in a sailboat cockpit, say, in the cockpit of Sea Frog exiting the mouth of the Choptank into the bay on a long, bright, windy, wavy day.  Every time I tilted my head they all rolled over to the low side, whacking into everything in the way and making me dizzy.  It was disturbing.   And it kept me from writing for a while.

So I want to get back to this blog to begin to recreate the habit, but current events in economics seem a little heavy for the moment.  There’s plenty to say.  The House Republicans are once again threatening to shut down the government and render the Treasury insolvent by refusing to raise the debt ceiling, which would mean that the Treasury would no longer be able to pay for the government functions that Congress has already legislated.  Sequester is still in effect, a circumstance that caused most government employees to be furloughed for a number of days earlier this summer.  At the start of the furloughs I said (here) that federal employees seemed to be taking it all with good grace, but wondered what would happen if it continued “next year”.  Well, October is the start of a new federal budget year.  I think the federal workforce is getting more than a little tired of job chaos, of pay freezes, furloughs, and constant budget brinksmanship that puts their bill payments at risk.  Still, we’ll put that topic off for another day.

Instead of delving into economics, I’ll talk about making boats.  Or daydream about it.  It’s a topic, for once, that many of my friends can comment on, some with real knowledge far beyond my own.   With any luck they can talk me out of trying it.  But I have a reason for thinking about it.  I have a few odd ideas about sailboat gadgets that I’d like to try out, and some of them would require serious surgery on any existing hull, so it seems more efficient (and possibly cheaper) to just build my own.   I’ll stick to something I can do in my backyard, some easy variety of stitch and glue.  Or maybe staple and glue.  Nothing fancy.

I need something that will float and sail, but for economy (there’s that damned word again!!) it can’t be too much bigger than a dinghy---but to make it all worthwhile I want something more than just a simple dinghy.  I’m actually thinking of building a kind of adventure.  I want a sailing dinghy that I can put in the water at the Washington Sailing Marina and sail to Galesville or Annapolis. It would be a two-day trip down the Potomac, and then it’s nearly 70 miles from the mouth of the Potomac up the bay to Annapolis, which, in a boat that size, will probably be another two to three days.  That means I’ll need a dinghy that I can sleep in comfortably, probably using a tent over the boom for shelter.  I also need to have a small stove of some kind to cook with.  And a head.  In other words, I’ll need to build a cruising dinghy, if that’s not too weird a concept. 

I’ll get back to economics in another post or two.  Maybe I actually will talk about Ricardian equivalence again.  The last time I posted about it Nick Rowe chastised me in the comments for claiming that the concept depended on full employment, so I might try to explain why I think that’s true.  Why Ricardian equivalence, which seems to me to be a minor and fairly silly idea in the vast universe of economic models?  Because it seems to me to be a perfect embodiment of what has gone wrong and sour in macroeconomics since I went through the graduate program at Georgetown.  It’s hard for me to believe that anyone can take it seriously for ten minutes at a time.  But people do.  People write long, difficult papers on it dense with mathematics.  I think there’s an affliction that I guess I’ll call TANSTAAFL-blindness that produces models like that.  Maybe.  The truth is that I don’t really understand how those who build and believe models like that think.  But maybe TANSTAAFL-blindness is part of it.

Maybe I’ll talk in another post about what I mean by that phrase…but not today. 

Monday, July 8, 2013


Today is the first day of the first week of furloughs for Defense Department employees. These federal employees will have to accept a 20% pay cut for the rest of this fiscal year (until October). This post is a quick personal sense of the morale of our federal workforce derived from what I’ve heard from those DoD employees I know: they are a little discouraged, but fairly resigned to it so far. I’ve heard some minor grumbling, some gallows humor, people are sighing and shaking their heads about the butt-headed head-butting dysfunction of Congress. But I’ve heard very little that I would call deeply felt grievance. Everyone understands that the wounds of the recession are not yet healed, and people everywhere are hurting.

But under all the mild grumpiness is recognition of a trend, and perhaps of a message from the country. The people I talk to here have started to internalize the idea that great parts of the country they work for doesn’t appreciate their efforts. They all know that the sequester doesn’t stop at the end of this fiscal year, and with this year’s furloughs coming on top of three years of pay freezes they are running low on patience. If furloughs continue next year, or if they are replaced with widespread reductions in force, I think that those who are eligible to retire will strongly consider it, and those who are presented with an opportunity to find employment outside the federal government will find little reason to stay where they are.

That’s particularly true of those employees the country should most want to keep, those with professional degrees or advanced degrees. Even the CBO study that is widely cited by the most vocal critics of federal workers shows that for those with a professional degrees and doctorates direct pay for those who work for the federal government is far below their counterparts in the private sector, and the benefits the study cites for federal workers don’t come close to making up the difference. Here’s the CBO study’s front-page graph:

The blue stacks are federal workers, the tan/mocha stacks are private sector workers. The lighter sections at the top of the bars are CBO’s estimates of the present value of future benefits (such as retirement benefits or continued enrollment in health insurance plans). In other words, the lighter sections are a good deal more speculative than the darker sections. In the CBO’s words, “measuring benefits was … uncertain.”

There’s a lot I don’t like about the study, but this graph shows pretty much what I’ve heard for decades: at the lower levels, employment with the federal government has better pay and benefits than the private sector, but above that the pay is higher in the private sector, and benefits are uncertain. And for those workers we most want, those that are hardest to get and keep, those shown in the last pair of columns in this graph, working for the private sector is far more lucrative even when all benefits are included.

So with pay freezes, furloughs, and a sense of national disdain for their efforts, why should those people---the people we most want and most need to make the government function---why should these people continue to work for the federal government if they are presented with an alternative? I think most of them will wearily endure this furlough episode. Most of them. But next year, if this happens again, it may be one furlough, one pay freeze, one RIF or retirement push too many for a lot of them.

Friday, May 10, 2013

Surreal fantasies of self-damping debt

I do strange things in my sleep.  I must.  I mean, I’m not sure what dreams really are, but I have the feeling that they should be filled with emotional jabber, with things the mind enjoys or fears or would like to do over but with superpowers.  Dreams should be sexy or scary or strange and slightly surreal.  I woke up this morning with a brain filled with algebra and graphs about how different people see the relationship between deficit and debt.  Well, ok, that could be scary.  But it’s definitely not sexy, and doesn’t involve any superpowers.  I really need some dream upgrades.  I’ll have to look into that.

I’m usually a little reluctant to post a lot of algebra in this blog.  But last summer, while sailing up the Potomac approaching the Wilson Bridge on our way back to the Washington Sailing Marina, my friend Jeff told me he thought that would be ok.  He thought algebra would be acceptable.  And this bit of algebra ends up with a picture that I think is interesting---if you really trust me, you can skip past the algebra and get to the pictures, but I’m leaving the algebra to show how I got there.  So, here it is.  

Everyone is interested in debt as a share of GDP, and how that changes over time.  The algebra of that is something like this---start with plain nominal debt, not as a share of anything:

I’m using---or at least approaching---the symbols used in the IMF’s chapter on debt overhang last fall (see page 104), but I end up with a slightly different version because I’m looking forward and they were looking back.  That means I’m asking what this year’s deficit will do to next year’s debt, rather than asking what last year’s deficit did to this year’s debt.   I mention that chapter because it keeps coming back to pester me.  The authors found only 26 episodes since 1875 in the entire IMF membership where debt to GDP rose above 100%, and none where it rose above 300%.  Only one, Israel in 1977,  was above 250%.  Why is that?  Why were there no instances of debts of, say, 500%, or 1000%?  Is 300% some kind of limit, beyond which nations simply dissolve or crash something?  Maybe.  But few of the countries in the study actually did crash.  A few had high inflation rates in the 15 years after they reached a debt of 100%, but some also had deflation.  It’s hard to know what those extreme episodes mean, though, because they were usually during or just after major wars.  

In any case, the B in the equation above is debt, i is the rate of interest paid on the debt, and the D is deficit.  The subscripts denote time periods---probably years.  (I know that the interest rate and the growth rate also change over time, and probably the time subscript should be applied to them also, but for this part of the algebra I only need the subscripts I used so why clutter everything up?  This is informal algebra, comfortable algebra, algebra en famille.)  The equation says that next year’s debt will be this year’s debt plus interest, plus whatever the primary (non-interest) deficit adds to or subtracts from the debt.  

I’m using capital letters so far, instead of the lower case used in the IMF chapter, because in this version the symbols are just talking about the raw numbers, nominal debt for example, rather than debt as a share of GDP.  But we want debt as a share of GDP.  So we need another equation:

Where Y, of course, is GDP.   I want to look just at the numbers, at nominal Y, so  is nominal growth rate.  To get to something like the IMF version, we would add that 

Where is inflation and g is real growth rate.  But I don’t need that decomposition to get where I’m going, so I’ll stick with the nominal rate.  

So the ratio of debt to GDP next year will be---just substituting in from the equations above---


Where the lower case letters are ratios of GDP, and the upper case letters are nominal.  

What we want to know, really, is whether debt as a share of GDP is rising or falling.  That is, algebraically stated, we want to know whether       is positive (debt/GDP is growing) or negative (falling).  I’ll call that difference     just because I like using Greek letters.  It looks sophisticated.

Since         ,  the sign in that last version depends completely on the sign of the phrase inside the last square brackets.  Whether the debt as a share of GDP is growing, stable, or shrinking is determined by whether 


(I’m using the braces there to indicate options---growing, stable or shrinking if greater than, equal to or less than.)

But the strange thing, the thing that crossed my eyes a little as I woke up this morning, was stating this condition a different way.  Let’s just look at the case where debt as a share of GDP is shrinking, so I don’t have to write that monster in braces all the time.  So shrinking debt/GDP implies that


Or, assuming that debt is positive,

And this is where the weirdness comes in.  If this inequality holds, b, the debt to GDP ratio, is declining.  In this form it looks as though the bigger b is, the more likely it is to decline.  I mean for any given   , the ratio    gets smaller in absolute value as  gets bigger.  That would make the inequality above easier to achieve---right?  So at high levels of debt to GDP, decreasing that ratio would become easier, according to this.  But can that be true?  Is debt somehow self-damping?  That’s absolutely not what we keep hearing in the political world.  We keep hearing that debt will become so huge that it will be “unsustainable”, that it will accelerate out of control, that compounded interest will make it explode.  But if nominal growth and interest rate were fixed, and we limited the primary-deficit-to-GDP ratio d at some fixed positive value, then the weird result above would imply that it is true, and that instead of running away, debt as a share of GDP would have a tendency to slow down and reverse itself, or at least slow to a stop, as it gets bigger.  And if it were true, maybe that would explain why nations never have debt to GDP ratios in the thousands of percent range.  
That would be a great relief, wouldn’t it?  If debt were self-slowing, we could all stop worrying about it.

But of course it isn’t quite that easy.  growth rate and interest rate are not fixed.  In fact, they are a function of the deficit d, among many other things.   Figuring out what the function  might look like is complicated.  I didn’t wake up with the algebra for that in my head and I don’t want to spend a lot of time trying to get at it.  If anyone knows what that should look like, let me know.  At a wild dream-state guess though---and for the moment it isn’t any more than that---we could postulate that nominal growth and interest as a function of d have shapes that looks something like this: 
Here’s the dreamy excuse I dreamed up for these dreamy shapes, kind of nodding to a lot of different people’s beliefs about the impact that deficits might have.

The nominal growth to the left of the vertical dashed line is mostly real growth, and to the right it’s mostly inflation.  Interest rates are low until we get out to the right, and then they rise because of inflation, and because the high deficits are soaking up a lot of the available money.  While interest rates are near zero the growth curve is rising, because multipliers of the deficit are relatively large there, so higher deficits result in higher growth; near the inflection point it’s flatter because multipliers are smaller (because the central bank counteracts any fiscal stimulus to avoid inflation).  Out to the right it’s big again because the deficits are so big the Fed has lost control, and inflation is pushing nominal growth.  
I’m not wedded to these shapes, they’re just the shapes I woke up seeing.  They might be wrong.   Still, it's not crazy to say that fiscal multipliers will be bigger when the economy is weak and we are far from full employment and smaller when we are close to full employment, either because it's hard to push the economy very far past that or because the central bank will push in the other direction to avoid inflation.  And it's not crazy to say that interest rates will be low when the economy is weak, and rise as the economy gets stronger.  So the critical part of the shape of these curves is at least not crazy: the slope of the difference between growth and interest rates will decline, or at least not rise, as deficits as a share of GDP increase.

If the shapes in the first graph are right then that difference, is the gap between the blue and red lines in the first picture, looks something like this

I haven’t put a vertical axis on these graphs because it’s not clear where it would go.  It depends on what the economy is doing.  If we are in a deep recession, the vertical axis will be farther to the left, farther toward the flat low interest rate area; if we are in a boom it will be farther to the right.  But the interesting thing happens when we put that axis in---let’s suppose we are in a weak economy, so the axis is farther to the left.  Then we can complete the graph that was giving me a headache when I woke up like this:

The solid green line is the ratio of deficit to debt when the debt is just a bit over 100% of GDP. (It would be a 45 degree line if b, which is debt/GDP, were exactly 1.)  If the deficit/GDP ratio is less than B and greater than A in this picture, then debt as a fraction of GDP is declining.  Above B, of course, the size of the deficit just overwhelms any increase in GDP that may result, and we have a pretty icky outcome: growing debt and rising inflation.  Below A, though, the economy is so weak that we are pushed into a slowly growing or even declining GDP, and the ratio begins to rise again: if the deficit is too low in this weak-economy situation, then we also have an icky outcome, with weak or negative real growth and also rising debt as a fraction of GDP.  That would not be true in a stronger economy; as the economy improves, the axis shifts to the right (and so does the green line, since it has to go through the origin).  

But the curious thing is the dotted green line.  This is a d/b line with higher b.  And notice that the gap between A’ and B’ is bigger than the gap between A and B---in this vision, a wider range of deficits will reduce the debt to GDP ratio if that ratio is already high.

So maybe there is something in the idea that high debts are---well, not self-capping, but at least they push against an increasing resistance as they get larger.
Does any of this make any sense at all?  Or is this all just as surreal as dreams are supposed to be?  If it makes sense, then maybe debt as a fraction of GDP does naturally slow down as we get up past a couple hundred percent---and there are several examples, such as Japan right now, where debts in that range have not created catastrophe.  I'm not suggesting that debt really doesn't matter, or that we should ignore it; it does make a lot of things harder to do, and it is a nuisance.  But maybe we also shouldn't panic about the specter of a runaway, exploding debt that seems, in this dream anyway, to be unlikely.

Of course it's just a simple model that came out of dream.  It may disappear after enough coffee.   And even if this does turn out to fantastic enough, surreal enough to be a proper dream, I still prefer dreams where I get to have superpowers.

Oh, and if you didn’t like the algebra, we can blame Jeff.