Sunday, October 20, 2013

So I was wrong

On Tuesday I made some predictions about the potential US credit default.  Obviously I was wrong as they managed to get themselves together sufficiently to agree to pay the bills they already agreed to pay.  Now we have the fun time of waiting three months until they have another showdown and do the whole thing one more time.  Huzzah and such.  I guess in retrospect my error was not in listening to opinion polls enough.  The Republicans took such a beating in polls regarding the shutdown and default that they desperately needed to get out and were willing to give up their crusade against Obamacare.  Perhaps had both parties been equally affected we would have seen my vision come to pass, but now we will never know.

In Canada on the other hand Harper is planning to introduce legislation that would make running deficits impossible.  I am hugely in favour of mandatory balanced budgets but I don't think this tactic is actually going to work.  Any government willing to run a loss can just repeal the law anyway and apparently the legislation is going to have built in loopholes for times of economic downturn.  I am not convinced that codifying the rational assumption that deficits are only temporary passes to get past crises is useful because of course we shouldn't have been running deficits all those years and of course the government would have found a way around it if they could.

We just have a fundamental problem that they are the government.  Any rule that is put in place to prevent them from racking up debt like removing their ability to issue bonds at all is something they can decide to ignore, change, or remove.  I feel like we need something absurd for it to actually work, something along the lines of "If the government runs at a loss or passes an unbalanced budget parliament is dissolved, an election must occur, and every currently sitting member of the ruling party is banned from federal public office for life and forfeits all pensions and other compensation."  The only thing that might actually work to stop them being irresponsible is to hit them where it hurts:  Get them in the pride, or the wallet if pride won't work.

Realistically they are all going to do what governments have always done.  They will rack up debt foolishly and either have their financial system collapse, inflate their way out of debt, or just default and tell everyone to suck it up.  Until the populace at large completely gets behind the necessity of a balanced budget it won't happen, and that means being willing to defund your favourite government program to make it happen.  I am not holding my breath.


  1. I don't think I agree about mandatory balanced budgets, but even if that was the goal I think you should be going after the lenders, not the borrowers.

  2. I think that there MUST be loopholes for times of economic downturn. I agree that it is an issue that cutting spending can make governments unpopular and no government wants to be unpopular. I don't necessarily agree with your disposition about government debt (and that it is bad and scary). You are personally uncomfortable with debt (I'm ok saying/assuming this yes?) but I need to see better evidence that your personal feelings can be mapped to national spending with better results that we have seen in countries choosing to carry (often significant) debt. The system is complicated and I'm uncomfortable agreeing with you wholeheartedly. We should talk about this at Christmas and do that thing where we both pretend like we know more about something that we actually do. I'm willing to be convinced any direction but require multiple lines of very compelling evidence.

  3. As an individual, it is acceptable to heavily borrow after balancing the present benefit/need vs the cost of repayment. The poster boy would be a mortgage for a bigger house when kids are on the way.

    However as government it is not acceptable?

    Eg: Your public infrastructures are not up to the task and not dealing with it now would cripple the country's economy in the next 10 years.

    Of course this has to be done very carefully, because the government that goes for a 'mortgage' now will not keep living in the same house in a few years time, nor would hesitate to use the funds in the most partisan or popular way instead of what is obscure but more necessary going forward.

    But postulating that at no point ever the benefit now will outweigh the repayment plan for a country is a bit naive, to my eyes.

  4. Peke: Public infrastructure spending doesn't show up as part of the deficit anyway. If they borrow $X with a plan to pay it back at $Y a year for 20 years, they include $Y in each of those 20 year budgets, but $X in the current one. So the deficit and debt doesn't actually capture deficit and debt that goes to capital.

    Of course there are non-capital expenditures that we should clearly cover with debt. A country without a public education system should promptly borrow the money to start one (if such a thing is possible) because the return on that investment is vastly higher than the interest. It's possible that our debt is largely good debt in this way. If debt is paying for health care, justice, education and social housing, then it is probably yielding a greater return (in terms of raw dollars, let alone anything else) than the interest we are paying. If you can borrow at 3% and invest at 15% but your investments don't pay off for 20+ years, how much debt should be you in? The answer is basically as much debt as they'll let you be in, and 20 years from now the answer should be the same.

    I can't promise you that's what governments are doing or that public finances are managed well. In fact, I think I'd feel safe wagering that they are managed very poorly, but probably better than the finances of any other organization of comparable size.

    As for the law, the law is about as stupid as it can be. First of all, Harper himself passed a fixed-date election law and then called an election mid-term, so we've see how useful laws are. Second, it's still going to be at least a few years before the current government manages to balance the budget - what on Earth is the point of passing a law that says they have to before they've even managed to do it? Besides all of that, I would think that the Liberals would be jumping on this with a slogan like: "The conservatives want to pass a balanced budget law? The liberal party just balanced the budget."

  5. I should clarify my position a little. I recognize that borrowing to invest at higher returns is a very good thing to do and there are times where a country could leverage this (like Sthenno's public education example above). However, the problem is not that borrowing is always bad but that a government, given the ability to borrow, does not do so in sensible ways. If you let them borrow they will simply do so all the time and use the ability to borrow to avoid making critical budgeting choices. They will dig the populace in deep to satisfy the short term foolishness of the populace when they should be governing with the long term in sight.

    So yes, I can make good, sensible borrowing decisions for myself and so could a government. We don't have that sort of government though, and a quick look at nearly any government in a modern democratic nation shows us that virtually none of them manage to make those good decisions. Even in times of plenty they borrow more to buy votes. Given that I think we are faced with two realistic scenarios:

    First, a government that cannot borrow. This will force us to miss out on good investments in bad times and improve our long term prospects in good times. Second, we have the scenario where the government can borrow. This leads to constant deficits in all economic climates and eventual direction of enormous amounts of the budget toward interest payments, to say nothing of repaying the principal. I suggest that the first scenario is better than the second. I would love it if we had a third scenario where the government borrows sensibly but I feel like that is a unrealistic scenario to say the least.

    If the government really wants more money to do more things I don't think the best solution is to offer to pay investors interest to use their money. That gives private investors huge control over a government and I feel like that is a big problem on its own. A government can make much better decisions if they are not beholden to stock exchanges an foreign investors to make the budget work.

  6. Recently, though, I wonder if all that debt is actually just a good thing. Take my example where you can borrow at 3% and get a return at 15%. As I say, the correct amount to borrow is as much as they'll let you have. Suppose you borrow $1000 every year. After 20 years you have $20,000 in debt and pay $600 a year to service it, but you are collecting $3000 in interest. Why would you pay back the principal?

    Government budgets aren't so transparent. It's easy to see the 3% charge and hard to see the 15% return. But imagine country A and country B both don't have public education. County A issues bonds to cover the entire cost of running the system every year, paying 3% interest. It costs them $100M a year to fund a 13 year public education program (K-12). Country B says debt is bad and manages to set aside $10M to fund a limited public education program that has 3 years (K-2).

    So 50 years from now Country A is "drowning in debt." They are paying more in interest than it would cost to run the entire system. But which country do you expect to be better off financially?

    When you are paying $150M in interest to run a system that costs $100M a year to run, you may feel a little foolish, but that is paying a lot of attention to the present. You could eliminate that $150M interest charge by paying back the $5B you borrowed, or you could spend that $5B further improving education, social housing, health care, etc. Which will make you richer 50 years from now?

    Not spending on social programs turns out to be hideously expensive. European countries are all finding out that government austerity is increasing rather than decreasing their deficits because the loss of spending is cutting the revenues more than it is saving them. The problem isn't that having a huge debt and deficit is a bad thing, the problem is that at some point in the future some government will decide to pay it back!

    As long as there is work that needs to be done and people who want to do the work, it is always going to be better to do the work than to not do it because someone said, "Well, who is going to pay for it?" That question might as well be, "But do we have the permission of rich people?"