Deficit reduction for idiots

[Undesired Walrus]

As I'm an economic idiot, I'd like to ask for your fine (but inevitably harsh) views on deficits, cut versus spend.

First of all, could someone tell me: Where do we buy money from? Do we need to pay it off quickly as many conservatives believe? Why?

Secondly, and this does from an economic idiot, but it strikes me as clear that the more you cut, and the more you make unemployed, the more you will ultimately have to borrow. Presumably more unemployed will mean less money spent on the economy by cash-strapped citizens, more money given out by the Government on benefits, and less income in taxes.

Is spending a recipe for disaster? Or is cutting a path to higher deficits?

If there are any articles on this subject, I'd appreciate suggestions.

[balrog666]

If you cut people who are unproductive, who produce nothing (see most government bureaucracy) or who produce less than they cost, costs go down, profits go up, and essential social services are maintained.

If you cut unemployment benefits from 2 ****** years to a few months or reduce the max benefits, then people look for jobs whenever they are unemployed and accept whatever jobs are available in the current economy and, gosh, that converts them from leeches on society to productive citizens.

As for deficits, borrowing more money from the Chinese is just stupid as the current interest on our debt now already pays for their entire domestic military establishment plus their overseas economic expansion in Africa. Why is that good for anyone? And why would expanding it be good for us?

[Puppycow]

Paul Krugman's take (http://www.nytimes.com/2010/10/17/world/asia/17japan.html?pagewanted=1&_r=1&sq=japan%20deflation&st=cse&scp=1)

[Ethan Thane Athen]

If you cut people who are unproductive, who produce nothing (see most government bureaucracy) or who produce less than they cost, costs go down, profits go up, and essential social services are maintained.

'Government bureaucracy' is a lovely convenient demon to persuade people that jobs can be cut with no impact. Unfortunately that is nowhere near as often the case as the popular press would have you believe - and even where it is, the bureaucracy is usually there for legal reasons. My particular public sector organisation is pretty good compared to most but we have our share of costly (and in the opinion of many, completely unnecessary - sometimes bordering on nonsensical) bureaucracy. We'd love to get rid of much of it and have tried on numerous occasions only to be blocked by 'Sorry, it's the law'. We have recently had to make a decision on an action which we don't want to do, our customers don't want, the public and press would think is a bad business call but...the law says we must do it and cheese everyone off.

Also, where the cuts fall is usually decided at a pretty senior level and you can be damn sure those making the decisions will ensure the axe doesn't fall on them but on those who are much cheaper to get rid of...ie the people actually doing the work.

Furthermore, cuts usually mean 'Hey look we got rid of loads of public servants' which leads everyone to assume the money has been saved (and even to calculate the savings based on the wages presumably no longer being paid) but all that's happened is that the work has been transferred to the private sector, along with all the staff (see TUPE), so you have the same people, doing the same work for the same wages but with the company adding a profit on top ie it costs more. Yes, economies of scale can theoretically engender savings but I've been personally involved in 5 such events and indirectly involved in dozens more and all ended up costing more for a lower quality service. The fact we actually do need to make savings (budgets are actually cut) this time suggests common sense may prevail over political dogma and the cheapest option (whichever it is) will win out....but I wouldn't hold my breath - especially with some nice fat directorships waiting at those companies (interesting to note that taking such a directorship would be a criminal act for a Civil Servant, but not for a politician).


If you cut unemployment benefits from 2 ****** years to a few months or reduce the max benefits, then people look for jobs whenever they are unemployed and accept whatever jobs are available in the current economy and, gosh, that converts them from leeches on society to productive citizens...



True....with the massive, and in large parts of my country erroneous, assumption that there are jobs available that they are able to do.

[Undesired Walrus]

Paul Krugman's take (http://www.nytimes.com/2010/10/17/world/asia/17japan.html?pagewanted=1&_r=1&sq=japan%20deflation&st=cse&scp=1)

Martin Fackler?

[brenn]

Secondly, and this does from an economic idiot, but it strikes me as clear that the more you cut, and the more you make unemployed, the more you will ultimately have to borrow. Presumably more unemployed will mean less money spent on the economy by cash-strapped citizens, more money given out by the Government on benefits, and less income in taxes.

Seems simple to normal people who are more concerned with the economy than gaining the votes of poor people with "feel-good economics."

That is, fundamentally, the root of the tax dispute between the right and left. The left says - take more from greedy corporations, to give to the poor...which means the corporations have less money to invest in making more money, which means there are more poor, less taxes, etc., etc. Down like a flushing toilet.

The right says, tax less, which the left then equates as "profits." The left refuses to accept the benficial power of greed. let "the rich" have mre money and they will use t to try to make even more money - to do that they have to build, buy, invest and hire. That creates fewer unemployed/poor and, ultimately, more tax revenue with elss people to spend it on. Greed works if allowed.

[Ethan Thane Athen]

Seems simple to normal people who are more concerned with the economy than gaining the votes of poor people with "feel-good economics."

That is, fundamentally, the root of the tax dispute between the right and left. The left says - take more from greedy corporations, to give to the poor...which means the corporations have less money to invest in making more money, which means there are more poor, less taxes, etc., etc. Down like a flushing toilet.

The right says, tax less, which the left then equates as "profits." The left refuses to accept the benficial power of greed. let "the rich" have mre money and they will use t to try to make even more money - to do that they have to build, buy, invest and hire. That creates fewer unemployed/poor and, ultimately, more tax revenue with elss people to spend it on. Greed works if allowed.

That's right 'cos it worked so well with the banks. All their uncontrolled greed created so much wealth for us all.....oh wait:p

The truth, as (nearly) always, is somewhere in between.

[Lothian]

First of all, could someone tell me: Where do we buy money from? Do we need to pay it off quickly as many conservatives believe? Why?Think of us as Manchester United. The Glaziers (the government) have borrowed loads of money from banks and loaded it on the club (country). We have big revenues but a lot of it goes in interest leaving less to spend on new players (hospitals, schools and sponging dole cheats). If we can pay off those debts there will be less interest so in future years we will have more of the money we receive from gate receipts and sponsorship (taxes and duties) to spend.

The question is should we sell Rooney, Vidic, Nani and Berbatov (tax the middle classes and withdraw the benefits from the working class) now. It will pay off our debts and in the future every penny in revenue can be used for the benefit of the club (our friends in the city), which will make us all stronger. However doing all that now will make us weaker and it will cost us lots in agents fees (redundancy packages).

Obviously being debt free is ideal but it is not the only option. Borrowing more money like Manchester City would help give us an advantage this season and make us a more attractive place for foreign players (businesses) to sign (invest).

What we don’t want as supporters (citizens) is to borrow so much that we can’t afford the loans. We will end up selling all our assets and drop to the second division where it will take us years to recover to the premier league. Leeds.



Secondly, and this does from an economic idiot, but it strikes me as clear that the more you cut, and the more you make unemployed, the more you will ultimately have to borrow. Presumably more unemployed will mean less money spent on the economy by cash-strapped citizens, more money given out by the Government on benefits, and less income in taxes.

Is spending a recipe for disaster? Or is cutting a path to higher deficits?

If there are any articles on this subject, I'd appreciate suggestions.A lot of the people you are making unemployed are fringe First teamers (Civil servants) you are moving them to youth squad (dole). You still pay them but not nearly as much. As you still put a team out (provide the basics) the gate receipts (tax income) will still come in. You might get a bit less incoem over the bar in the players lounge (tax from the sacked employees) but given they hardly played (did) much any way you should be better off with a slightly lower income but a much lower expenditure.

If you don’t follow football the three answers are Banks, perhaps and maybe.

[drkitten]

Seems simple to normal people who are more concerned with the economy than gaining the votes of poor people with "feel-good economics."

Well, that's one of the problem. Confusion between macro- and micro-economics, or specifically "normal people" who don't understand that running a national economy is different than running a household budget, precisely because households don't need to concern themselves with issues of "money supply"; the money supply they have is fixed and comes from outside (wages and whatnot), while the money supply of a nation-state is almost entirely under the control of the nation-state itself.

Basically, what's going on is that the nation-state has a certain amount of economic activity, which we can approximate as the GDP. It also has a certain amount of currency units in circulation. If the government puts more currency into circulation, then the currency is worth less per unit; if the government takes currency out of circulation, then the currency is worth more per unit.

BUT, since GDP isn't fixed, if the economy becomes more productive, then the value of each currency unit goes up, because it represents the same share of a larger pie. And since money itself circulates, there's another factor involved about the speed of actual circulation. (Oversimplifying, money that's not in circulation -- sitting in a cookie jar, a till, or a bank account that the bank's not lending out -- "doesn't count.")

---

So in direct answer to the questions in the OP; when the government spends money it doesn't have, it can either print it directly, or simply borrow it by issuing bonds (and allowing people who do have money to lend it to the government).

We don't need to pay it off quickly at all, and depending upon economic circumstances, paying it off quickly can be a disaster. Of course, depending upon economic circumstances, not paying it off quickly can also be a disaster, but right now what the US (and world) economy needs is a larger money supply to stimulate investment instead of hoarding.

The big question with any borrowing -- and this applies at the micro as well as macro level -- is what are you doing with the money you borrow. Household economists talk about the difference between "good debt" and "bad debt"; basically, the idea is that debt that gives you money that you use to generate more money later is "good." Student loans, for example, will make you money later through a better salary. A car loan is typically "bad debt" because cars don't actually generate money unless you're a jitney driver or something.

At the macro level, borrowing money to pay for infrastructural investments (like the construction of the Interstate Highway System, or a new nuclear plant) or R&D, is generally "good debt." Borrowing money to build a new football stadium generally isn't.

[drkitten]

Think of us as Manchester United. The Glaziers (the government) have borrowed loads of money from banks and loaded it on the club (country). We have big revenues but a lot of it goes in interest leaving less to spend on new players (hospitals, schools and sponging dole cheats). If we can pay off those debts there will be less interest so in future years we will have more of the money we receive from gate receipts and sponsorship (taxes and duties) to spend.

The question is should we sell Rooney, Vidic, Nani and Berbatov (tax the middle classes and withdraw the benefits from the working class) now. It will pay off our debts and in the future every penny in revenue can be used for the benefit of the club (our friends in the city), which will make us all stronger. However doing all that now will make us weaker and it will cost us lots in agents fees (redundancy packages).

And it will also cost you a lot in gate receipts, because, frankly, if you sell all your good players, the team will suck and fewer people will want to watch.

That's a pretty good analogy, actually. For the Americans who have no idea what the hell Lot's talking about, just look at MLB. You generally have to have a decent team to get decent receipts (look at the Pirates for an example of what happens otherwise), and you need to pay decent money to get a decent team (again, look at the Pirates). But if you spend too much money (A-Rod in Texas comes to mind) you will end up hurting yourself because you can't afford to buy what else you need, and your team sucks again.

The big questions thus become "what do we need to buy?" and "how much is what we need to buy really worth?"

The elephant in the room for US politics is that we've already bought A-Rod. Medicare and Social Security are, frankly, unsustainable. They're taking up far too much of our current budget stream and there's not much chance that will get fixed.

Beyond that, we're also faced with another A-Rod-like bill for the current set of wars. While in theory we could cut and run, this would probably end up hurting the United States politically and diplomatically for a long time.

The third problem is the Bush tax cuts. To continue the analogy, the last team owner decided that he wanted to cut ticket prices in an effort to get more of his friends into games. The problem is that this ended up also cutting into team revenue, which makes the problem of paying team bills even worse.

The problem is that simply raising ticket prices won't solve the problem (because we're already having attendance problems and raising prices will just make people stay away further), and the team is already losing too many games for it to be practical to cut some of the star players.

[brenn]

That's right 'cos it worked so well with the banks. All their uncontrolled greed created so much wealth for us all.....oh wait:p

The truth, as (nearly) always, is somewhere in between.

No, the truth is that the left likes to take examples of the faults of a heavily government controlled system and then claim they are examples of an uncontrolled, free market, in order to justify arguments for even more control. Like you just did.

[drkitten]

No, the truth is that the left likes to take examples of the faults of a heavily government controlled system and then claim they are examples of an uncontrolled, free market, in order to justify arguments for even more control. Like you just did.

Yeah. That's why these "faults" have only appeared after significant bouts of deregulation. Funny how the more heavily regulated the system, the less the faults appear. The closer the system is to an uncontrolled free market, the more blatant the examples of the faults in the system become.

:rolleyes:

[Undesired Walrus]

Thanks for all the information. I've heard that the UK debt (I've started listening to the Guardian business podcast) has a 14 year maturity. What does that mean?

[drkitten]

Thanks for all the information. I've heard that the UK debt (I've started listening to the Guardian business podcast) has a 14 year maturity. What does that mean?

It means that they have to pay it all back by the end of 14 years, just like if you take out a 15 year mortgage, you need to pay it back sooner than if you take out a thirty year mortgage.

Of course, in both cases you have the option essentially to refinance and use new debt to retire the old debt. Both governments and households use this trick all the time.

[Ethan Thane Athen]

No, the truth is that the left likes to take examples of the faults of a heavily government controlled system and then claim they are examples of an uncontrolled, free market, in order to justify arguments for even more control. Like you just did.

As a middle-class, senior manager who has voted Tory most of his life it's quite amusing to be called 'the left'.:D

The last Labour Government (not really 'the left' anymore but certainly not 'the right') heavily de-regulated the banks such that even the Tories at the time criticised it (this is relatively fresh in my mind because I recently, and fairly, lost an argument where I'd contended that it was rich for the Tories to criticise Labour for de-regulation when they'd have probably done more if in power and someone dug out the statements from the time that showed at least one Tory Shadow Cabinet minister criticising the move and calling for tighter regulation - believe it or not it was on a Rugby web-site so don't ask me to dig it out!).

It wasn't regulations that made banks lend to people who couldn't afford it, package the debt up with other debts and sell it on as Grade A (or whatever the rating was) 'can't fail' secure loans to other banks, secure in the knowledge that they'd pocketed the profit and weren't taking the risk. And it wasn't regulations that caused those other banks to spend beyond their reserves to take on those 'secure' loans.

The bankers caused this crisis, not Civil Servants but we apparently can't hit them because they might bugger off to another country and we need their 'talent'. Yup, they definitely showed that they're so bright there can't possibly be anyone waiting in the ranks who'd happily take on their jobs. I mean, it's really clever to allow the seller to decide on the rating of what he's selling....

Don't get me wrong, cuts in public spending are needed - but I doubt they'll be done right or even for the right reasons. It's about creating an enemy that won't get much public sympathy and 'seeming' to do something as much as it's actually about doing something. Some economists have even suggested the debt (in Britain at least) isn't that great ie we've had bigger debt, about half is accounted for by the banks that can be re-sold back at a profit and, depending on inflation figures the 'value' will fluctuate hugely anyway. Not sure that's the case myself, but then I'm not an economist - and they can't seem to agree anyway.

[Ethan Thane Athen]

Oh and as for the regulation we did have - the FSA were part of the problem. They were meant to police the banks but relied on those same banks to report back to their bosses on how good they were ie the banks rated them and therefore fed in to whether they got promoted, had bonuses etc. You couldn't make it up.

Despite that, one courageous soul did point out the dangers to his superiors in the FSA well before the crisis actually hit (I seem to recall a year before but I wouldn't swear to it) and was told 'Don't frighten the horses' ie as long as confidence remains high it'll all be ok but it could all go boom if anyone realised it was built on sand. I think he ended up being dismissed - he should have been promoted!

[Corsair 115]

And it will also cost you a lot in gate receipts, because, frankly, if you sell all your good players, the team will suck and fewer people will want to watch.


This is usually true, but there are a few markets where that logic doesn't apply, and people happily show up no matter what. For example, see: Toronto Maple Leafs.

:D

[drkitten]

This is usually true, but there are a few markets where that logic doesn't apply, and people happily show up no matter what. For example, see: Toronto Maple Leafs.


Metaphors only go so far. There are probably a few areas out there where people are so irrationally enamored of the government that they willingly go out of their way to overpay.

The various little religious cult communities -- Antelope, OR; Clearwater, FL; and New Knoxville, OH come to mind -- might be examples. People were willing to give the cult leader anything he wanted.....

[Puppycow]

Paul Krugman's take (http://www.nytimes.com/2010/10/17/world/asia/17japan.html?pagewanted=1&_r=1&sq=japan%20deflation&st=cse&scp=1)

Martin Fackler?

:o

Wrong url.

Here's Krugman (http://www.nytimes.com/2010/10/22/opinion/22krugman.html?src=me&ref=general)

[Francesca R]

It means that they have to pay it all back by the end of 14 years, just like if you take out a 15 year mortgage, you need to pay it back sooner than if you take out a thirty year mortgage.No, that is the weighted average maturity at market values. The longest maturity gilts have 45 years to run to redemption. [Info here (http://www.dmo.gov.uk/index.aspx?page=publications/Quarterly_Reviews)]

Of course, in both cases you have the option essentially to refinance and use new debt to retire the old debt. Both governments and households use this trick all the time.Again, no. The government can't redeem its bonds early, and doesn't, as far as I know, buy them back in the market either. The debt management office just issues more or less than may have been anticipated depending on needs. The Bank of England has bought some, but that's the "quantitative easing" thing.

[drkitten]

No, that is the weighted average maturity at market values. The longest maturity gilts have 45 years to run to redemption. [Info here (http://www.dmo.gov.uk/index.aspx?page=publications/Quarterly_Reviews)]

I stand corrected.


Again, no. The government can't redeem its bonds early, and doesn't, as far as I know, buy them back in the market either.

You misunderstand. If Her Majesty needs ten squillion pounds to pay off the 1 November 2010 bonds, she can just sell ten squillion pounds worth of 1 November 2030 bonds, and use the proceeds from the sale to retire the old debt -- essentially rolling the debt over.

Just as I can put my $1000 Visa bill on my Mastercard.

If the terms are good enough, that can even be a sound financial move. For example, if I've got 0.0% interest for the next three months, I might be able to do something more useful with $1000 cash (like lend it out at six for five at Jerry's Place, making about $600 while paying no interest).