That governments should, over the long term, run balanced budgets. ie there are many good reasons for a short term budget deficit (global crisis, natural disaster) but governments should budget to return to government surplus as soon as possible and pay down debt (eg to something like 20% GDP). This obviously doesnt seem weird to me, but people from MMT theorists to heads of world major economies think it is. Why do I believe that? Well we (New Zealand) had major reforms of economy and government in 1980-90s. At time, (showing my age) I thought it is was madness and seriously, morally bad. However, once the pragmatists replaced the ideologues, it now seems to me that the residuals of the reforms (including the balanced budget requirement) has delivered a strong and resilient economy. Various crises have been managed well because the government has been in a strong fiscal position to start with.
Have I really examined or tested this belief? Nope. I find many things more interesting than economics and whether the belief is right or wrong doesnt impact on anything I do, including voting. The policy has cross-party support so unless I vote for a fringe party, then I am voting for this anyway.
Which I guess is why we have Fiscal Responsibility Act to enforce it on politiicians. However, running large government surplusses seem to be regarded as fine (ie consequence free) by pollies of many nations, provided you can pay the interest. If they are correct, then my belief is indeed weird (and incorrect). The MMT argument made my head hurt.
Even if many countries are in insane debt and function okay… it is not obvious to me how to distinguish between “it’s because debt doesn’t actually harm you” and “it’s because they are strong enough to survive the debt, but still would be better without it”.
In my personal life, there were only three situations when I got into debt. Twice it was mortgage, which I considered rational because the prices of apartments were increasing, so if I tried to save the full amount of money, it would be “the longer I save, the more money is still missing”. (Since then, the property costs of both apartments have doubled, so this policy still seems okay in hindsight.) The third time, I caused a property damage that needed to be fixed immediately, and I was insured but the insurance company took its sweet time (one year) to actually pay, so I took a small debt to bridge that period, but then I was extra frugal to pay it back as soon as possible. Generally, whenever I was in debt, I took care to pay it back as soon as possible.
Now I imagine that someone with large income, or even income at my level, could e.g. spend 30% of that income paying credit card debt, and still live a happy life. Hey, I save about 30% of my salary, so that person would in short term have exactly the same quality of life as me. It just seems extremely stupid to me, in long term. But if all neighbors did that, it would be “normal”.
So my question is, essentially, whether the countries with huge-but-survivable debt are more analogical to “me taking mortgage” or “the high-income guy with 30% credit card debt”. From outside, both seem similar: owing some money, living good life. The difference is in the counterfactuals: the alt-me that didn’t take the mortgage now spends more money on rent than I spend on home ownership + mortgage payment combined; while the alt-credit-card-guy that didn’t maximize credit now saves 30% of his salary and can maybe retire a bit sooner.
The state-level equivalent of mortgage would be like borrowing money to build a railroad connecting distant parts of the country. Perhaps this should be made explicit in the budget. Like, the government should publish the railroad-related debt, and have a temporary special tax, like 50% of the train ticket price would go to pay the debt (including interest), until the debt is paid. (Things like this actually happen in real life: there is a bridge in San Diego financed this way: the city took debt, built the bridge, collected a toll to pay the debt, and afterwards the bridge was free to use.)
So, in my “fiscal utopia”, the state would only be allowed to take debt if it was (a) approved in referendum, and (b) budgeted separately until the debt is fully paid. Because the utopia wouldn’t start with a balanced budget, there would also be a law to reduce the existing debt by, dunno, 0.2% of GDP every year (a number completely made up); the same mechanism would be used if it turned out that e.g. the railway is actually not able to pay its own debt—but to do this, the government would have to publicly admit it made a mistake.
Actually, what would be bad about being a net creditor? Like, let’s push the “fiscal utopia” even further, and make the law that the foreign debt needs to be decreased by 0.2% of GDP every year even if it is already below zero. So, at some moment, the entire country would be “early retired”, like it could collect 0 tax and provide free healthcare and education, because everything would be financed by the collected interest. What exactly is wrong with this? -- Well, I suppose, realistically, this is when someone finds a pretext to declare a war on you.
One way to look at this is in focusing on what purpose money serves.
Suppose you do something for someone, and that person pays you a $1 bill. What does it mean, to have that $1 bill in your hands? After all, concretely speaking, it doesn’t serve for much. It’s a small piece of generic printed paper, so you can use it for same general purpose any piece of paper with something printed on it serves.
However, it has attached to a formal “possibility of” a future something, as you can eventually exchange it for something else, be it a good or a service. Hence, at its core that $1 bill is a contract, or more specifically, a promise.
Hence, when you do something and receive $1, you’re exchanging that work for a promise. And, conversely, someone else is promising you a future reward in exchange for you doing something now. And, evidently, such promises themselves can be exchanged, such as when one exchanges one country’s currency for another’s.
Notice then that debt, in aggregate, works in a very similar way. When a credit agencies you owe money to negotiates that debt of yours with another, they’re exchanging promises between themselves, tied to something eventually happening, namely, you providing them many $1 promise bills in exchange for a return of the big promise letter with your signature one of them is carrying. And thus, similarly, at higher layers, until the much higher one of debts hold by countries, which also are exchanged around.
Hence, at that very high level the movement of debts around is a form of money. Rather than moving around packs of first-order promises, aka, stored currency, they move around wide blocks of second or third-order promises, tied to their whole countries doing this or that in the negotiated time frame.
This is why holding countries to having a positive cash flow doesn’t make much sense. I mean, it does make some sense, in that handing out blocks of “small promises” simplifies many things. But it also makes other movements more complex, as using debt, that is, “big promises”, can be a very effective tool to move things faster when done carefully.
The “fun” part of our financial system is the usury—the idea that if I do something for you today, once, and then wait for a sufficiently long time, it afterwards makes you obligated to keep doing things for me effectively forever (if I only ask you to pay back the interest, not the principal).
Why is it considered a smart idea to be the one who needs to pay back the favors forever, instead of the one who collects the favors forever?
If you were an immortal vampire, would you prefer to be one who keeps paying 30% of his salary as a credit card debt, for eternity, or the one who is early retired?
The official theory is that the debt allows you to finance smart things that make you so much better off that having to return favors forever is definitely worth it. Instead, I suspect than most of the money is typically wasted or stolen, and does not make a difference in long term… except for the debt that the next generations inherit.
I wouldnt pretend NZ is fiscal utopia by a long way, but actually pretty weak provisions have resulted in quite strong fiscal discipline. https://econpapers.repec.org/paper/risnzierw/2018_5f001.htm for a review. Governments may have to act faster than a referendum can be organized but so long as there is then a realistic plan to return to a budget surplus, I dont think you need one.
But your comments have reinforced my view that my beliefs are not weird.
I agree with Phil that this sounds very … counterintuitive. Usually nothing is free, and even with free things there is consequences or some sort of externality.
However, I recently read an argument by a Finnish finance podcaster, who argued while the intuition might be true and government debt system probably is not sustainable and is going to have some kind of messup in long term, not participating may put your country at disadvantage compared to countries who take the “free” money and invest it, and thus have more assets when it all falls down.
That governments should, over the long term, run balanced budgets. ie there are many good reasons for a short term budget deficit (global crisis, natural disaster) but governments should budget to return to government surplus as soon as possible and pay down debt (eg to something like 20% GDP).
This obviously doesnt seem weird to me, but people from MMT theorists to heads of world major economies think it is.
Why do I believe that? Well we (New Zealand) had major reforms of economy and government in 1980-90s. At time, (showing my age) I thought it is was madness and seriously, morally bad. However, once the pragmatists replaced the ideologues, it now seems to me that the residuals of the reforms (including the balanced budget requirement) has delivered a strong and resilient economy. Various crises have been managed well because the government has been in a strong fiscal position to start with.
Have I really examined or tested this belief? Nope. I find many things more interesting than economics and whether the belief is right or wrong doesnt impact on anything I do, including voting. The policy has cross-party support so unless I vote for a fringe party, then I am voting for this anyway.
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Which I guess is why we have Fiscal Responsibility Act to enforce it on politiicians. However, running large government surplusses seem to be regarded as fine (ie consequence free) by pollies of many nations, provided you can pay the interest. If they are correct, then my belief is indeed weird (and incorrect). The MMT argument made my head hurt.
Even if many countries are in insane debt and function okay… it is not obvious to me how to distinguish between “it’s because debt doesn’t actually harm you” and “it’s because they are strong enough to survive the debt, but still would be better without it”.
In my personal life, there were only three situations when I got into debt. Twice it was mortgage, which I considered rational because the prices of apartments were increasing, so if I tried to save the full amount of money, it would be “the longer I save, the more money is still missing”. (Since then, the property costs of both apartments have doubled, so this policy still seems okay in hindsight.) The third time, I caused a property damage that needed to be fixed immediately, and I was insured but the insurance company took its sweet time (one year) to actually pay, so I took a small debt to bridge that period, but then I was extra frugal to pay it back as soon as possible. Generally, whenever I was in debt, I took care to pay it back as soon as possible.
Now I imagine that someone with large income, or even income at my level, could e.g. spend 30% of that income paying credit card debt, and still live a happy life. Hey, I save about 30% of my salary, so that person would in short term have exactly the same quality of life as me. It just seems extremely stupid to me, in long term. But if all neighbors did that, it would be “normal”.
So my question is, essentially, whether the countries with huge-but-survivable debt are more analogical to “me taking mortgage” or “the high-income guy with 30% credit card debt”. From outside, both seem similar: owing some money, living good life. The difference is in the counterfactuals: the alt-me that didn’t take the mortgage now spends more money on rent than I spend on home ownership + mortgage payment combined; while the alt-credit-card-guy that didn’t maximize credit now saves 30% of his salary and can maybe retire a bit sooner.
The state-level equivalent of mortgage would be like borrowing money to build a railroad connecting distant parts of the country. Perhaps this should be made explicit in the budget. Like, the government should publish the railroad-related debt, and have a temporary special tax, like 50% of the train ticket price would go to pay the debt (including interest), until the debt is paid. (Things like this actually happen in real life: there is a bridge in San Diego financed this way: the city took debt, built the bridge, collected a toll to pay the debt, and afterwards the bridge was free to use.)
So, in my “fiscal utopia”, the state would only be allowed to take debt if it was (a) approved in referendum, and (b) budgeted separately until the debt is fully paid. Because the utopia wouldn’t start with a balanced budget, there would also be a law to reduce the existing debt by, dunno, 0.2% of GDP every year (a number completely made up); the same mechanism would be used if it turned out that e.g. the railway is actually not able to pay its own debt—but to do this, the government would have to publicly admit it made a mistake.
Actually, what would be bad about being a net creditor? Like, let’s push the “fiscal utopia” even further, and make the law that the foreign debt needs to be decreased by 0.2% of GDP every year even if it is already below zero. So, at some moment, the entire country would be “early retired”, like it could collect 0 tax and provide free healthcare and education, because everything would be financed by the collected interest. What exactly is wrong with this? -- Well, I suppose, realistically, this is when someone finds a pretext to declare a war on you.
One way to look at this is in focusing on what purpose money serves.
Suppose you do something for someone, and that person pays you a $1 bill. What does it mean, to have that $1 bill in your hands? After all, concretely speaking, it doesn’t serve for much. It’s a small piece of generic printed paper, so you can use it for same general purpose any piece of paper with something printed on it serves.
However, it has attached to a formal “possibility of” a future something, as you can eventually exchange it for something else, be it a good or a service. Hence, at its core that $1 bill is a contract, or more specifically, a promise.
Hence, when you do something and receive $1, you’re exchanging that work for a promise. And, conversely, someone else is promising you a future reward in exchange for you doing something now. And, evidently, such promises themselves can be exchanged, such as when one exchanges one country’s currency for another’s.
Notice then that debt, in aggregate, works in a very similar way. When a credit agencies you owe money to negotiates that debt of yours with another, they’re exchanging promises between themselves, tied to something eventually happening, namely, you providing them many $1 promise bills in exchange for a return of the big promise letter with your signature one of them is carrying. And thus, similarly, at higher layers, until the much higher one of debts hold by countries, which also are exchanged around.
Hence, at that very high level the movement of debts around is a form of money. Rather than moving around packs of first-order promises, aka, stored currency, they move around wide blocks of second or third-order promises, tied to their whole countries doing this or that in the negotiated time frame.
This is why holding countries to having a positive cash flow doesn’t make much sense. I mean, it does make some sense, in that handing out blocks of “small promises” simplifies many things. But it also makes other movements more complex, as using debt, that is, “big promises”, can be a very effective tool to move things faster when done carefully.
The “fun” part of our financial system is the usury—the idea that if I do something for you today, once, and then wait for a sufficiently long time, it afterwards makes you obligated to keep doing things for me effectively forever (if I only ask you to pay back the interest, not the principal).
Why is it considered a smart idea to be the one who needs to pay back the favors forever, instead of the one who collects the favors forever?
If you were an immortal vampire, would you prefer to be one who keeps paying 30% of his salary as a credit card debt, for eternity, or the one who is early retired?
The official theory is that the debt allows you to finance smart things that make you so much better off that having to return favors forever is definitely worth it. Instead, I suspect than most of the money is typically wasted or stolen, and does not make a difference in long term… except for the debt that the next generations inherit.
I wouldnt pretend NZ is fiscal utopia by a long way, but actually pretty weak provisions have resulted in quite strong fiscal discipline. https://econpapers.repec.org/paper/risnzierw/2018_5f001.htm for a review. Governments may have to act faster than a referendum can be organized but so long as there is then a realistic plan to return to a budget surplus, I dont think you need one.
But your comments have reinforced my view that my beliefs are not weird.
I agree with Phil that this sounds very … counterintuitive. Usually nothing is free, and even with free things there is consequences or some sort of externality.
However, I recently read an argument by a Finnish finance podcaster, who argued while the intuition might be true and government debt system probably is not sustainable and is going to have some kind of messup in long term, not participating may put your country at disadvantage compared to countries who take the “free” money and invest it, and thus have more assets when it all falls down.
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