Yes, but. The Federal government has many monetary tools available to it that Detroit doesn't. It's not clear to me that making the analogy between the way the Federal government and a non-soverign entity like Detroit work does anything but confuse the issues.
I think the analogy is useful, because the financial problem has some of same roots. That the federal government has more solutions available to it doesn't excuse following the same path. It's useful to to look at Detroit to try and avoid the problem, it's not useful to look at Detroit for solutions once it hits critical mass.
No, it is not useful. As someone with an economics degree I can tell you with authority that comparing the finances of a city to the finances of a nation is absolutely and utterly asinine.
You see similar memes on the Internet, made by conservatives, comparing the national economy to a household budget. It's just laughable.
You have a strong political opinion, and an inflated sense of authority. That smells like youth, so I forgive you for it. I promise when you're older you'll look back and be embarrassed at claiming to be entitled to make authoritative economic claims.
Regardless, there are certainly economists with more than an undergraduate degree in economics who have held out Detroit as a warning for the US debt problem. Do you have more authority than Rachel Greszler who has a masters in Economics from Georgetown? I know, you'll disregard her because she works for an conservative group. Just be honest and acknowledge that this is about a political difference, not an authoritative truth.
>>Do you have more authority than Rachel Greszler who has a masters in Economics from Georgetown?
No, but Paul Krugman does. He's a Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University and a Centenary Professor at the London School of Economics. Oh, he also won the Nobel Prize in Economics back in 2008. Suffice it to say, he has more than a simple Master's degree from Georgetown. Here's what he has to say on the subject.
In light of your high-horse comment, I found this part especially funny.
"Perhaps most obviously, the economic “experts” on whom much of Congress relies have been repeatedly, utterly wrong about the short-run effects of budget deficits. People who get their economic analysis from the likes of the Heritage Foundation have been waiting ever since President Obama took office for budget deficits to send interest rates soaring. Any day now!"
One, that's an appeal to authority. And two, if you think Krugman is the least bit unbiased in his column, you're mistaken. For someone as smart as Krugman, he's a master at manipulating facts to suit his political beliefs.
It's kind of funny how both economists you have cited so far can have their ideologies traced to some economically ultra-conservative think-tank. These are people who believe strongly in small government (in other words, are strongly political) and write countless articles that are anti-government spending so that they can "starve the beast."
>>Interesting article. I read it, and then saw the footnote.
I have to disagree. It was meandering and had little to offer in terms of evidence, facts or actual policy prescriptions and was instead filled with anecdotes that somehow ended up supporting policy positions already supported by the Manhattan Institute. The author jumps from charter schools to federally funded highways in a span of a sentence right at the end. Not a lot of evidence is offered that local regulation is somehow strangling entrepreneurship nor is his idea of denying federally supported bonds to over regulated entities ever elucidated in any fashion. (Maybe because sticking local communities with higher taxes is rather counterproductive in the first place). So basically he spends most of piece talking about the 'entrepreneur' as a mythical entity that deserves to be supported by a verifiable buffet of policies that aren't really explained. So the Think of the Children!! argument rehashed.
The article reads exactly like a lot of cookie cutter political writing these days that say absolutely nothing about anything of concrete importance but are just couched to ideological compatriots that enjoy light reading from authors who will appeal to their political vanity while safely holding all the 'bad' ideas at arms length by appealing to the most simplistic possible explanations of problems; while you the reader are serenaded for easily understanding what your political 'enemies' cannot.
>You have a strong political opinion, and an inflated sense of authority."
But he's correct. It's one of the most ridiculous arguments perpetuated. Comparing a city (or a household) with an entity with the capacity to print the currency in which its debts are denominated is nonsensical. Solvency and bankruptcy are a not an issue for the United States. The constraint is inflation.
The whole country can't stop spending at once. The sooner people realize that public deficits create private financial assets, and hence are necessary during recessions, the better we'll all be.
As far as your article, anyone who considers "unfunded obligations" to be debt is not worth listening to.
You are arguing that the US has seatbelts and can survive a car crash, while Detroit gets ejected through the windshield. I'm saying, stop recklessly speeding down the highway like Detroit, because we're better off avoiding the car crash.
The goal is to avoid a debt crisis entirely. Detroit and the US are both spending themselves into a debt crisis. That different solutions apply once the crisis is reached is true, but the analogy holds when you are looking at the cause and hopefully avoiding the crisis.
>"Detroit and the US are both spending themselves into a debt crisis."
Do you have any data that the US is on its way to a debt crisis?
It sounds to me you're just repeatedly and wrongly assuming that we're somewhere near a point where paying our bills is an issue. Like Detroit. Except Detroit is bankrupt, and the US is growing.
There is no similarity between "debt issues" of Detroit and the US. None.
The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that “the buck stops here.” Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.
Many of the points distinguishing a household from the federal government also apply to the task of evaluating how much the later is like a municipality.
It's apples and oranges. When your debts are denominated in something you issue, your problems are inflation and unemployment; when it's not something you issue, your problem is solvency.
The US problem is worse than Detroit's, because Detroit can escape via bankruptcy and the US can't. Fixing the debt by printing money and the resulting inflation and unemployment would be far more disruptive to the US than the bankruptcy process will be to Detroit.
> The US problem is worse than Detroit's, because Detroit can escape via bankruptcy and the US can't.
"Bankruptcy" is just the sovereign conditionally permitting a debtor to repudiate (some or all of) its existing debt, and is only relevant because, in the absence of bankruptcy, the sovereign would instead be enforcing the existing debts.
As a sovereign state, the US doesn't need bankruptcy; if it chooses to repudiate its debt, it just does so, it doesn't need to ask a higher sovereign for permission or terms (it might choose to negotiate with other creditors to maintain good relations, but that's something any debtor can do short of bankruptcy.)
I agree with you in general, and completely disagree with the guy you're replying to, who doesn't know what he's talking about.
However, it's worth pointing out that the idea of national-level bankruptcy isn't _entirely_ meaningless. The other thing the bankruptcy process does is provide an orderly means of distributing what funds are available amongst creditors, directed by a theoretically neutral third party.
There is sometimes discussion of creating an inter-national (ie, between nations) bankruptcy process, to make defaulting on national debt a more orderly (and, at least in rhetoric, a more fair and just) process.
They haven't gone anywhere for a variety of reasons, and even in proposal it would have to be a pretty different process from ordinary bankruptcy, because indeed sovereign entities are so different in their relationship to debt and financial equity than non-sovereign entities as you note.
(And possibly because the idea of the _liquidation_ of a nation state has rather terrifying implications for democracy, but I don't think that actually puts much pause in the those who run things.)
(And, then, as you mention, there's the fact that the US's debt is in it's own currency; AND most of our creditor's debts are in _our_ currency too. Which puts the U.S. in a unique class of it's own, even among sovereigns. And generally, means nobody anywhere actually wants the U.S. to 'pay its debt'.)
A refusal of any considerable scale by the US to repay its foreign debt obligations would probably be considered an act of war. Things would have to be very, very bad for things to go that far. More likely you'd see dollar devaluation and heavy inflation, but even that would be a global political problem.
> A refusal of any considerable scale by the US to repay its foreign debt obligations would probably be considered an act of war.
Default has rarely been considered an act of war except when the default was on debts incurred as part of a peace settlement, and its not like anyone is in a position to take much substantive action because they "consider" a US act to be an act of war.
> Things would have to be very, very bad for things to go that far.
Well, its not going to happen in practice in any case, because the US debt is dollar denominated, and if it was necessary, it could be monetized (not that it would have to be: creditors would probably prefer to allow the US to restructure debt rather than encouraging monetizing it, since many other debts are dollar denominated, and for most creditors it would be better for the US debt to be devalued through restructuring than for all USD-denominated debts to be devalued by monetization.) Sovereign default is mostly an issue with countries whose debts are denominated in something other than their own national fiat currency.
Tell that to Japan. They have a debt to gdp ratio well north of 200% and they still are fighting deflation. BTW, their interest rate is 0. Those bond vigilantes are tough.
The US needs to run larger deficits until we are at full employment. A simple way to do that is to eliminate the payroll tax both on employer and employee side. This will stimulate demand, and demand is the name of the game in this era of high productivity.
>"because Detroit can escape via bankruptcy and the US can't"
What does "escape" mean in this context? Bankruptcy means that bondholders and other investors get stiffed. That's a rather one-sided view of the outcome, and will itself have economic consequences beyond The City of Detroit.
There is no "escape". Bankruptcy, while necessary, picks the wrong winners.
Why does money printing cause more unemployment? I don't see the link?
EDIT: I guess a good debt destroying hyperinflation would root out all the FIRE jobs and cause unemployment there. A high inflation would funnel more wages into debt payoff so think I can see the link.
It seems to me that the proximate cause of Detroit's problem is this massive flight of high-value (in the economic sense) population. I don't see even an echo of that happening in the US; certainly not at the level that it could be considered a problem.
That may not currently be a problem, and as I'm not a psychic, it may never be a problem, but it's certainly more likely to happen from over-taxing the top 10-20%, and/or overtaxing businesses. History has examples of a nation trying to fix its financial woes through taxing the rich, and generally, the rich simply leave.
Currently, Americans are renouncing their citizenship at record levels due to FATCA[1] and emigration from the US is at elevated levels since it spiked in 2009[2].
The problem with Detroit is unsustainable debt. Depopulation is just one of many contributing factors. The depopulation has been slow, very long term, and predictable. The debt could have been avoided by scaling back spending as the the population decreased. Or an effective Detroit government might have even taken steps to improve the city so people didn't leave or even moved in.
I agree that there are cautionary lessons to be learned from the Detroit fiasco; but to my mind they're less about the particulars of, say, the Kilpatrick debt issue boondoggle, and more about the problem of incentives for elected officials. If you're looking at an average career in public service, you're going to be making decisions that have a time horizon of decades, but your electoral prospects are determined by the short term pain your constituents face, and so kicking the can down the road is entirely a sensible decision. But these sensible decisions compound, and that ends up causing enormous knock-on effects.
> instead of term limits, make it you have to win each election with 5% more of the electorate?
But that would be an exponential increase, an increase without bound that would sweep past 100% as if it was standing still.
If a candidate won a substantial majority in one election, that rule might decrease his chances to be re-elected because the stakes would be raised in the following contest. So being popular would count as a handicap.
> He would have to be head-and-shoulder above the competition, yes, but he could run.
More to the point, he would have to be 5% more popular each time he ran. That's not likely. And eventually he would have to win more than 100% of the vote.
You are correct; over the short term. The federal govenment can print money, Detroit cannot. But when you print money you de-value it, so if the Federal govenment uses the monetary tools you mention, without reverses their effects when the economy improves (politically unpopular)you are likely to end up with the same result at the federal level.
So if bernanke rained money from his helicopter but everyone sold their neighbour a massage that night then the money is not devalued because it was absorbed?
I'm not an economist, but my understanding is that the quantitative easing that Bernanke has been using over the last few years is more or less equivalent to raining money from his helicopter, only into financial markets. Runaway inflation has not resulted because there are sufficient downward pressures on prices to counterbalance the easing.
Runaway inflation has not occurred because something like $3TT in wealth evaporated from the balance sheets of (mostly) the shadow banking system during 2007/2008. That's massively deflationary. The printing of money has filled that void.
This makes my head spin. Is there an ELI5 explanation of this somewhere? How can 3 trillion dollars suddenly evaporate, and how can newly printed money fill this void as if nothing had happened?
Imagine that lots and lots of people own shares in the mineral rights to various oil fields. Oil is at a really high price, all those rights are being traded for tons of money, and they're assets collectively valued at billions of dollars.
All of the sudden, the value of oil plummets to a fraction of its former price. So cheap, in fact, that it costs more to get the oil out of the ground than you can sell it for. So all these mineral rights aren't worth anything anymore, there's no more income coming in from selling the oil, the fancy drilling and exploration equipment is being auctioned off for pennies on the dollar, and all the people depending on that money go broke. Then their employees, accountants, lawyers, dentists, real estate agents, grocery stores, furniture stores, and everyone else that depended on that cash flowing go broke. And, of course, a lot of people bought those oil rights or that expensive equipment on borrowed money that they can't pay back. So now the banks go under, and hurt anyone depending on those banks. That's a brief synopsis of how billions of dollars vanished in the blink of an eye in the Texas oil boom collapse (and then the Savings and Loan collapse) in the 80s.
The real estate thing is more or less the same thing, but with mortgage backed securities. Once it turned out that people couldn't pay back all those ridiculous mortgages they'd been getting, suddenly the right to collect those mortgage payments was worth a fraction of what it had been. And all the high-flying companies that were getting rich off of owning, trading, and packaging those securities suddenly were left holding little pieces of paper that went from being worth billions to being worth a tiny fraction of that. Because it turned out that those mortgages were worth way less than everyone had thought they were worth, all that money effectively just vanished.
I'm not very good at ELI5, but briefly: all debt is a liability on one balance sheet, and is therefore an asset on someone else's balance sheet. That's an accounting identity.
If you go belly-up and can't pay your debt, then the financial asset disappears from the other balance sheet as well. Poof.
Picture owning $100,000 in bonds of a company that goes bankrupt. One day you have a net worth of $100,000, the next day it's gone.
Not really. QE is a swap. Bonds (or other financial assets) for cash. If I take a bond from you and give you cash, are you going to interpret it as a windfall and go on a spending spree?
Adding demand and thereby liquidity to a market creates a windfall that wouldn't have been there otherwise. Whether it's because you were sitting on a bond that was impossible to sell and now you have money because you sold it, or because you would have gotten $1000 for it and now you got $1200, that's a windfall.
Whether that money goes into buying groceries or buying other securities, I assume most of it will continue to circulate in the economy. If it doesn't, then it's pretty much a failure as a quantitative easing.
Central banks sit on bonds because they buy them as part of their open market operations, and they are legally required to make a market for treasuries so the government is funded.
The Fed does not own a helicopter. Congress does, but they're keeping it grounded.
Your example is ridiculous and contrived, but if there is enough massage capability because everyone has the free time to do so and everyone decided that's what they wanted to spend on, then yes.
So your position is, if Bernanke made it rain 100 trillion dollars and 250 million people charged each other $(100 trillion/250 million) for the massage, then money is not devalued?
Yes the example is contrived but it illustrates you are wrong.
The Fed cannot introduce 100 trillion into the economy without taking 100 trillion in assets out; if congress were to introduce 100 trillion into the economy, of course there would be inflation.
Also, people aren't going to buy 100 trillion in massages, that is fucking ridiculous, if you start from a ridiculous set of circumstances, you're going to arrive at a ridiculous ending point -- it's not instructive of anything.
Congress doesn't print money. The Fed does. Congress can spend money that it doesn't have by getting the treasury to sell bonds.
Foreign CBs are not mopping up all those bonds which is why the Fed is buying them up with QE.
What is the problem with a toy model in extreme to illustrate the absurdity of your position?
First off, the Fed is a creature of Congress. Congress issues spending orders, the Treasury creates bonds and sells them to the primary dealers (who are contractually obligated to buy them), and the Fed will make liquidity available to those primary dealers if necessary. The practice of issuing bonds equal to the difference between taxes and spending is a self-imposed constraint, and is really a hold-over from the convertible currency era.
>What is the problem with a toy model in extreme to illustrate the absurdity of your position?
It's not illustrative of anything, other than a contrived absurd example.
If there was capacity to absorb 100 trillion in massages (equally absurd), then prices would remain stable.
Think of it like this: we hit a recession, orders drop and companies lay off workers and produce less output. From one day to the next the capacity for a certain level of output remains the same, but on the second day less is produced.
Actually it does not, or at least does not when institutions like the Federal Reserve Bank are operating as they were designed to.
The purpose of the Federal Reserve is to set inflation in a way that is optimal for the economy. That does not mean providing the government with cheap loans. In fact, one reason the Fed is independent from the government is so that it cannot be used for this purpose.
At the end of the day, people are able to borrow only because people are willing to lend to them. There is no magical trick the federal government can use to get around this constraint.
That said, I don't believe that the analogy is useful, but for different reasons: the federal government has completely different responsibilities from the city government. Each issue should be judged on its merits not by some crude analogy.
