Sovereign debt bubble thread

[DGuller]

The point where actual debt change is zero is overly conservative, and only makes sense in a zero growth environment.

The problem with this thinking is you end up either reducing deficit spending in recessionary times, which exacerbates rather than counteracts the business cycle, or you end up running small deficits in good times and larger ones in bad times.  Repeat the second enough times and you run out of credit.

Over the long term, of course.  Obviously I didn't mean that every single year's budget should be set at a level that would bring about zero change in debt/GDP.  I was just making a point that the neutral point of zero deficit is in general way too high, and not mathematically justified.

[DGuller]

So?

So politics is generally Keynesian.

Only if you judge by faulty criteria.  EDIT:  Actually, despite using fauly criteria.  The point is generally correct, as debt grew even when adjusted by GDP, but the argument is invalid for the reason mentioned previously.

[Admiral Yi]

Over the long term, of course.  Obviously I didn't mean that every single year's budget should be set at a level that would bring about zero change in debt/GDP.  I was just making a point that the neutral point of zero deficit is in general way too high, and not mathematically justified.

It's not in general way too high and it is mathematically justified if you account for the fact that total credit is not an infinite resource.

[Tamas]

So?

So politics is generally Keynesian.

Only if you judge by faulty criteria.

Please elaborate, because so far your argument seems to be along the lines of "if it can be showcased as a good thing, it is Keynesian. If it's not, it's not".

[DGuller]

Over the long term, of course.  Obviously I didn't mean that every single year's budget should be set at a level that would bring about zero change in debt/GDP.  I was just making a point that the neutral point of zero deficit is in general way too high, and not mathematically justified.

It's not in general way too high and it is mathematically justified if you account for the fact that total credit is not an infinite resource.

By that logic, neither is GDP.  However, if we go there, then the whole economic theory crumbles.

[Tamas]

Over the long term, of course.  Obviously I didn't mean that every single year's budget should be set at a level that would bring about zero change in debt/GDP.  I was just making a point that the neutral point of zero deficit is in general way too high, and not mathematically justified.

It's not in general way too high and it is mathematically justified if you account for the fact that total credit is not an infinite resource.

By that logic, neither is GDP.  However, if we go there, then the whole economic theory crumbles.

well, yes.

[Admiral Yi]

By that logic, neither is GDP.  However, if we go there, then the whole economic theory crumbles.

What the fuck are you talking about?

[Sheilbh]

Talk to Joan, it's his bazooka.  After it's fired, everyone lives happily ever after.

I agree with Joan.  What I was saying was about the bailouts which I think you support.

So politics is generally Keynesian.

That seems a reductive and frankly dishonest interpretation of Keynesianism.  It's like judging whether a country's following monetarist policies based on their unemployment rate.

[DGuller]

By that logic, neither is GDP.  However, if we go there, then the whole economic theory crumbles.

What the fuck are you talking about?

Almost any argument that relies on "X can't grow indefinitely" without any further qualifiers is undercut by the fact that GDP is assumed to grow indefinitely.  And if GDP doesn't grow indefinitely, then economics becomes a zero-sum game, which changes the rules dramatically.

[DGuller]

That seems a reductive and frankly dishonest interpretation of Keynesianism.  It's like judging whether a country's following monetarist policies based on their unemployment rate.

Yeah, that too.  Just to clarify, when I said that Yi was making a true statement despite supporting it with a bad argument, I meant just the debt part.  Obviously the Keynesian part is idiotic, and uses the hysterical assumption about its result as a criteria for spotting it.

[alfred russel]

The more I think about it, the more I think that the concept of budget surplus/deficit is unhelpful for anything except a talking point.  Yes, it's simple, as long as you have the skill and experience to tell a negative number from a positive one, but it doesn't seem that useful. 

It seems like the real neutral point, or at least the approximation of one, where one side is good, and the other side is not good, is the point where debt/GDP change is zero.  The point where actual debt change is zero is overly conservative, and only makes sense in a zero growth environment.

On the one hand I agree with you on a mathematical basis (and have made the same point before).

But we also need to remember that so much of governmental accounting is off balance sheet. For example, I've read the argument that Spain is an example of a "victim" of this crisis because they didn't have much debt and had a surplus headed into it. While that is true, they also set up a system with progressive taxation that would lead to automatic tax reductions in a recession, while at the same time creating for itself obligations for social spending that would increase in a recession. It is almost Enronesque in the way revenues, expenses, and liabilities were all set up to go the wrong way if any turbulence came to the economy. Spain being able to balance a budget and sustain itself with "only" a 40% debt to GDP ratio (or whatever it was) during an epic post Franco economic boom described as a "miracle" maybe wasn't such an accomplishment after all.

I'm not trying to call out Spain--certainly the US went into the crisis in worse shape and the lack of their own currency doesn't help. But this is certainly a mild crisis in the US compared to the Great Depression and our balance sheet is in awful shape after just a few years.

[Sheilbh]

I'm not trying to call out Spain--certainly the US went into the crisis in worse shape and the lack of their own currency doesn't help. But this is certainly a mild crisis in the US compared to the Great Depression and our balance sheet is in awful shape after just a few years.

But in large part it's a milder crisis because of the automatic stabilisers in the economy.  Without that social spending this would have been a far worse and more painful recession.

As I've said before I think the thing with Spain (and Ireland) was that they had this massive amount of credit, in part because of the single currency.  Because they were in the Euro their currencies didn't really appreciate as much as they should have, there wasn't any central bank to raise rates based on their situation or to impose credit controls or anything like that.  It reminds me of reading about the early post-war when you've got the Breton Woods system.  From what I understand the only way they could have deflated that bubble was by hugely deflationary budgets.  That's a flaw in the Eurozone system that I don't think was known about and needs addressing, though I could be wrong.

I also think you're wrong to point out progressive taxation, I'm not sure about Spain but I know Ireland which is similar,  a big problem in the revenue side was that they lifted lots of people out of paying tax at all (about as many as in the US) and really over-depended on property taxes.  Also Spain's not got a great welfare state, from what I understand it's like other Mediterranean systems, so very strong on pensions but not so great for things like unemployment.  The costs are always high, but don't fluctuate as much with the economy.  The other side of this is that I think Mediterranean countries have far more family dependence and support than Northern Euro countries, so often a person on a pension will be helping support their unemployed kids or grandkids.

[MadImmortalMan]

So politics is generally Keynesian.

Sheilbh may be more correct about Britain than the US. I know that for us, it never went away, and while monetarist theory did wax for a while, it cannot really be said to have ever surpassed Keynes as the predominant theory in politics, IMO. Even Reagan and Bush were Keynesian in approach with their "tax cut stimulus" justification, which was essentially the same one used by Galbraith and JFK in the 60s.

[Admiral Yi]

I agree with Joan.  What I was saying was about the bailouts which I think you support.

Then I don't understand what you mean.

That seems a reductive and frankly dishonest interpretation of Keynesianism.  It's like judging whether a country's following monetarist policies based on their unemployment rate.

It's a little dishonest.  Keyenes himself can't be faulted for endemic deficit spending.  But by the same token modern Keynesians haven't raised many objections.

[Sheilbh]

But Keynesianism is about balancing a business cycle.  Thatcher, certainly, was about allowing busts and tolerating large unemployment to tame inflation, crush the unions and embrace the creative destruction of capitalism - unlike a Keynesian like, say, MacMillan.  I don't know the extent that goes for Reagan.  They may have used the language of tax cuts for stimulus but I always thought the greater part was because they believed in them ideologically, that people should be taxed less, and to starve the beast.