Category Archives: Economics

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softbank donald trump

The Truth About SoftBank’s Investment

On December 6, Donald Trump announced that SoftBank would be investing $50 billion in America, a proclaimed deal for which Trump immediately — and erroneously — took credit, tweeting the following:

Of course, such self-congratulatory language misses, as it always does, nuance and simply lacks truth.

SoftBank announced in October that, in conjunction with the Saudi Arabian government, it would raise $100 billion to invest in technological startups to become the “biggest investor in the…sector.” The United States, home to the likes of Facebook, Google, Uber, and Apple, would obviously attract substantial investment. Startups are a dime a dozen in Silicon Valley and they’re always looking for more capital. It would be shocking if SoftBank forewent American investment.

The notion that SoftBank decided to invest $50 billion after an hour long meeting is simply ridiculous. This may shock Trump, but successful businesses don’t spontaneously throw billions of dollars at an idea after a short talk with someone who refers to tech as “the cyber.” The bank knew it would invest in America — there really is no better home for technological startup funds than our country — but waited until after the election to make its announcement in hopes of gaining favor with the incumbent, whoever it may have been.

By giving Trump credit for a massive investment though he is owed none, SoftBank hopes to curry favor with the incoming administration so its longstanding goal, merging Sprint and T-Mobile, will be completed. SoftBank bought Sprint in 2013 and, a year later, pursued T-Mobile in hopes of creating a cellular behemoth to challenge Verizon and AT&T for industry dominance. The Obama administration turned down the request because it would have significantly decreased market competition, hurting consumers. This has hurt SoftBank as Sprint lost value and laid off thousands during restructuring.

Donald Trump bends over backwards for those who compliment him. See, for instance, his admiration of tyrant and eliminator-of-dissent Vladimir Putin, upon whom Trump has lavished praise after Putin called Trump a “genius.” You compliment Trump or otherwise give him credit for happenings in which he had no influence and you will receive favors. SoftBank, of course, realizes this and plans to use Trump’s vanity to its advantage.

Trump understands the favor game and is willing to play. That, of course, is a huge risk as it raises the possibility of the administration playing clear favorites with certain businesses (at its worst, this could lead to rent-creation the specifically benefits supporters and targets opponents). SoftBank’s investment isn’t about Trump’s business genius, it’s about the ease of manipulating him. If SoftBank gets what it wants, consumers will suffer and Trump won’t bat an eye.

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free trade

Free Trade is a Benevolent Force Whose Discontents Can Be Managed

Donald Trump’s economic populism and nationalism helped propel him to an unlikely victory on November 8. But like most populist appeals, Trump’s attacks on economic cornerstones such as free trade fall well short of facts and reality and offered few — if any — actual solutions to globalization’s discontents. Democrats have increasingly become the party of free trade; however, as the party begins its trek through the wilderness, resurgent leftist populism risks following Trump down the path of ignorance.

Free trade is, by all accounts, a benevolent force. I write this on a Macbook (not domestically produced), glancing occasionally at my Samsung phone (imported), wearing clothes made abroad, and sitting in a non-American chair. Thanks to trade, I can afford all of these items. Returning production to America would price me out of these consumer goods on which I rely to do my job. Anyone railing against free trade and speaking solely of its evils is a hypocrite if they do so from a machine not made in America.

Utilitarianism also demands that we embrace free trade. If policy seeks the greatest good for the greatest number, then we should strive for free trade when and wherever possible. Yes, there are downsides to free trade and it is their concentration that helped elect a demagogic president, but the dispersed cost-saving benefits far outweigh income losses. There’s irony in watching individuals on the one hand decry the influence of special interests in politics while on the other demanding national policy be changed to hurt the nation and benefit those upset about special interests. They forget that they themselves are a special interest group with outsized electoral sway.

Anger at a changing economy no longer understood by many pushed Rust Belt voters into the hands of Trump, whose grand promises of resurgent manufacturing are but the fantastic tales of an old man reminiscing of how things used to be. Today, the microchip is the primary culprit in a low-labor intensive manufacturing sector. All the tariffs in the world and renunciations of free trade agreements will not rollback machinery. Trump’s plans offer false promises that will likely plunge the country into recession without ever having a realistic chance of returning to our shores factories that moved abroad.

Those disaffected by trade need real help, not fables. Democrats need to give them solutions. A very simple and yet quite effective policy is job retraining. Empowering local nonprofits to assist displaced workers in acquiring the skills sought by new producers results in higher employment and higher wages. Workers are also decreasingly mobile. This creates problems as economic theory dictates that when jobs leave one region, workers will move to areas experiencing economic growth. Part of the setback stems from the high cost of living in booming areas — few low-skilled workers can afford to move to San Francisco. Encouraging housing growth in those areas will drive down rent. Similarly, investments in public transport such as commuter rails will decrease commute time and allow individuals to live far from expensive cities while still being able to work where the economy is hot. A simple trade displacement voucher would allow workers to choose job retraining or mobility.

Trade’s discontents are not a death knell. They’re an opportunity to help transition the economy into the 21st Century. Democrats would do well to embrace the competition and innovation spurred by free trade. Cowering in electoral fear and chasing Trump down the rabbit’s hole of ignorance hurts workers and the country as whole. The party ought to embrace globalization and deliver a strong message of how to deal with its repercussions. To do otherwise would be to follow Trump’s playbook: Lie to Americans with impunity.

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Hillary Clinton and Wall Street Speeches

Hillary and Bill gave many speeches to Wall Street firms, earning them millions of dollars.  Good for them!  That’s not a problem – that’s one using skills and talents to make money in the free market.  We shouldn’t hold that against her or foolishly think it impacts her dedication to passing Wall Street reform bills.  In fact, her Wall Street plan shows her at “her wonkish best,” seeking to address problems that actually contributed to the 2008 crisis and could prevent another (unlike Bernie’s, whose plan is designed to fundraise well).  The plan itself also should dispel all fears that Hillary is too pro-Wall Street to seek change.

She is in no way dependent on Wall Street.  Assume she becomes president and then wants to make money afterwards.  Do you think there will be any shortage of individuals, firms, or universities willing to pay her for a speech?  Any shortage of people wanting to buy her memoirs?  Of course not.  She would, in no way, rely on Wall Street to earn a post-presidency income.  In other words, she can – and will – push Wall Street reform because she depends not on them.

But if that’s not enough for you and you somehow think that giving speech greatly impact her ability to reign in Wall Street excesses…

  • Hillary said in a speech that Dodd-Frank, though unpopular on Wall Street needed to be enacted
  • She argued for working with Wall Street to strengthen the economy, because maybe – just maybe – a president shouldn’t seek to pin all economic blame on a single sector
  • President Obama, who signed and pushed for the Dodd-Frank bill, received millions in campaign contributions from Wall Street (by the way, if you believe in research and political science, you would know that no corporation expects to buy a politician)
  • At a speech in front of a Wall Street audience, Hillary outlined the need to end financial fraud and expand Dodd-Frank
  • It’s natural that Hillary would have connections to Wall Street – she represented New York in the Senate and Wall Street is a major employer and economic driver in the state
  • That she’s already given speeches to many other organizations (also for money, the free market is great!) dispels the notion that Wall Street owns her
  • “Americans who are doing business in every aspect of the economy want to know more about the world. I actually think it’s a good conversation to be having” – Hillary on her speeches.  This seems more than reasonable; it’s responsible as she wants to engage all economic forces, unlike Bernie who seeks to alienate and vilify Wall Street and all those who succeed in the economic system
  • Wall Street considers Hillary a pragmatic problem solver.  Is that really so bad?  That’s exactly what I want in a president – a bright, wonkish politicians able to navigate many interests and get things done in a responsible manner.  She knows how things work.  I’ll take that 100 times out of 100.  Do we want a president that alienates all industries and will espousing extreme rhetoric that’s not based in reality?  No, we don’t.

We want a president who gets things done and knows how to get things done.  That’s Hillary, not Bernie.  Bernie wants to play victim and pin all responsibility for all economic woes on two singular forces: Wall Street and “the billionaire class.”  It’s absurd rhetoric that plays well to populists but doesn’t address root causes.  He’s tied to extremism, not to solutions.  Hillary, the Democrats’ number 1 wonk, knows how to work with all parties to enact meaningful reform.  Her Wall Street plan promises vast changes to make the economy fairer.  But she also knows how to work with all interested parties to reach feasible reforms that check Wall Street without damaging the industry’s ability to create wealth and contribute to economic growth.  Hillary knows how to work with others to advance a goal.  Hillary knows how to pass reform and will do just that.

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hillary clinton bernie sanders

Before You Vote, Consider This

Primary voting starts in just 6 days with the Iowa Caucuses.  A little more than a week later brings the New Hampshire primaries; after that, it’s off to the races with Nevada, South Carolina, and Super Tuesday.  We know you’re seeing many campaign ads, are inundated with opinion posts on Facebook and Twitter, and likely are already predisposed to a certain candidate.  Please, though, consider this before you caucus or cast your primary vote.

Democrats face an election of head versus heart

Bernie Sanders’ upstart, insurgent campaign identifies a singular problem – income inequality – and seeks to address it.  Nothing more.  His candidacy is premised on the one issue; the plans he offers cannot – and will not – pass Congress.  Lofty rhetoric of fundamental change plays well and offers ideas whose merit needs to be debated, considered, and discussed, but words with no hope of action do not a president make.

Hillary Clinton represents the head of the Democratic Party.  Of course, the House of Clinton has been a mainline force for decades.  More importantly, though, Hillary has long been considered a policy wonk, willing to work across the aisle to see legislation pass and to make change happen.  Bernie’s strong liberal positions earn him a weak congressional record with very few significant legislative achievements and no known ability to compromise on his values.  Love it or hate it, compromise and deal making gets things done in Washington.  Vote for the head of the Democratic Party and let the heart continue to fight in the Senate and to shape discourse without further polarizing and gridlocking our legislative system.

Political Revolution

I take many problems with this phrase.  It’s blatant reference and conjuring of Karl Marx’s writings make it immediately distasteful, reminiscent of failed ideas, and undemocratic.  Even ignoring that, the phrase is still wrong.

We don’t need, nor does anyone want, a full-on political revolution.  The country needs people to vote.  Turnout rates are incredibly low when compared to other Western democracies.  Voters skew older and wealthier than the average American.  Increasing the turnout rate will lead to more young and poor citizens voting, therein boosting Democratic vote share and the appetite for redistributive policies.  Progressive platforms win when turnout is high.  No political revolution is needed.

People voting is not a revolution, it’s simply a democracy at work.

Minimum Wage

Though it’s clear the minimum wage needs to rise, an increase to $15/hr is simply irresponsible.  That would double the current minimum wage.  Such actions would greatly increase unemployment through much of America.

What works in New York does not work in Tulsa, Oklahoma.  Expensive cities need higher minimum wages than do cheap places.  The cost of living simply differs over much of the country.  San Francisco, New York, Washington, and Los Angeles are all much, much, much more expensive than Cheyenne, Wyoming, Sioux City, Iowa, and Gary, Indiana.  The national minimum wage cannot be premised on the cost of living in the most expensive cities; it must establish a baseline above which states and localities should increase their minimum wages.  $15/hour would increase unemployment and inflation (if the base wage starts at $15, all other rates must then be raised to maintain hierarchy) in states like Nebraska, Ohio, Vermont, etc.  Costs, too, would rise.  The benefits are slim with a national wage hike to such an absurd level.

Hillary wants to raise the minimum wage to $12 an hour.  This still represents a large and substantial increase, but precludes many of the unemployment worries caused by Bernie’s plan.  The difference between the two plans – Bernie’s desired wage is 33 percent higher than Hillary’s – has a real impact: It raises business costs by at least that amount.  To offset the costs, firm will either layoff workers and/or raise prices.  A $12 minimum wage lifts millions out of poverty without creating the unemployment and inflation caused by a $15 wage.  It respects the cost of living differences between states and encourages municipalities, like New York and San Francisco, to update policy on their own terms.  The national minimum wage, as Hillary understands, should be set at the lowest common denominator; wages should be raised to higher levels by the government closest to the people whom the wage will impact.  They are in a better place to make that decision.  Hillary, and not Bernie, understands that.

A lot of policies can be made on the national level; this is not one of them.

Free College

College is an investment.  Students decide whether to go to college to boost potential earnings.  Like any investment, they must have skin in the game.

College should not be free for everyone.  It should be affordable and students should have the opportunity to attend debt-free, but the government should not subsidize a public college education for all its inhabitants (also irresponsible to raise taxes only to redistribute them to the children of wealthy parents).  His plan relies on Wall Street taxes, but that would not raise enough money to pay for the plan.  How would he fill the gap?  Similarly, ideas capping interest rates on student loans are nonsense.  Many are upset that one can get a mortgage with a cheaper interest rate than a student loan.  This makes economic sense.  Loans are based on risk.  Students are risky.  Even after earning a degree, earning potential might be low.  Unlike a mortgage, which is backed by a house (a real, physical asset), student loans have no backing.  A bank cannot seize a degree in the case the student does not repay debts.  The risk associated with student loans leads to higher interests rates.  That’s not a corrupt economy; that’s basic market principles.

Hillary’s proposes debt free public education.  This makes sense.  It stops cost from being an educational barrier while ensuring that students still have skin in the game (as it is an investment, after all).  She also goes about this in the right way: public universities are operated by the states; Hillary’s plan incentivizes states with block grants to urge them to provide no-loan tuition.  Moreover, in the case of loans, Hillary will cap repayments at 10 percent of income.  This ensures that students will not sacrifice subsistence to pay down debt.  It also does not interfere with the forces of the free market – it doesn’t distort supply, demand, and risk elements.  Unlike Bernie’s plan where the proposed funding does not add to the price tag, Hillary’s plan to cap deductions for top tax-earners would cover her proposals.  Hillary solves college debt and makes college affordable without introducing moral hazard or burdening the free market.

Free college is not a good idea.  Debt-free college is.

Infrastructure Spending

Bernie has the right idea here.  $1 trillion of infrastructure spending is necessary for the health of our economy.  However, the timing is wrong.  Such an endeavor should be undertaken during a recession so it can serve as an economic stimulant.  When the unemployment rate is 5 percent, as it is now, the government needs to tighten its belt and close deficits, paying down the national debt.  That theory stems from basic Keynesian principles.  When the economy inevitably sags again, stimulus spending will be needed to create jobs and spur economic growth; that’s when Bernie’s plan should be introduced.  To do so now is fiscally irresponsible.

Hillary, on the other hand, proposed a reasonable $250 billion infrastructure plan that would create jobs and provide needed service to the country’s crumbling roads and bridges without severely straining the federal budget.  In addition, Hillary calls for a $25 billion seed fund for an infrastructure bank, a crucial step to ensuring the long-run vitality of America’s modes of commerce.  The bank would help finance another $250 billion in infrastructure improvements.  Her plans will create jobs without straining the federal budget, critical during a boom period in which we should be seeking to close the deficit and pay down debt, not add another $1 trillion to it.

Rigged Economy

Former chairman of the Federal Reserve Ben Bernanke wrote in his memoir that Bernie has a “conspiracy view of the world.”  This is absolutely correct.  Bernie envisions a world in which “the billionaire class” – in perfect sympathy with ideas of class warfare – tries to keep everyone else suppressed below them.  It’s an outlandish sentiment that bears little reality to data.

Economic mobility has not changed in 50 years, since the Johnson administration.  Only if you think that the economy was rigged during the liberal heyday of social programs, tax and spend policies, and Democratic legislative domination can you now believe that the economy is rigged.

Yes, inequality has grown, but that’s not a bad thing.  Income inequality is the natural result of a market economy.  Not everyone can earn the same income.  Higher incomes generate incentives and are rewards for society’s most talented and hard-working.  That inequality exists proves our economy is working.

The problem is stagnant middle class wages.  For the middle class, incomes have not grown in 25 years.  Yes, the top 1 percent’s income has grown manifold, especially following the Great Recession, but much of that can be attributed to stock market increases and changing payment schemes for CEOs.  That’s simply not the problem.  Taxing the rich to give to the poor would not solve inequality.

This is another instance in which Bernie’s policies break down.  He relies on soaking the rich to combat inequality.  Such ideas don’t raise middle class incomes.  A $15/hr minimum wage raises incomes only so far as it doesn’t create unemployment – and it will.  Bernie doesn’t focus on job creation and wage growth; he focuses on taking and giving – a concept that simply will not work to fix the only issue to which he is committed and pretends to be versed.

His policies and rhetoric of a rigged economy pitting the little guy against corporate fat cats is only correct if you ignore economics.

Wall Street

Once more, there’s a disconnect between Bernie’s fiery, populist rhetoric and reality.  His platform centers around breaking up the big banks.  But guess what?  Doing so would not have prevented the 2008 financial crisis, which started with pure investment firms (Bear Stearns and Lehman Brothers).  Breaking up big banks does not solve problems potentially endemic to the financial sector.  In fact, “a breakup of the largest financial institutions would reduce the value that they provide for the economy, businesses, and consumers. Recent research points to significant economies of scale and scope at large financial institutions, leading to efficiencies for businesses and consumers.”

Bernie’s spectacular fundraising pitch – reinstalling Glass-Steagall – fails to live up to his goals.  Like politicians on the far right, Bernie has an incredible immunity to social science.

The best means of preventing another financial calamity seems to be taxing the behavior that made the 2008 crisis awful: reliance on short-term, often overnight, funding.  Prior to 2008, many banks needed overnight lending from other institutions in order to pay daily operating expenses and meet capital requirements.  As assets lost value, banks began to worry about solvency and ceased the web of lending.  This prevented banks from meeting daily operations and made them illiquid, prompting a fire-sell of assets that were quickly losing value.  In came a crisis of solvency and banks suddenly faced bankruptcy.  To prevent another catastrophe of the sort, banks need to be discouraged from short-term funding.  Hillary’s plan does this by levying fees on the institutions that rely heavily on volatile, short-term loans.

Her proposals are many times better than Bernie’s because she addresses the root problem instead of issuing rally cries.  There’s a reason Hillary is respected on both sides of the aisle when it comes to policy credentials and know-how.

Money and Special Interests

Here, too, lies another instance in which Bernie’s call to action stands against political science research and would actually increase political polarization.

No corporation expects to buy a politician.  All the money in the world cannot elect a candidate if the candidate’s positions are anathema to the majority of voters.  Decision making is still – and is always – left in the hands of the voters and it becomes their responsibility to turnout and have their voices heard.  It seems misplaced and normatively wrong to forbid companies from exercising speech and preferences while not placing any blame on apathetic voters.

Moreover, when corporations donate to political campaigns, they tend to do so in a bipartisan manner because they want things to get done.  It’s bad for business when Congress fails to pass laws.  Take, for instance, the 2011 debt ceiling debacle.  Corporations and their lobbyists urged Congress to raise the debt ceiling as failing to do so would have resulted in an economic catastrophe.  However, many House members and some Senators wanted to default on obligations because the grassroots voters thought that was the best position.  Businesses actually tried to bring the sides together.  That’s not corporate-induced polarization – that’s corporate induced bipartisanship.

Preventing the moderating force of many of these corporations from influencing elected officials actually worsens polarization by increasing the impact of grassroots donors.  Proposals in which small donor sums are matched by the government can empower radical candidates who attract a broad grassroots movement.  In the presidential election, that would pit Bernie, the most liberal senator, against Ted Cruz, one of the most conservative.  It’s easy to see how that might lead to more extremists in both congressional chambers, worsening polarization and ensuring that no legislation whatsoever is enacted.

That said, it’s important to point out the most corporate political money goes to lobbyists.  Again, that’s not necessarily a bad thing as it can bring sides together to pass budgets and raise the debt ceiling.  The main impact of Citizens United and Speechnow is the ability for individuals – whose motivations are quite different than those corporations – to donate vast sums to super PACs.  But there’s still no definitive literature on how super PACs and individuals impact elections.  In fact, if 2012 is any precedent, super PACs and outside money have a muted impact on elections.

Super PACs and unlimited contributions are inherent parts of free speech.  Since Buckley v. Valeo, money has been equated with political speech, and for good reason.  By and large, there are three ways to engage in the political process: 1) donate, 2) volunteer, and 3) vote.  Each contains elements of speech and each should be unlimited.  Let’s use a though experiment.  If you supported a candidate, how would you act to ensure the candidate’s election?  You would donate, volunteer, and vote and you would want to complete freedom to do all three.  Perhaps the easiest way of engaging with politics is to donate money to campaign committees and PACs.  They have a competitive advantage in producing political communications as they specialize in it (I could make lawn signs on my own, but a campaign will do it much more efficiently).  In this sense, I’m using money to further my speech by giving it to an organization that can best amplify it.  My donation adds to the marketplace of ideas and allows many points of view to be presented to the electorate.

Liberals tend to dislike Citizens United because conservatives make the most of the decision.  That’s no reason to curtail rights.  We cannot limit speech because we don’t like what’s being said.  We must instead counter donations or utilize the other elements of political engagement to ensure victory for our candidates and ideals.  We can’t limit freedom because we don’t like what’s being done with it.  A liberal society is bettered and strengthened when speech is wholly encouraged.

Lastly, accepting this chart from political science research, we see that more money in elections betters the chances of challengers to unseat incumbents.  Challengers need fewer dollars to sway voters and given the natural incumbency advantage – around 5 to 9 percentage points, for a variety of reasons – more money can lead to more competitive races.  And, if the challenger raises a lot of money but his or her views are deplorable, it’s easy to still vote for the incumbent. 2016-01-26 11-58-24


What’s more, there is nothing Bernie, as president, can do.  To overturn Citizens United, either a new Supreme Court case is needed or a constitutional amendment (which no president can pass or propose).  Any case needs to have standing and injury, hard to prove considering the equal availability of all to make use of the campaign finance system.  It would set a dangerous precedent to sue based on speech unfavorable to one’s interests.  Bernie doesn’t seem to understand this – he tweeted that he would appoint Supreme Court justices whose first case would be to overturn Citizens United.  That’s not how the judicial system works.  Furthermore, establishing any sort of litmus test for a judicial nominee makes a mockery out of judicial independence – a value enshrined in the Constitution and the Federalist Papers.  It amounts to subversion of the Constitution.

In the end we have a choice: elect rhetoric or elect results.  Bernie’s policies fix no problems, especially not those about which he cares.  What’s more, his proposals are too far left to have any chance of passing a Republican or split Congress.  With no ability to set an agenda and no laws to his name, a Bernie presidency would amount to nothing but a cheerleader-in-chief, fervently calling for an end to the problem he doesn’t know how to solve.

Hillary has a record of working across the aisle.  Her policy ideas draw from social science and actually address root issues.  She’s a leader and has breadth of knowledge about which the single-issue Bernie can only dream.  It’s fine to have a single-issue politician in the House or the Senate, but in a president, we need someone ready to fight on all fronts, someone able to make deals, and someone truly able to lead the country forward.

We need Hillary.

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Debt: An American Obsession

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Debt: An American Obsession

America is suffering from the disease of misguided rhetoric. Common though this ailment is, in certain circumstances it has a more damaging effect than in others. The economy – the most vital organ in a country – is being choked because of anti-national-debt rhetoric and sentiments. Many Americans view public debt as toxic – a financial element that needs to be avoided at all costs. In reality, as Alexander Hamilton, the first Secretary of the Treasury, stated, “national debt, if it is not excessive, will be…a national blessing” that can boost the economy, create jobs, wealth, and lower debt in the long run. Given the current economic malaise, the purveying anti-debt sentiment is actually preventing a return to high employment rates, high labor participation, and respectable GDP growth. The fixation with the level of debt is detrimental to the American economy because it prevents certain stimulatory actions from being implemented – actions that would boost aggregate demand and GDP, creating jobs and wealth. American debt is not, as many Americans and politicians believe, yet at a dangerous point, as evidenced by the market’s faith in America’s ability to repay debt, a public debt to GDP ratio that is far from a historical worst, and a relatively and economically safe public debt to GDP ratio. The dangerous anti-debt feelings are the fault of the media, whose indexing model cause politicians ignorant debt statements to become widespread and not subject to challenges by another school of thought. America, indeed, has a flawed fascination with lowering the national debt when the general populace – as well as politicians – need to realize that our debt is not so bad as rhetoric suggests, that Keynesian economic principles that will expand the debt in the short run need to be implemented, the austerity measures rampantly chased and endorsed by conservatives does not work, and the media needs to change its framing of the national debt – which, due to indexing, will likely only occur if politicians once again begin to view debt as a tool by which a booming economy can be created.

As America plunged into the throes of the Great Recession, suffering tens of millions of lost jobs and financial agony, the political response to the plight of everyday Americans was to focus on job creation. Not just job creation, but job creation whatever the cost may be to the federal checkbook. That sentiment led to the 2009 passage of an $800 billion stimulus bill (the American Recovery and Reinvestment Act), which succeeded in stopping the hemorrhage of job loss and creating around 2 million jobs (Cohen). However, despite its successes, the reaction to the stimulus was largely negative because unemployment remained at a startling 10% (Leonhardt), and instead of focusing on the objective flaws of the stimulus (which revolved around its size, an amount that was too small to combat the depth of the financial crisis), Republicans and the emerging Tea Party seized voters’ anger caused by high unemployment, channeled that anger into an electoral victory, and began to push forward austerity measures which claimed to reduce the deficit and debt while creating jobs. The midterm elections of 2010 and resulting Republican takeover of the House and gains in the Senate caused the rhetoric and political actions of Washington to shift from job creation at all costs to a flawed fixation with curbing runaway deficits and lowering the national debt.

Even before the midterm elections, President Barack Obama gave credit to the Republicans’ political agenda, stating in the 2010 State of the Union address that “if we do not take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery” (Sahadi). This change in rhetoric – from job creation and growth to a focus on taming the debt – was quickly echoed throughout the media, building a grassroots hatred of debt – a sentiment from which the Republicans would easily and happily draw in the midterm elections. Following Lance Bennett’s principle of “indexing”, which states that the media tends to echo issues advanced by politicians and the media focuses on the sides argued by opposing politicians, even if those positions have no basis in fact – the media’s reporting of debt dramatically increased immediately following the State of the Union address and once again during the run up to midterm elections. The combination of increased news reporting and changing political rhetoric was primarily responsible for the widespread anti-debt sentiments, however economically dangerous though those feelings are.

A primary concern of those worried about the national debt is the borrowing cost for the United States (Bivens and Irons). It is argued, correctly, that should a country appear insolvent to investors, occurring when investors feel that a country has no possible way of paying back debt obligations and will thus default on loans, interest rates will rise on government-issued bonds because investors will want a greater reward for risking their money, an occurrence that fits within the definition of capital flight (McLeod). When interest rates on bonds becomes too high, it is extremely difficult for a country to raise money because future interest payments will be large and contribute to deficits and future debt. Essentially, it becomes too expensive for a country to borrow money. This has happened recently to European countries such as Greece, Ireland, and Portugal. Those three countries faced abhorrent interest rates on 10-year bonds (the primary measurement of investor faith in a nation) and couldn’t raise money; instead, they relied on loans and bailouts from the Troika (the European Central Bank, the International Monetary Fund, and the European Commission). Fiscal conservatives – those who advocate lessening government spending in order to bring down deficits and the national debt – rightly don’t want America to follow in the footsteps of the financially doomed European countries. But if we let the market speak, we are not in any danger of that happening – after all, as prominent fiscal conservative Milton Friedman said, “If an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it.”

Interest rates on 10-year Treasury bills are near historic lows and have been for quite some time, with inflation-adjusted bonds actually carrying a negative interest rate for parts of 2013. This means that investors were paying the US government to hold onto their money. Clearly, investors have faith that the federal government will be able to pay back its dues and is in no immediate threat of becoming insolvent.

Figure 1: Interest rates on the 10-year Treasury bill from 2010 to November, 2013. Source: Yahoo! Finance
As seen by the above chart, the general trend for the interest rate on the 10-year T-Bill has been for it to fall; in fact, since the first week of 2010, the interest rate has fallen almost 29%. The current rise in interest rates has nothing to do with debt levels, but rather the combined effects of a government shutdown, a near breach of the debt ceiling (which would have left the United States unable to repay short-term debt obligations), and a strong stock market rally, encouraging investors to pull money from low-yielding bonds and instead purchase stocks whose potential for high returns is greater. Furthermore, the current interest rate (2.80% at the time of this writing) is well below the 6.77% average yield of the 10-year T-Bill between 1962 and 2012 (based on data from the Federal Reserve). Letting the market speak – as so many fiscal conservatives scream to let happen – simply bolsters the argument that debt is not yet spooking investors: Based on interest rates, investors are more confident in the safety of the United States government’s long term debt obligations than ever before.

When the national debt reached $16 trillion, fiscal conservatives, Republicans, and even some Democrats threw a fit, zeroing in on the number – out of context – to advocate austerity policies. While the number – $16 trillion – is undoubtedly frightful, it is not “too overwhelming to comprehend” (Perry). When put in context, the amount of debt looks much more manageable and even ceases to be an immediate worry, opening the door for discussions about further expansionary policies.

Yes, the US national debt is large, but so is the US economy. To put the national debt into context, one must examine the ratio of the debt held by the public to the gross domestic product (GDP). Economists care about the debt held by the public and not the gross amount of debt because debt owned by the government (for example, in the Social Security trust fund) “does not affect credit markets” (Kogan, et al). Debt held by the public “affects the economy” and “[t]he borrowing associated with that debt competes for capital with investment needs in the private sector…and can affect interest rates” (Kogan, et al). Thus, to create an apt measure of debt that affects credit markets in relation to the size of the economy, economists use the public debt to GDP ratio (PD/GDP). The chart below shows the US debt held by the public as a ratio of GDP throughout the history of the country.

Figure 2: US public debt as a ratio to GDP. Source: The Atlantic
Historically, the United States’ PD/GDP is not at a high – far from it. During the Second World War, the government ran massive deficits and raked up a high debt in order to purchase the necessary military goods. While this contributed to debt, it also created a booming economy that helped the nation recover from the Great Depression and from which decades of prosperity were born. While there is no world war, or total war, for that matter, on which the government can spend money, the same idea of deficit spending would sow the seeds of an economic boom.

In addition to the PD/GDP ratio not being historically bad or dangerous, the United States’ PD/GDP is lower than that of other countries. Germany’s estimated PD/GDP ratio for 2012 is 81.9%; the United Kingdom, 90%; France, 90.2%; Japan, 214.3%. By comparison, that of the United States for 2012 was 72.5%. In relation to these other G-5 countries, the United States is in solid financial standing with regards to PD/GDP, a story that is rarely told. Even Japan, with a PD/GDP of twice its economy, is experiencing near-record low rates on its 10-year treasuries. The same can be said of Germany. Bond vigilantes, “investors who dump a country’s bonds – driving up its borrowing costs – when they lose confidence in its monetary and/or fiscal policies” (Krugman), have yet to attack any of the countries in a worse fiscal position than the United States, suggesting that should the United States’ PD/GDP rise, the country will be on firm financial standing.

Another issue with which conservatives like to threaten the country with is the inevitable difficulty in paying off the national debt. They are right – it would be extremely difficult to pay off over $16 trillion without substantial damage to the economy and years of austerity measures. That being said, the national debt need not ever be paid off entirely, or at all. Debt can continue to grow as long as its rate of growth is less than the rate of GDP growth. Paul Krugman highlights the trivial example in his book End This Depression Now!: The quickest way to lower PD/GDP would be to keep the real value of the debt constant, achievable if the United States were to pay “the value of debt multiplied by the real rate of interest” (Krugman). Using a real interest rate of 2.5% (around the real interest rate prior to the financial crisis) and multiplying it by the debt held by the public, approximately $12 trillion, results in interest payments of $311 billion per annum to keep the real value of debt constant. While that is a substantial amount, it is only 1.94% of a $16 trillion economy. The United States would be put under minimal financial duress to keep the real value of debt constant. As the economy naturally expands, the PD/GDP will fall. The above example highlights the quickest means of lowering PD/GDP; the ratio will fall no matter what as long as real debt growth is lower than real economic growth.

Accepting, now, that debt is not an immediate problem, the conversation ought to turn to creating policies that will promote full employment and economic growth. That, however, has not been done as austerity measures are all the fashion in Washington. Lord John Maynard Keynes stated it best: “the boom, not the slump, is the right time for austerity at the Treasury.” This is due to the fundamental equation in macroeconomics, which says that GDP is equal to consumer spending (C) plus government spending (G) plus investment (I) plus net exports (NX). Austerity measures decrease government spending, obviously lowering the value of GDP. Fiscal conservatives argue that austerity, which includes decreasing government spending, will lead to an increase in consumer confidence and investment (Aslund). Not so. In an economic decline, consumer spending will remain depressed and as long as unemployment remains high, consumer spending will not increase enough to offset a reduction in government spending. Also, investment will not rise because investors will be hesitant about private investment (money going to business allowing them to upgrade infrastructure, etc). Since consumer spending will be muted, there is little potential for increased profits – or even for profits – making an investment into a company rather risky. Hence, many investors will flood the government bond market seeking safe, albeit slimmer, returns. Now that austerity during the slump has been debunked, a quick examination of the below figure explains why expansionary fiscal policy (i.e., a stimulus) is beneficial to the overall economy.

Figure 3: Expanding aggregate demand. Source:
Expanding the aggregate demand, which is equal to the GDP, also makes the GDP greater and boosts employment (Blinder). Given the components of the GDP, and also employment, it is vital to increase recessionary spending to combat the decline in investment and consumer spending, something that can only be done by the government. Those opposed to government spending will turn to the increase of price levels (inflation) caused by said increase of government spending. Though on the surface inflation may appear to be bad, in moderate amounts it actually aids a recovery.
According to Paul Krugman, one of the main problems facing consumers after the Great Recession was private debt. During the boom of 2000s families piled on debt with levels often times higher than incomes. Consumer spending stalled because as people slowly returned to work, wages were used to pay interest rather than to purchase consumer goods. Here’s where inflation comes in. Inflation benefits debtors; it decreases the value of money so after a period of time, say 15 years, the initial amount borrowed is worth less than it was at the time of borrowing. Assuming wage growth keeps up with inflation, consumers will spend a smaller proportion of their income on interest each ensuing year. Therefore, as inflation rises, the burden of debt diminishes and consumers will begin to have the financial means to buy other goods, thereby increasing GDP and allowing the government to curtail spending, which would rein in inflation growth. For all the bad press it gets, some inflation is actually helpful.

Perhaps the biggest impediment to successful implementation of Keynesian economic policies is the accrual of debt that accompanies deficit spending. The actual amount needed to correct a recession is dependent upon the multiplier effect, the expansion of a country’s money supply because of banking (Investopedia), and Okun’s law, which describes the relationship between changes in unemployment and changes in GDP (Okun); but large deficits would be needed, which ultimately will add to national debt. However, the effects of a Keynesian-style expansion ought to be remembered: higher employment, inflation, and GDP growth. These three elements combined, in the long run, work to erase the added debt.
A contributing factor to the accumulation of debt during a recession is the diminishing of the tax base as consumers become unemployed or encounter lower wages. Higher employment has the opposite effect – it widens the tax base, meaning more tax revenue can be collected and the government will have more funds with which to pay interest on debt. Inflation, too, plays an important role when coupled with a larger tax base. As prices rise, wages also rise (ideally in tandem). Higher wages equates to more taxable income across a wider tax base yielding higher government revenue compared to before the recession. GDP helps lower the burden of debt by the aforementioned statement that GDP growing more quickly than debt lowers the PD/GDP ratio and eases the stress of debt. Together, higher employment, inflation, and GDP growth leave a country in a better financial position than before a recession and in a much better position than if austerity measures were implemented.

The purveyance and anti-debt sentiment can be traced back to 2009, beginning with President Obama’s State of the Union address and continuing with the rise of the Tea Party. While the movement has many vocal supporters – whose numerous, and frankly ridiculous, statements and dramatic rhetoric on the subject translated into increased media coverage and the dissipation of beliefs – the national debt of the United States is decidedly a non-issue. The market has stated that it does not believe the United States is at risk of failing to pay obligations, as evidenced by persistently low interest rates on treasury bills. Moreover, the PD/GDP ratio – the amount of debt held by the public divided by the gross domestic product – is neither near record highs nor as bad as other G-5 countries, all of whom are also experiencing near-record low interest rates. The United States’ PD/GDP of around 75% is well below the 90% threshold that many economists believe to be dangerous for economic growth (Kogan, et al). Even another stimulus will not bring the country to that level and if it does, the positive effects of the stimulus will quickly lower the PD/GDP. The benefits of adopting Keynesian-style expansionary policies far outweigh the costs of an immediate increase to debt. Boosting government spending via deficit spending and borrowing will lead to an increase of aggregate demand, raising employment, wages, and GDP, allowing the United States to enter a virtuous cycle of economic growth. Once consumer spending returns to levels capable of driving the economy, the government can implement slight austerity measures to contain a hot economy and to pay down debt.

Debt levels are hefty, but they never need to be repaid. The burden of debt will be eased as long as GDP growth is greater than the growth of publicly-held debt. This means deficits need to be a smaller proportion of the total publicly-held debt than the rate of GDP growth. During a fiscal expansions this will not be the case, but once the economy has recovered due to expansionary policies, deficits can be curtailed and GDP growth will be high. Over time, the PD/GDP ratio will fall and even fiscal conservatives will not be able to use debt as a means by which to win elections.

The above suggestions currently feel unfeasible because of the political and popular climate towards debt. Again, this can be changed either by vocal progressive politicians or by a change of the media. Either will provide the spark needed to burn the incessant and erroneous debt beliefs.
Debt is a tool and must be viewed as such. Without utilizing all financial weapons, the country will inevitably be doomed to years of minimal growth, high unemployment, and low labor force participation. To quote Larry Summers, the Treasury Secretary during parts of the Clinton administration, “[w]e averted Depression by acting decisively in 2008 and 2009. Now we can avert a lost decade by recognizing current economic reality.”

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