Government budgets versus family budgets

[devans0]

I see money as the original gift card. The company (USA) prints a bunch of gift cards. A certain number of these gifts will never be redeemed. Some will go overseas to power dollar based economies, some will be lost, etc.. so there is a profit to the gift card maker for each card that never gets redeemed.

If there are a zillion workers added to the job market each year, the company could print enough gift cards so that each worker has enough money available so that they can each get a fair income for their labor.

It is a great system until a bunch of curmudgeons clustered around a FIRE website start hiding money in jars buried in their yards. Now the supply of money diminishes, prices shoot up and curmudgeons cash in on deflated money. Everyone starts hoarding money. The gift card company says "This isn't working out." "How about if I put out enough gift card papers that it starts inflating slightly. Everyone gets a raise, there is enough money to go around, and those curmudgeons that hoard money will lose value each year giving them incentives to invest money".

Use it or lose it...

 

[NW-Bound]

I see money as the original gift card. The company (USA) prints a bunch of gift cards. A certain number of these gifts will never be redeemed. Some will go overseas to power dollar based economies, some will be lost, etc.. so there is a profit to the gift card maker for each card that never gets redeemed.

If there are a zillion workers added to the job market each year, the company could print enough gift cards so that each worker has enough money available so that they can each get a fair income for their labor.

It is a great system until a bunch of curmudgeons clustered around a FIRE website start hiding money in jars buried in their yards. Now the supply of money diminishes, prices shoot up and curmudgeons cash in on deflated money. Everyone starts hoarding money. The gift card company says "This isn't working out." "How about if I put out enough gift card papers that it starts inflating slightly. Everyone gets a raise, there is enough money to go around, and those curmudgeons that hoard money will lose value each year giving them incentives to invest money".

Use it or lose it...

I am using it. I am using it. To the tune of 4% a year. I am doing my share.

Seriously, your analogy applies even better to the Japanese. Their government debt is high, but I have read that they are OK because most of the public debt is held by Japanese themselves. And so far, their citizens are not redeeming their gift cards for goods and services. And it may be a good thing they don't, because if they would, there might not be enough workers to provide those goods and services that they demand.

So, lots of gift cards floating out there, and what will ever happen to them? Seems to me the ones who redeem their cards at least get something in return, compared to the hoarders who get nothing.

Should I cash more in, meaning spending more now and redeem my gift cards and not wait until I have to fight with the crowd when they wake up and flock to the store and empty its shelf (meaning high inflation)?

Economics is a funny field. I never really like it, nor can be sure what is right or wrong. What a dismal science!

 

[Hamlet]

Four years ago, I didn't think much of Krugman. I, like many people, thought that the Fed printing massive amounts of money would trigger lots of inflation. The thing is, it didn't.

Krugman is the one who has spent the last four years explaining why it didn't. He's gotten the last four years right, while most of the people arguing with him have been dead wrong.

That alone should make it worth listening to him.

I would start by recommending his blog. He has links on the right side of it that highlight some of the more important things he's discussed. In particular, his explanation of what a "liquidity trap" is is must reading.

Note that he is highly partisan. People from the other side of the political divide will find it unpleasant to read stuff by him. I recommend that they do so anyway, as he is explaining something that their models of the way the world works have gotten dead wrong for the last four years.

If you're looking for an explanation of why inflation is low and unemployment is high even though interest rates are zero and we're printing money like crazy, I've yet to hear a better explanation than Krugman's.

I'll be curious what you think of that book. I recently read another by Krugman (well, skimmed it after ~ 1/3 of the way through), and my impression of Krugman was:

I am an award winning economist.
I have certain 'beliefs'.
When I talk economics, I make connections to my 'beliefs', and infer cause/effect.
I expect you to accept my inference of cause/effect w/o any attempt at proof, because I am an award winning economist.
​

At least that was my take on it, curious what others may think.

-ERD50

 

[Shawn]

Four years ago, I didn't think much of Krugman. I, like many people, thought that the Fed printing massive amounts of money would trigger lots of inflation. The thing is, it didn't.

Krugman is the one who has spent the last four years explaining why it didn't. He's gotten the last four years right, while most of the people arguing with him have been dead wrong.

Four years is not very much time. If four years is enough time for Fed printing to cause high inflation, than four years should be enough time for Fed printing to create a robust economy. It's not like the economy is "humming along." So far, neither Krugman nor his opponents have been right or wrong.

Also, while a few people argue specifically for high inflation, most argue that excessive Fed printing can cause structural imbalances that create other undesired effects (e.g., Fed printing can ultimately cause deflation; some argue that loose Fed policy significantly contributed to the economic problems of 2008/2009).

Obviously, I cannot argue monetary policy with Krugman or even with many of those who disagree with him. They all know infinitely more about economic theory than I do. However, Krugman often writes about non-economic issues that he knows little about. He doesn't hesitate to use distorted or incorrect facts and/or to ignore fundamental issues about subjects that I know more about than him. Because of this, I do not consider him to be credible. I do not know when he is being academic or when he is simply driving his political agenda. On the other hand, I consider someone like Ben Bernanke to be credible. This doesn't specifically mean I agree with him, but he speaks relatively dispassionately about his domain (and only about his domain).

 

[Lsbcal]

Rogoff and Reinhart came out with an analysis of past systemic crisis: This Time Is Different: Eight Centuries of Financial Folly: Carmen M. Reinhart, Kenneth Rogoff: 9780691152646: Amazon.com: Books

I admit I haven't read their book. This recent article seems to say we are basically on a decent recovery path:
Reinhart, Rogoff New White Paper - Business Insider

The equity markets seem to confirm a decent recovery path. The unemployment picture is the black spot in my opinion. Could be a structural problem that takes some time to work out. Workers need to rethink their future paths and employers need more confidence plus refresh their growth ideas, etc., etc.

 

[Hamlet]

Krugman has never said that printing money was going to create a robust economy. IMO, he's been pretty solid all along in explaining why it wasn't going to be adequate.

Note that I've never heard of anyone claiming that too much money printing can cause deflation. The narrative that I've heard continually for the last four years is that zero interest rates and printing too much money will cause serious inflation and that the path to prosperity is government belt tightening. It's pretty clear to me that the countries that have tightened their belts the most have faired the worst.

The sources of this narrative have spent the last four years mocking Keynesian economics while being wrong in just about every prediction they have made, while Keynesian economics has done a pretty decent job of predicting the last four years. At some point you have to start considering the possibility that Keynes was onto something.

I agree that Krugman is a very biased source. Frankly, his main value to me has been explaining the rather counter-intuitive nature of a liquidity trap.

Four years is not very much time. If four years is enough time for Fed printing to cause high inflation, than four years should be enough time for Fed printing to create a robust economy. It's not like the economy is "humming along." So far, neither Krugman nor his opponents have been right or wrong.

Also, while a few people argue specifically for high inflation, most argue that excessive Fed printing can cause structural imbalances that create other undesired effects (e.g., Fed printing can ultimately cause deflation; some argue that loose Fed policy significantly contributed to the economic problems of 2008/2009).

Obviously, I cannot argue monetary policy with Krugman or even with many of those who disagree with him. They all know infinitely more about economic theory than I do. However, Krugman often writes about non-economic issues that he knows little about. He doesn't hesitate to use distorted or incorrect facts and/or to ignore fundamental issues about subjects that I know more about than him. Because of this, I do not consider him to be credible. I do not know when he is being academic or when he is simply driving his political agenda. On the other hand, I consider someone like Ben Bernanke to be credible. This doesn't specifically mean I agree with him, but he speaks relatively dispassionately about his domain (and only about his domain).

 

[NW-Bound]

I have never read any of Krugman's writings, but I tend to agree with what Buffett said a while back about government's pumping money into the economy.

He said that when trying to rescue a victim stuck in quick sand, you would try to yank him out with a rope tied to a pickup, without worrying too much about dislocating his shoulder. That, we could deal with later once the guy's survival is ensured.

But then, if we agree that extra money is helpful, is it spent in a way that can be nullified later? We have to be careful about entitlement programs that once enacted would be very difficult to reverse.

For example, only recently when I stopped working and had my income dropping into the 15% bracket that I discovered all the goodies for people in situation like mine now, such as tax-free cap gains and dividends. Why is it fair for someone who makes 8 hrs/day making $70K to pay more taxes than someone loafing on $70K of passive income? The law benefits me, but is it good for the society at large, for my children's generation?

 

[ejman]

snip-

For example, only recently when I stopped working and had my income dropping into the 15% bracket that I discovered all the goodies for people in situation like mine now, such as tax-free cap gains and dividends. Why is it fair for someone who makes 8 hrs/day making $70K to pay more taxes than someone loafing on $70K of passive income? The law benefits me, but is it good for the society at large, for my children's generation?

Careful now. The usual story behind the low tax rates is that we rentiers are the engine of civilization and job creation. Certainly my wife would set you straight on my involvement with the first part and frankly I don't know that I'm doing much for the second part. But the story has a nice ring to it.

 

[NW-Bound]

Careful now...

I am careful. I am careful.

Careful enough to test drive my tax program for 2012 to see how much cap gains I could harvest without going over the 0% tax bracket. They do not make it easy with all those personal exemptions and stuff, you know?

However, I forgot one thing. As I should not be paying a lot of taxes this year, I should have forgotten about deferred savings, and funded our Roth instead. I only thought about it after the New Year Day. Darn, I missed out!

 

[ejman]

I am careful. I am careful.

Careful enough to test drive my tax program for 2012 to see how much cap gains I could harvest without going over the 0% tax bracket. They do not make it easy with all those personal exemptions and stuff, you know?

However, I forgot one thing. As I should not be paying a lot of taxes this year, I should have forgotten about deferred savings, and funded our Roth instead. I only thought about it after the New Year Day. Darn, I missed out!

I hear your pain. Frankly the only (stupid I know) reason that I haven't followed the Roth bandwagon is that knowing what a cheap bastard I am, whatever I put into a ROTH WOULD NEVER UNDER ANY CIRCUMSTANCES EVER EVER COME OUT. I've been retired for 10 years now and the thought of touching my IRA's never even crosses my mind (I'm 62 now). So I figure come age 70 1/2 I'm gonna have to start spending it whether I like it or not... And that's a good thing.

 

[donheff]

Sorry to backtrack to the platinum coin discussion but I missed it earlier. This is not a tongue in cheek discussion, it is a real possibility. Certainly a legal loophole expanding the law to do something never originally envisioned - sort of like off label use of medicine. But a loophole to get around what? A Congressional choice to possibly wreak the world economy by defaulting on our national debt? Keep in mind, the coin itself is held by the Fed which simply credits the General Account allowing us to continue to spend. As long as Treasury matched the ensuing spending with increased debt, the existence of the coin would have no more impact on inflation than would an increase in the ceiling. And everyone agrees that raising the debt ceiling is ultimately something we must do to live up to the promises we have already made. I vote for the coin. In fact, mint a much, much bigger coin - enough to assure the world that this stupid debt ceiling debate can't be used hold the economy hostage again a few months or years down the road.

There is a different concept floating around that might be another alternative. Issue consuls - debt instrument without a face value, sort of an annuity like promise to pay a certain amount for x years or in perpetuity in return for lending us $Y now. The debt ceiling is apparently based not on the volume of payments but on the total face value of the instruments used. Consuls would be invisible to the Ceiling. None of the discussion I have read on consuls answer whether they are something Treasury has the authority to issue without a law being passed. Maybe some of the savvy readers on this forum can answer that.

The third option, to simply declare the ceiling unconstitutional based on the 14th amendment's demand that we honor our debt, would be a very questionable approach if either platinum coins or consuls are real possibilities. After all, the courts don't look fondly on repudiating laws you can implement through constitutional means.

 

[Lazarus]

And everyone agrees that raising the debt ceiling is ultimately something we must do to live up to the promises we have already made.

I do not agree. I am sure there are a few others.

 

[REWahoo]

Rather than a $1T coin, or consuls or declarations of unconstitutionality, how about something really radical: Congress actually reaching an agreement (shock!) on reasonable, measured spending cuts linked to corresponding adjustments in the debt ceiling.

Yes, completely unrealistic and totally pie-in-the-sky, but a guy can dream can't he?

 

[donheff]

Rather than a $1T coin, or consuls or declarations of unconstitutionality, how about something really radical: Congress actually reaching an agreement (shock!) on reasonable, measured spending cuts linked to corresponding adjustments in the debt ceiling.

Duh. Of course that is preferable. I doubt there is a member of this forum who does not agree. But what should we ask our Executive to do if the Hill fails to reach agreement? At some point the question becomes rather black and white. We either default on the debt and see what happens to the world economy or we take some radical action to avoid that.

 

[MichaelB]

Yes, completely unrealistic and totally pie-in-the-sky, but a guy can dream can't he?

I think you have a better chance of going on a date with Scarlett Johansson.

 

[Lazarus]

I think accounting tricks like the coin and clever end runs around the Constitution do not befit the United States. There is a division of power between the branches of the Government for a good reason.

 

[Hamlet]

I think the existence of the debt ceiling at all is idiotic. Remember, Congress is the branch of government that makes spending decisions. So if they don't raise the debt ceiling, they are essentially sending the Executive branch two conflicting sets of instructions.

1. Spend all of this money that we told you to spend
2. Don't borrow money to do it.

If they don't raise the debt ceiling, they force the Executive branch into breaking one of those instructions, since they are in contradiction to each other.

It's not clear to me at all that the debt ceiling is constitutional, given the 14th amendment, but I suspect that we are going to have some judicial rulings on this before we are through.

My question is-- If we hit the debt ceiling and have to cut spending down to what is coming into the Treasury, who gets to decide how that spending is cut? I'm assuming that it is the Executive branch, since Congress will not be able to pass anything.

Can the Executive branch just decide what doesn't get funded? How granular can he get on that? California SS checks go out but Texas's don't?

 

[MichaelB]

My question is-- If we hit the debt ceiling and have to cut spending down to what is coming into the Treasury, who gets to decide how that spending is cut? I'm assuming that it is the Executive branch, since Congress will not be able to pass anything.

Can the Executive branch just decide what doesn't get funded? How granular can he get on that? California SS checks go out but Texas's don't?

Spending is not affected, paying bills is. The US Treasury dept is responsible for paying, and they would determine which bills to pay and which to defer. It can probably get as granular as they want. It has never happened, so how they would act, and react, is speculative.

 

[samclem]

I'm ready for a balanced budget amendment to the Constitution. I didn't favor it in the past, but the present foolishness (Trillion dollar coin, no Senate budget since 2009, the accounting tricks both sides engage in, legislating spending with no provisions to pay for it, etc) have made it clear that the situation is out of control, apparently there's a systemic flaw in the way we, as a nation, decide to run our finances. We need a systemic solution. Sure there would be more accounting tricks, but then they could be challenged all the way to the Supreme Court. One more defense against irresponsibility and a protection of the rights (to property) of American Citizens yet unborn. Emergency spending? Write an emergency tax. The present flexibility is killing us.

 

[Lazarus]

I'm ready for a balanced budget amendment to the Constitution. I didn't favor it in the past, but the present foolishness (Trillion dollar coin, no Senate budget since 2009, the accounting tricks both sides engage in, legislating spending with no provisions to pay for it, etc) have made it clear that the situation is out of control. Sure there would be more accounting trick, but then they could be challenged all the way to the Supreme Court. Emergency spending? Write an emergency tax. The present flexibility is killing us.

+1

 

[NW-Bound]

I think the existence of the debt ceiling at all is idiotic. Remember, Congress is the branch of government that makes spending decisions. So if they don't raise the debt ceiling, they are essentially sending the Executive branch two conflicting sets of instructions.

1. Spend all of this money that we told you to spend
2. Don't borrow money to do it.

If they don't raise the debt ceiling, they force the Executive branch into breaking one of those instructions, since they are in contradiction to each other.

The problem is that spending is not easily cut; entitlement expenses still go on, and even discretionary spending cannot be easily cut without a lot of disruption to programs, contracts, and people whose livelihood depend on it. On the other hand the income due to taxes drops dramatically during a recession.

So, the question is "can a gummint at any level, federal or local, build surplus in good years to tide them over in bad years"?

 

[NW-Bound]

Looking again at the title of this thread, "Government budgets versus family budgets", and thinking about a concurrent thread about spousal dispute over spending issues, I can see some similarities.

When the " income > expenses " criteria is met, the spouses may not quite agree with how the other spends but still keep their mouth shut, but when " income < expenses " due to one taking ER, oh la la, much unhappiness and grudges in the past boil to the surface.

 

[Hamlet]

With a balanced budget required, normal recessions would almost surely become depressions.

Imagine having a recession, and suddenly having to cut $500 billion from the budget. That's going to turn a run-of-the-mill downturn into a disaster.

The only thing worse than running budget deficits in a recession is not running those deficits.

Trust me, split government doesn't get any better because you "can't" borrow money. Here in Minnesota, we had to shut down the government for a month or so, and only got an agreement when both sides agreed to borrowing against future tax revenues. I'm not sure how that was legal, given our balanced budget requirement, but we did it.

I'm ready for a balanced budget amendment to the Constitution. I didn't favor it in the past, but the present foolishness (Trillion dollar coin, no Senate budget since 2009, the accounting tricks both sides engage in, legislating spending with no provisions to pay for it, etc) have made it clear that the situation is out of control. Sure there would be more accounting trick, but then they could be challenged all the way to the Supreme Court. Emergency spending? Write an emergency tax. The present flexibility is killing us.

 

[Texas Proud]

Sorry to backtrack to the platinum coin discussion but I missed it earlier. This is not a tongue in cheek discussion, it is a real possibility. Certainly a legal loophole expanding the law to do something never originally envisioned - sort of like off label use of medicine. But a loophole to get around what? A Congressional choice to possibly wreak the world economy by defaulting on our national debt? Keep in mind, the coin itself is held by the Fed which simply credits the General Account allowing us to continue to spend. As long as Treasury matched the ensuing spending with increased debt, the existence of the coin would have no more impact on inflation than would an increase in the ceiling. And everyone agrees that raising the debt ceiling is ultimately something we must do to live up to the promises we have already made. I vote for the coin. In fact, mint a much, much bigger coin - enough to assure the world that this stupid debt ceiling debate can't be used hold the economy hostage again a few months or years down the road.

There is a different concept floating around that might be another alternative. Issue consuls - debt instrument without a face value, sort of an annuity like promise to pay a certain amount for x years or in perpetuity in return for lending us $Y now. The debt ceiling is apparently based not on the volume of payments but on the total face value of the instruments used. Consuls would be invisible to the Ceiling. None of the discussion I have read on consuls answer whether they are something Treasury has the authority to issue without a law being passed. Maybe some of the savvy readers on this forum can answer that.

The third option, to simply declare the ceiling unconstitutional based on the 14th amendment's demand that we honor our debt, would be a very questionable approach if either platinum coins or consuls are real possibilities. After all, the courts don't look fondly on repudiating laws you can implement through constitutional means.

First, all this talk about 'default' is just wrong.... as many people have said, the gvmt takes in a LOT of money... plenty of money to pay interest on the debt and any maturing obligations.... and they can even borrow any principal that is due because we can go up to the debt ceiling...


The real question is spending. I disagree with MichaelB that spending will continue as is... spending money that you can not pay is debt... from the interviews that I have seen, both sides have basically said spending will be cut...

Who get's to decide Again, according to the interviews that I have seen, it is the Executive branch.... so they can say that SS checks will not go out, or that we will not pay our soldiers..... or whatever else they decide to pay...

 

[Lazarus]

This is what happens when Government spending is too large a portion of the economy. If it were smaller it would have a much smaller effect when spending was cut.

They should not be spending more than comes in period. I don't think there is any effective way for a Government to store wealth for the future.

Borrowing in an emergency? Maybe ok but who decides what an emergency is?