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Saturday, October 28, 2017
If you prefer to listen rather than read, this blog is available as a podcast here. Or if you want to listen to just this post:
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I’m an okay chess player. But I’m a voracious reader, and so the amount of reading about chess I’ve done is high relative to my skill. (If you were being technical you might say I have a high pages/Elo rating, which is actually bad.) All of this is my way of saying, when I start talking about chess, which I’m about to, that I’m not trying to put myself forward as some sort of chess savant, merely someone who’s read a lot. And in that reading I came across an idea which has ended up being a useful framework for thinking about a lot of situations that have nothing to do with chess. It’s the idea of a “speculative attempt to complicate” and as far as I can tell I am the only one who’s adopted it for use outside of chess, given that a search on the term (in quotes) yields only seven results.
(As a tangent if you ever doubt my mastery of search engine optimization, just watch me rocket to the top of that seven, now eight item search, with my well chosen title.)
What is a speculative attempt to complicate? In chess notation you use an exclamation mark for good moves (more is better) and question marks for bad moves (more is worse) but you’ll also occasionally see an exclamation mark and a question mark, and if the question mark is first (i.e. “?!”) it means “A speculative attempt to complicate”. The idea being that the game isn’t going great for the person making the move, so they make some speculative, chaos-causing, non-standard move, hoping that out of the chaos a new setup will emerge where they’re in a better position. The idea being that if they do what’s expected they’ll just lose, but if they cause some chaos, or if they complicate the game, the possibility exists, that once the complication is resolved, that their position will be better.
In 1787 the King of France, Louis the XVI, was losing the game of running the country. And to be fair the deck was stacked against him (to mix metaphors). At the time, people were dealing with the heady ideals of the enlightenment. There was a rising, and restless middle class, not to mention, social unrest, famines and wars. And, speaking of wars, the American Revolution was of particular impact, in that it not only served to stoke revolutionary fervor in France, but added an immense amount of money to France’s already substantial debt. And as it turned out this debt was getting to be a problem, though, at least here, the King was not blameless, since he, his father and his grandfather had spent an enormous amount of money on themselves (you may have heard of a little thing called Versailles?) In fact while things like social unrest and war and famine may have been more important in the final analysis, it was the country’s debt which really started the ball rolling, or as historian John Shovlin said:
It is a truism that the French Revolution was touched off by the near bankruptcy of the state.
For those paying attention you may see why this post follows my last post. And, to be clear, I’m not claiming that the debt caused the revolution. It wasn’t the biggest problem, but in 1787, on the eve of the revolution, it was the most immediate problem. Obviously neither the King nor his finance minister were unaware of this problem and the quick succession of ministers who were dismissed after failing to solve it, should give some clue as to its severity. However despite the number of people who made the attempt, the problem proved impossible to resolve. Eventually, in desperation the King convened an Assembly of Notables. The arcana for why he convened the assembly and what he was hoping they would accomplish is too lengthy to get into, but structurally, although the assembly probably wanted to do something, they ended up being largely ineffectual. (One wonders if that would have changed if the nobles had known what was coming.) With the notables/nobles unable to get on top of the problem there was only one thing left to do, convene the Estates General. While convening the Assembly of Notables was kind of a risky move, convening the Estates General was the King’s true speculative attempt to complicate. Perhaps the fact that it had been 175 years since the last time they were convened (1614) will give you some sense of how risky, unprecedented and desperate this move was.
It’s interesting to imagine what would have happened if the King had not made this move. I’m no expert on the French Revolution, and given all the revolutions that subsequently occurred, just in France, it may be that the overall arc of things would not have been that different. Perhaps the King would eventually have to have abdicated in favor of someone else. Perhaps if he hadn’t convened them everything would have been a lot worse. What is clear is that none of the major players, and particularly the king, would have convened the Estates General if they had known what was going to happen: Robespierre, the execution of the King, the rise of Napoleon, etc. etc. (One wonders if even Napoleon, who was 20 at the time, would have “pulled the trigger” if he had known the whole arc, probably, but it’s hard to say.)
Also one other thing about speculative attempts to complicate. By this point you have probably realized that we do have other terms for what the King was doing that are in more common usage. Someone can “go out on a limb”, “roll the dice” , or “throw a hail mary”. But the problem with these terms is none of them mention the idea of complicating the situation as a way of turning around a losing game. Rather these terms just represent desperate gambles that will either clearly fail or clearly succeed. The pass is either caught or it isn’t. Had Louis the XVI asked the UK for help (totally inconceivable I realize), or had he implemented a radical new tax, or if he had executed the latest finance minister rather than firing him, those are all hail mary’s, but by convening the Estates General he was complicating matters, primarily by granting de facto authority to a lot of new people, all of whom were wildcards to a certain extent.
Lately a similar idea has been getting press in the US and the parallels are a little bit eerie. We are also in a situation where there’s broad agreement that government is broken. There’s even some agreement that one of the main problems is financial, though, to be clear, despite what I said in the last post, I don’t think the US is heading towards bankruptcy in the same fashion as the French Monarchy. (History doesn’t repeat, it rhymes.) But, for those who are the most worried about financial crisis, there is an unused clause of the constitution, that may allow them to make a speculative attempt to complicate in a game they feel like they’re otherwise going to lose, just like the king.
This particular speculative attempt to complicate involves calling a constitutional convention, as provided for by Article V. In one of the recent articles about this possibility from the Economist, they explain the interesting backstory of the convention clause:
THE I’s had been dotted; the T’s were crossed. The 55 delegates to America’s first and so-far-only constitutional convention had hammered out compromises on the separation of powers, apportionment of seats in the legislature and the future of the slave trade. But on September 15th 1787 George Mason, a plantation owner from Virginia, rose to his feet to object.
Article V of the draft text laid out two paths by which future amendments could be proposed. Congress could either propose them itself, or it could summon a convention of representatives from the states to propose them. Mason warned that if the federal government were to become oppressive, Congress would be unlikely to call a convention to correct matters. To protect the people’s freedom, he argued, convening power should instead be vested in the states. Should two-thirds of their legislatures call for a convention, Congress would have to accede to their demand: a convention they should have.
The constitution was signed two days later, with Article V changed as Mason had suggested. Since then 33 amendments have been proposed, with 27 subsequently ratified, a process which requires approval in three-quarters of the states. Whether the issue was great (abolishing slavery) or small (changing the date of presidential inaugurations), all 33 of the proposals came from Congress. Mason’s mechanism for change driven by state legislatures has never been used. Even politically informed Americans often have no idea it exists.
As mentioned it’s never been used, so that gives us yet another parallel, it had been 175 years since the last time the Estates General were convened, it has been 230 years since the last constitutional convention. It may be too early to queue the ominous music, but you can see why it’s interesting.
As the article mentioned even well-informed people often have no idea that such a thing is possible, and if you are one of those people who had no idea you may be experiencing some combination of curiosity, fear or possibly boredom. Let’s start with boredom.
You might be experiencing boredom because your immediate reaction is to view it as one more thing which, while technically possible, is very unlikely. Something like Evan McMullin becoming president in 2016 if he had won in Utah and the electoral college was otherwise deadlocked, or like the Secretary of Housing and Urban development becoming President after everyone else is killed. Well, one of the reasons it’s in the news is that it may be more likely than you think. At this point 27 states have requested a convention. A convention only requires 34, which leaves just 7 more states. Conveniently, there are 7 Republican states who haven’t requested a convention and in the next couple of years they’re all going to consider the issue.
What does being Republican have to do with it? Well the major impetus for all of this is a balanced budget amendment. These are the people I mentioned who are really concerned about the financial crisis and are attempting their own speculative attempt to complicate. In any event, what this all means is that, according to the article, opponents and supporters are giving even odds of it happening by 2020. Thus it may not be as unlikely as you think. Better odds than people gave Trump and we all know how that turned out.
From this you may be ready to move to curiosity, but before we do that, let’s look at one other reason for boredom. The subtitle of the Economist article is “If it did, that would be a dangerous thing.” Okay, admittedly that’s not a phrase that immediately brings boredom to mind. But in the letters section of the next issue one of the supporters of Article V, wrote in and retorted that holding a constitutional convention wasn’t dangerous, and that, in fact, it isn’t even an actual constitutional convention. That it was rather a “convention for proposing amendments”, in other words it’s only point would be to get a narrowly worded amendment approved for voting, in the current case the balanced budget amendment. Thus while the convention wouldn’t necessarily be boring per se, it would be a lot less exciting than The Economist (or any of the other articles) is claiming.
But, of course, I’ve come a long way without saying why the Economist called it dangerous or why Esquire called it a constitutional crisis. And if you’re still with me, at this point, you’re probably more curious than bored. And to satisfy that curiosity I suppose we should actually look at Article V:
The Congress, whenever two thirds of both houses shall deem it necessary, shall propose amendments to this Constitution, or, on the application of the legislatures of two thirds of the several states, shall call a convention for proposing amendments, which, in either case, shall be valid to all intents and purposes, as part of this Constitution, when ratified by the legislatures of three fourths of the several states, or by conventions in three fourths thereof, as the one or the other mode of ratification may be proposed by the Congress;
I think the key word in the clause about the state conventions is, “amendments” plural. I know the guy who wrote the letter to the editor in The Economist seemed pretty knowledgeable, and cited a lot of legal precedents, but at a minimum, from my reading, it looks like there would be grounds for someone to try and go beyond just the balanced budget amendment to propose numerous amendments. Even if they did, it still appears, that this just puts the amendments on the “ballot”, so to speak, and that you would still need 3/4ths of the states to approve them.
Three-fourths of the states is a pretty high hurdle, and even when you toss in the possibility of multiple amendments, it’s not, on it’s face, “dangerous” or a “crisis”, but this is why I started by talking about speculative attempts to complicate and the convening of the Estates General. The king didn’t convene them because he wanted to be beheaded in four years. He convened them for the very narrow purpose of fixing the financial crisis. Just like the, suggested, constitutional convention is being organized for the very narrow purpose of proposing a balanced budget amendment. And the danger and the potential crisis come from the idea that just like the Estates General went WELL BEYOND their original purpose, there is some possibility that a new convention would go well beyond it’s original purpose. This is where fear enters into the picture.
But what reason would the convention have to go beyond it’s original purpose? I think when people consider the current divisiveness and anger, the answer to that question is obvious. Though, to be clear, things were a lot worse in 1789 than they are in 2017. That point aside I’d like to draw your attention to another issue which goes unmentioned by any of the articles I’ve read. The other method in Article V for proposing amendments, the congressional method, is broken. The last amendment was passed in 1992, 25 years ago, and given that it was initially proposed in 1789, I don’t think it should win any awards for either speed or efficiency. Nor was it particularly controversial.
The last one before that was 1971, 46 years ago. And it was the relatively uncontroversial amendment of lowering the voting age to 18. As evidence of how uncontroversial it was, it was the shortest time from proposal to ratification of any amendment. And, though I won’t bother to go through each amendment one-by-one, I would say that you have to go all the way back to 1920, or nearly 100 years, to find an amendment that was actually controversial. I’m referring to Amendment 19, the one giving women the right to vote, (an idea that’s completely uncontroversial now.) It could possibly be argued that the 24th, eliminating the poll tax, was controversial, but if so, it’s the only one in 100 years that was.
As I have argued previously, the Supreme Court has mostly usurped the role of the amendment process. Making it largely unnecessary, particularly for those on the more liberal side of things. And thus one way of looking at this may be as a battle between the liberal method for amending the Constitution and a new way the conservatives are trying to implement. And in part I think that’s why people are worried. If this convention does happen and it does end up being yet another battleground, how could the left/Democrats/progressives sit it out? Perhaps if they’re sure, like the letter-writer I mentioned earlier, that the judiciary will keep things tightly contained, they might not worry. But I wouldn’t count on it.
If you’re looking for reasons to worry, the soonest a convention could happen would be 2019 (blame Montana) and it probably wouldn’t happen until 2020, and a lot can happen in 3 years (just ask Louis XVI). Imagine that in that time, Trump has managed to appoint another justice to the Supreme Court. And imagine that with both Gorsuch and this new judge that things start moving in a direction the left doesn’t like. Imagine that some of the rulings which act like amendments, for example Roe v. Wade, are in danger of being overturned. Imagine further that before the convention can be held that Trump wins re-election. None of these scenarios is that unlikely (though I acknowledge that the cumulative probability is low). If a convention is held and all of these things have happened, does anyone imagine that the convention would be a nice quiet affair?
I’ve gone fairly deep on this one example of a speculative attempt to complicate, and to wrap things up I should probably go wide. Perhaps you’re convinced that the convening of the Estates General was an attempt to complicate and that it went poorly. And maybe you’re even convinced that the proposed constitutional convention bears enough resemblance to what happened then for people to be concerned. Despite all this, you’re almost certainly looking for other examples, which is what I mean by going wide. Making one connection doesn’t prove much of anything, but what if there are dozens of examples of speculative attempts to complicate? I would argue that there are, and that, in fact, they’re everywhere once you start looking. However, this doesn’t mean that the individuals making these “moves” always realize that that’s what they’re doing.
A couple of examples:
After 9/11 the US was losing to the terrorists (or at least that’s how it felt), Saddam was still in power and the Middle East was a mess. After considering all of this President Bush decided to make a speculative attempt to complicate by invading Iraq, though he probably didn’t think of it that way. And here we see one of the key features of the unknowing speculative attempt to complicate. The people attempting it often only see the likely, good outcomes, not all the possible outcomes. In this case Bush thought that overthrowing Saddam was obviously a good thing, and there was even a chance that he could turn Iraq into a peaceful and stable democracy that would be a beacon to the rest of the Middle East. I assume that there was always a chance that this is exactly how it would go, and Saddam was a bad guy, and, as I said, the Middle East was a mess. Finally, It did feel like we were already losing, and how much worse could it be? Well we got our answer. Iraq is basically a client state of Iran. (Or so my Lebanese cab driver claimed.) ISIS replaced Al Qaeda. And while Iraq may have provided the spark for the Arab Spring, that’s definitely been a mixed bag, particularly when you consider the Syrian Civil War. Meaning, whatever else you may think of it, Iraq was a speculative attempt to complicate, and it didn’t work out.
Wars are the biggest example of this sort of thing, and World War I in particular really took the cake. Gavrilo Princip and the Bosnian Nationalists were losing their quest for independence so they made a speculative attempt to complicate and assassinated the Archduke. Germany was losing the game of colonies and they made their attempt by starting the war and invading Belgium. Britain was worried about staying on top navally and they joined in on the side of the allies. The Austro-Hungarian empire was crumbling so they decided to invade Serbia. And the list could go on. Many people honestly thought a war was exactly what was necessary to shake things up. They also believed, almost to a man, and on all sides, that it would be a quick war. I was just reading the World of Yesterday by Stefan Zweig (of which I may say more in a future post), who was there during this period. He talked about exactly this feeling playing out at the beginning of the war in Austria, where young men were “honestly afraid” that the war might be over before they could get there. And I’ve read other books that described exactly the same thing happening in other belligerent nations. Numerous speculative attempts to complicate, all made by people who were only looking at only the potential good outcomes, not loss of empire, execution by the Bolsheviks, hyperinflation, or another, worse war 25 years later.
Currently I see speculative attempts to complicate everywhere I look: the debt ceiling brinksmanship, Catalonia voting to secede, Brexit, Kim Jong Un’s nuclear posturing, or perhaps the biggest one of all, the election of Trump…
Is donating to this blog a speculative attempt to complicate? Maybe, it is complicated and unlikely to make much difference. But it might nevertheless yield interesting results.
Saturday, October 21, 2017
If you prefer to listen rather than read, this blog is available as a podcast here. Or if you want to listen to just this post:
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I mentioned last week that I “feel a post about the deficit coming on.” Which makes it sound a little bit like a bowel movement. Perhaps that’s a valid comparison. Certainly it’s a subject that affects our lives a lot more than we would like to admit, but also rarely discussed in polite society. Finally, if things get out of whack, there can be disastrous consequences.
I don’t recall specifically thinking about this at the time, but I’m sure the news that the national debt recently passed 20 trillion dollars had to play a part in my desire to write about it now.
Perhaps you also heard the news that the national debt had passed $20 trillion, but it’s equally probable that you didn’t. It didn’t appear to be very big news, at least from my perspective. Certainly people mentioned it, but I think the news was dominated by Irma and as usual, i.e. Trump. As I said, it’s possible that it was just me, but in an effort to find a more objective source I stumbled onto the Vanderbilt Television News Archive. Searching a period from September 11th (I’m sure that’s part of the problem) to today (October 20th) There were zero stories which mentioned the “deficit”, 4 stories which mentioned “debt” (and none of them actually appear to be talking about the national debt) versus 109 stories which mentioned the word “hurricane” and 190 stories which mention Trump. Leading me to conclude it wasn’t just unremarked on from my perspective.
I do understand that $20 trillion is somewhat arbitrary, and it would be difficult to make the case that somehow $20 trillion is qualitatively different than $19.5 trillion. Still they’re both staggering numbers, high enough to deserve some comment, I would think, even if we hadn’t passed a major (albeit somewhat arbitrary) milestone. My go to source for the a snapshot of the problem and all its facets is the US Debt Clock, which is equal parts illuminating and frightening. As of this writing the debt, stands at $20.424 trillion (meaning we’re closing in on halfway to our next trillion.) The debt clock helpfully translates this into more easily understandable numbers and tells us that this equates to a debt of $63,646 per citizen and $169,251 per taxpayer.
I would hazard to predict that most people start worrying when they hear these numbers, but it’s most likely a directionless worry. What can the average citizen do about a $20 trillion dollar or even a $63k of debt? Of course there are people whose job it is to worry about these sorts of things and to offer advice about what should be done. This includes people with direct responsibility like those who actually work at the Treasury Department, but I would also extend it to include people outside the system, like economics professors and newspaper columnists. And many, if not most, of these people, the most notable of which is Paul Krugman, contend that there’s really nothing to worry about.
Why aren’t they concerned? Well, if you look into it you’ll come across a few different reasons for this. I’ll provide a brief overview of several of them, though this list is not comprehensive. And then later I’ll look at why, despite these reassurances, we might still need to worry.
- Unlike individuals who are obligated to pay back their debt according to the terms of the original loan, governments are not so obligated, they just have to, as Krugman said, “ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.”
- Krugman also points out (from the same article) is that, unlike individual debt, which is money we owe to someone else. The national debt is money we owe to ourselves. Just to be clear this is true for the majority of the money, but there’s still $6 trillion dollars which is owed to foreign investors.
- When you compare the debt to the national GDP, and compare the US’s indebtedness to other countries it’s not that bad. The US is only number 8 in terms of indebtedness, and based on debt as a percentage of GDP, we’re only half as bad as the #1 country, Japan. (Over 100% vs. well over 200%.) And Japan is doing okay, meaning presumably we have a long way to go before we have to worry.
- Borrowing money is currently a very good deal. Ever since the financial crash the interest rate the government has to pay to borrow has been extremely low. To once again use the analogy of a typical consumer, sure it’s stupid to borrow money on a credit card that charges 18%, but borrowing money at 1.5%, particularly if you could find a way to reinvest it at 5% would be a great deal.
- Our debt is in dollars, and we can print dollars. One person compared defaulting on our debt to the difficulty of starving to death in a warehouse full of food. It’d be possible, but not very likely.
- Our assets greatly exceed our liabilities. The US government owns buildings, land, infrastructure, and some exceptionally valuable nuclear missiles. Our debt may be a huge negative value, but our net worth is an even huger positive value.
Those are a selection of the most common reasons the experts give for not worrying about the national debt or the current deficit. I may have missed one or two, but I think I got all the big ones. And now, if you’re anything like most people you may be torn between the gigantic size of the debt, and your long standing belief that debt is bad, on the one hand and the “experts” telling you, on the other hand, not to worry about it.
Unless this is the very first post of mine that you’re reading, you can probably guess that I think the debt, and the ongoing deficit, are problems. Problems we should be worried about. That being the case, what would I say in response to the six reasons listed above urging me and everyone else not to worry?
- Krugman says that we just have to ensure that the debt grows more slowly than the tax base. I agree, but I don’t see any evidence that this is happening. The government consistently spends about 18% more than it takes in, and most future projections show that this will only get worse. I’ll have a lot more to say about this point.
- I also understand that this is money we owe to ourselves, but that doesn’t make it frictionless. It’s not like when my wife owes me $20, but really she doesn’t, because we have a joint checking account. This joint ownership has significantly more players involved, with significantly less affection. As a thought experiment, imagine the US reneging on the domestic portion of the debt with a cheery, “Well it was all money we owed ourselves!” And see if, afterwards, anyone is still making that argument from the smoking ruins of Washington DC.
- I agree that other countries have it worse. And perhaps as long as Japan is fine we can confidently continue on our course, but just because Japan is fine now (though there’s argument even with that) doesn’t mean they’ll be fine forever, nor does it even mean that we’ll be fine until we hit the same level as Japan. Japan is one data point, and not even a very good comparison to the US, given the vast differences.
- Yes, interest rates are currently low, but it’s not as if there’s some method whereby the minute they go up we pay off the $20 trillion dollars and go back to being financially prudent. Rather we still have that debt (and probably a lot more) and we start to have to pay the higher rate of interest, which takes up an increasing percentage of the total budget. Federal debt isn’t a 30 year fixed rate mortgage it’s an adjustable rate mortgage that lasts forever.
- It is true that our debt is denominated in money we can print, but that doesn’t mean that printing money is free of consequences. You may have heard of a little thing called inflation? I suppose this technically does mean we can’t default on our debt, but that doesn’t mean bad things can’t happen and that we shouldn’t be worried.
- Finally, getting back to friction, we do have vast assets, but how liquid are those assets? If it comes to it, who’s got the money to really buy an aircraft carrier? I’m sure China would, but that’s a situation where the cure is worse than the disease. People like Krugman make a lot of noise about how you can’t compare household debt to government debt, and in this case, you can’t compare household assets to government assets. There is no ebay for the Pentagon.
At this point we have a bunch of clever reasons not to worry about the deficit and a bunch of clever responses for why we still should. And if asked to choose between the cleverness of a Nobel Prize winner like Krugman and my cleverness, or what I’m attempting to pass off as cleverness, it’s perfectly reasonable to want to choose the Nobel Prize winner over me. But before you do that, there are some additional things for you to consider. First there is no true cleverness here or on the other side. No one really knows anything. Having a debt of $20 trillion dollars is so far outside of the range of normal human and historical experience that neither the expert’s reasons for calm, nor my responses are based on anything actually resembling data.
This is not to say people haven’t tried. As I mentioned above, when you compare the US to Japan our debt as a percentage of GDP looks pretty good. But how strong is this comparison? Well, by the normal standards of scientific rigor it’s really, really weak. On the other side of things Reinhart and Rogoff released a study which showed once your debt to GDP ratio got over 90% that economic growth slowed. This at least was more than a one to one comparison between the US and Japan, but it also had some problems, not the least of which was the lack of real data. In other words, it doesn’t matter what side you’re on, we’re definitely in uncharted territory. Which is fine, if the consequences for being wrong are small, but the consequences for being wrong are not small, the chances of being wrong may be small, but the consequences of being wrong definitely aren’t. (And I don’t think the chances of being wrong are especially small either.) The US Government Bond market represents a single point of failure, and if it fails, it would be catastrophic in ways you could hardly imagine.
All of which takes us to a point I make again and again, certain risks are so great that even if the probability is low, making sacrifices to prevent that catastrophe are not only warranted but wise. And while I agree that in the short term the danger is pretty low, no one is sure what the endgame is going to be, and that’s where I’d like to turn now.
To begin with, let’s return to Krugman’s assertion. That debt just needs to grow more slowly than the tax base. Once again, I agree, but this last happened around the year 2000, and it was a tiny blip even then. I don’t see any reason to suspect it’s going to happen again, certainly not in the foreseeable future, particularly when you consider the enormous, and increasing cost of the entitlement programs. Thus even if we grant that a certain amount of debt is okay and maybe even beneficial, I don’t think anyone believes that we can take on infinite debt. But if debt continues to grow faster than taxes, something is going to have to give. That might not even happen until debt is 1000% of GDP, but regardless, as long as debt grows faster than taxes something will have to change. So what are the options?
Given that it’s worked so far, let’s turn to another list of six items. This time a list of options.
- Grow our way out of debt: As I have already mentioned this is the ideal way to deal with debt. But as I have also pointed out it doesn’t seem very likely to happen. Since 1967 the debt has grown at an average rate of 8.65%, while GDP has grown at an average rate of 2.85% during that same period. Increasing the tax rate can overcome some of this gap, but that will only take you so far. (See Option 3) Also if anything growth appears to be slowing while the budget (particularly mandatory spending) just keeps getting bigger. Again I agree with Krugman that as long as our growth keeps up with our debt, we probably have bigger things to worry about, but I don’t see the slightest evidence that this is happening.
- Cut Spending: Obviously this is where all the arguments are taking place. Though despite all the Sturm und Drang over entitlement cuts and the revocation of Obamacare, I haven’t seen much evidence that anything like this is going to happen. And if you look at the amount that would have to be cut, it’s frankly ridiculous. Imagine that you wanted to get the debt down to 50% of GDP within the next 20 years. Assume that the economy grows at 3% per year without a recession. (Which is extremely optimistic.) Our current GDP is around $18.5 trillion, so in 20 years it would be $33.5 trillion, meaning 50% is $16.75 trillion. That’s $3.25 trillion dollars less than our current deficit, meaning we’d have to not only balance the budget, we’d have to be 162 billion dollars under budget on average, every year for 20 years. In the recent history that did happen from 1999-2001. But 3 years in a row is a lot different than 20 years in a row, particularly given that in less than 20 years, according to the Congressional Budget Office projections, entitlements and interest are expected to consume 100% of revenues. Finally, even if we assume that the right mix of politicians could do this, how would they ever get elected?
- Raise Taxes: Obviously these first three options are all closely related, and, to me, they all appear extremely unlikely, though I know that some people feel that raising taxes would be the easiest of the three. That said it’s not as straightforward as people think. There’s a functional limit to how much you can extract both practically and politically in taxes, and the tax rate has less to do with it than you think. Look at this graph and observe how despite the top marginal rate being all over the place (at one point as high as 90%) the actual revenue collected since World War II, as a percentage, has barely budged. And as I mentioned, there’s very good reason to believe that growth is slowing, and when that’s combined with increased spending, which is already locked in by law, the tax increases would be pretty staggering. In the near term 50% is not out of the question, and in the long term, if trends continue as they have, you could be looking at having to double tax revenue. If you thought it was hard to get elected by promising to cut the deficit, imagine how hard it would be if you promised to double taxes.
- Inflate the debt away: From 2008 to 2009 Zimbabwe entered a period of hyperinflation. The numbers are astonishing, and almost hard to grasp (how often do you hear someone use the term “sextillion percent”?) But one illustrative example is that at the beginning of things they were printing 10 dollar Zimbabwean Bills, and by the end they were printing 100 billion dollar Zimbabwean Bills. Meaning, if the same thing happened to the US, you might be able to pay the entire debt off with the equivalent of 2,000 pre-hyperinflation dollars (presumably in gold or something like that). This is a particularly extreme example, and I’m not suggesting that’s what will happen in the US, if it did the cure would be much worse than the disease. The question is, is there some less extreme version of this? There might be, but I’ve never seen a good explanation of how it might work. But at a minimum if the gap between debt growth and GDP growth continues at 5.8% (see figures in option 1) then inflation would have to be at least that much, and that assumes that the debt doesn’t start growing faster, but it almost certainly would since much of spending is indexed to inflation, and even the stuff that isn’t indexed to inflation would still be influenced by it.
- Default on the debt: Given that this is precisely the cataclysm we want to avoid, I don’t think it’s an option anyone would choose voluntarily. But it is an option, and definitely the option that is mostly likely to happen without warning and without any planning, and perhaps without even much advance warning. Needless to say while most people acknowledge this it’s a possibility, no one wants to discuss it. And to use a quote from Douglas Adams: “The major difference between a thing that might go wrong and a thing that cannot possibly go wrong is that when a thing that cannot possibly go wrong goes wrong it usually turns out to be impossible to get at or repair.” I’ve already linked to people who say we can’t possible default on our debt. I hope they’re right, but consider that there have been all manner of things which cannot possibly go wrong, but have gone wrong despite this.
- A singularity: Long time readers of this blog were probably wondering when this was coming. And for those that are just joining us. Here I refer to something that changes the rules in such a way that none of the previous assumptions are valid. In this case it would probably have to be something big enough that it eliminated the need for money all together. A nanotechnology manufacturing revolution which creates a post-scarcity society. Brain digitization into a virtual world where nothing costs anything because it’s digital. Something of that nature. Of course, what this amounts to in essence, is hoping for a miracle. Or at the very least they’re hoping that something will come along in the future and fix it. A more accurate name for this is kicking the can down the road.
I don’t think most of the people telling us not to worry about the debt will actually come out and say they’re advocating kicking the can down the road, but if they’re not, which of the other solutions I listed above are they proposing?
I honestly don’t know. There are people who argue that we don’t need to worry about the debt, but they mostly seem to be arguing that we don’t need to worry about it right now. Primarily because the US can still borrow very cheaply and there’s no sign of that anyone is losing trust in our ability to repay the debt. That does appear to be true, for now. The question no one knows the answer to, regardless of what they claim, is how long that will last.
The national debt is a giant source of fragility. And the best plan for dealing with it seems to be “ignore it and hope something comes along later to solve it.” Which takes us back to a theme I’ve been emphasizing since the beginning, we’re in a race between singularity and catastrophe. And as far as the national debt goes, I think catastrophe has a sizable lead.
The Federal Government needs an enormous amount of money to run, you know who doesn’t need an enormous amount of money? Me. In fact I’d be happy with a buck a month. If you enjoy this blog and can spare it, consider donating.