As usual, Marco, this is a very thoughtful comment, especially because you cite such thoughtful analysts(!).
You are absolutely right that America's "soft budget constraints" have permitted debt to rise rapidly and no one across the political spectrum wants to address the problem. I wonder, however, if we are thinking about this the wrong way. It's a problem, but unlike a household the US never has to pay back all its debt. It just need to keep convincing investors that it has the most open economy with the best prospects for delivering consistent innovation and growth. As long as that remains the case, the absolute levels of debt matter much less. Now I agree that neither candidate is proposing measures that will make America more innovative and more attractive to invest, but think of how well we are doing in spite of all these missteps.
In fact, it's an interesting thought experiment to consider how much more growth could we really expect if we had a sensible tax system, lower debt levels and a reasonable social safety net?
Christopher, I am glad you approve of my sources :)
I think the crux of the matter is where you say " It [the US] just need to keep convincing investors that it has the most open economy with the best prospects for delivering consistent innovation and growth. That is absolutely correct. And my concern is exactly that given the underlying trends, this premise might at some point prove incorrect. Productivity growth is weak (yes, I know, we have the eternal digital promise...), human capital is deteriorating, and government is becoming more heavy handed with regulations and various forms of industrial policy. True, it's all relative, and our competitors are doing even worse (as I think I mentioned in my comment on your analysis of the dollar); and Japan survives with a much higher debt.
So maybe a clearer way to express my concern is the following: I don't worry about a possible debt crisis -- we agree there. I worry that the rising burden of debt together with an already bloated budget will make it increasingly harder for US policymakers to restore the conditions that can generate faster growth in per capita incomes.
So why not turn your thought experiment into an actual experiment...?
The two parties are playing a game of chicken with the debt, each hoping that the issue comes to a head on the other’s watch.
The big question for me though is: when did politics become policy-free? Do parties only cater for emotions because that way they can mobilize the base? Or is it that voters aren’t interested in policy? Or both? (I blame social media, but I think that’s only part of the answer.)
Yes, on the first point, I remember a game-theory paper from my graduate school days making the simple point that each party, when in power, has an incentive to run up debt so as to reduce the room for maneuver the opponents will have when they take power -- validates your argument.
Your big question is much more important, and I do not have a tight answer yet. It feels to me like (1) too many voters have taken prosperity for granted and forgotten the hard work it takes to build it; (2) the policy focus over the past 25 years has been almost exclusively on demand stimulus: lower interest rates, Quantitative Easing, more government spending; this has entrenched the sense that economic policy boils down to printing and spending money whenever the economy looks weak - and has weakened the incentive to think about what policies can build sustainable prosperity; (3) in our societies, attention spans have weakened and thinking has become shallower (and here social media has played a key role); there is little patience and appetite left for thinking through the problems, listening to different points of view and making up our own mind -- the preference defaults to slogans and easy answers.
That might explain why, even as voters say they care above all about the economy, neither part feels the need to present a well-thought out economic plan.
Thanks Marco, very insightful. A (maybe provocative) question on debt: should we find another word for it? 'Federal Debt' assumes that the US public sector will pay back something in the future. It will, because otherwise it would be publicly shamed (or even more inconveniently, interest rates would rise); but the money to repay its debt (and its interest payments) is gathered via more debt. So long as US debt continues to rise, investors are forced to pour more and more money into US Federal assets, crucially more than what they get back in interest and principal repayments.
So is it 'debt' a hidden taxation? Not really, because tax yields no interest; but should we consider (debt-interest payments) as a tax on the public? If so, what is the real tax burden in the US? And what do foreign investors get in exchange for their holdings?
Provocative and hard to answer. Here is how I understand it: (1) US debt is one of the largest and most liquid asset market, because historically the US economy has been strong and backed by sensible macro policies. In exchange for their money, foreign investors get to hold a liquid and safe asset ; (2) this allows the US government to issue more debt at limited additional cost (compared to other countries); (3) a typical negative effect of a weak budget constraint is that there is no incentive to spend the money well -- indeed infrastructure, education and health care outcomes ave deteriorated even as spending and debt have gone up; (4) this can't last forever -- eventually it becomes harder to finance debt with new debt, and the existing debt becomes a tax on your citizens (through higher taxes or lower services). That's where many other countries have ended up, and eventually....
As usual, Marco, this is a very thoughtful comment, especially because you cite such thoughtful analysts(!).
You are absolutely right that America's "soft budget constraints" have permitted debt to rise rapidly and no one across the political spectrum wants to address the problem. I wonder, however, if we are thinking about this the wrong way. It's a problem, but unlike a household the US never has to pay back all its debt. It just need to keep convincing investors that it has the most open economy with the best prospects for delivering consistent innovation and growth. As long as that remains the case, the absolute levels of debt matter much less. Now I agree that neither candidate is proposing measures that will make America more innovative and more attractive to invest, but think of how well we are doing in spite of all these missteps.
In fact, it's an interesting thought experiment to consider how much more growth could we really expect if we had a sensible tax system, lower debt levels and a reasonable social safety net?
Christopher, I am glad you approve of my sources :)
I think the crux of the matter is where you say " It [the US] just need to keep convincing investors that it has the most open economy with the best prospects for delivering consistent innovation and growth. That is absolutely correct. And my concern is exactly that given the underlying trends, this premise might at some point prove incorrect. Productivity growth is weak (yes, I know, we have the eternal digital promise...), human capital is deteriorating, and government is becoming more heavy handed with regulations and various forms of industrial policy. True, it's all relative, and our competitors are doing even worse (as I think I mentioned in my comment on your analysis of the dollar); and Japan survives with a much higher debt.
So maybe a clearer way to express my concern is the following: I don't worry about a possible debt crisis -- we agree there. I worry that the rising burden of debt together with an already bloated budget will make it increasingly harder for US policymakers to restore the conditions that can generate faster growth in per capita incomes.
So why not turn your thought experiment into an actual experiment...?
The two parties are playing a game of chicken with the debt, each hoping that the issue comes to a head on the other’s watch.
The big question for me though is: when did politics become policy-free? Do parties only cater for emotions because that way they can mobilize the base? Or is it that voters aren’t interested in policy? Or both? (I blame social media, but I think that’s only part of the answer.)
Yes, on the first point, I remember a game-theory paper from my graduate school days making the simple point that each party, when in power, has an incentive to run up debt so as to reduce the room for maneuver the opponents will have when they take power -- validates your argument.
Your big question is much more important, and I do not have a tight answer yet. It feels to me like (1) too many voters have taken prosperity for granted and forgotten the hard work it takes to build it; (2) the policy focus over the past 25 years has been almost exclusively on demand stimulus: lower interest rates, Quantitative Easing, more government spending; this has entrenched the sense that economic policy boils down to printing and spending money whenever the economy looks weak - and has weakened the incentive to think about what policies can build sustainable prosperity; (3) in our societies, attention spans have weakened and thinking has become shallower (and here social media has played a key role); there is little patience and appetite left for thinking through the problems, listening to different points of view and making up our own mind -- the preference defaults to slogans and easy answers.
That might explain why, even as voters say they care above all about the economy, neither part feels the need to present a well-thought out economic plan.
Yes, sounds familiar - Persson/Tabellini or something by Alesina :)
Caught between a rock and a hard place! Difficult to imagine that the USA has been reduced to this state as far as electing a president is concerned!
A depressing state of affairs indeed!
Thanks Marco, very insightful. A (maybe provocative) question on debt: should we find another word for it? 'Federal Debt' assumes that the US public sector will pay back something in the future. It will, because otherwise it would be publicly shamed (or even more inconveniently, interest rates would rise); but the money to repay its debt (and its interest payments) is gathered via more debt. So long as US debt continues to rise, investors are forced to pour more and more money into US Federal assets, crucially more than what they get back in interest and principal repayments.
So is it 'debt' a hidden taxation? Not really, because tax yields no interest; but should we consider (debt-interest payments) as a tax on the public? If so, what is the real tax burden in the US? And what do foreign investors get in exchange for their holdings?
Provocative and hard to answer. Here is how I understand it: (1) US debt is one of the largest and most liquid asset market, because historically the US economy has been strong and backed by sensible macro policies. In exchange for their money, foreign investors get to hold a liquid and safe asset ; (2) this allows the US government to issue more debt at limited additional cost (compared to other countries); (3) a typical negative effect of a weak budget constraint is that there is no incentive to spend the money well -- indeed infrastructure, education and health care outcomes ave deteriorated even as spending and debt have gone up; (4) this can't last forever -- eventually it becomes harder to finance debt with new debt, and the existing debt becomes a tax on your citizens (through higher taxes or lower services). That's where many other countries have ended up, and eventually....
(5) the reward is the subtle pleasure to die a creditor :)
We are in for exciting times😹
must feel even more exciting for our enemies...
Anyone knows betting odds on US election in Russia, China, Iran, Palestine ?