Comments on: The political economy case for Kerry

By: Giles

Giles — Sun, 29 Aug 2004 00:19:57 +0000

but on the other hand the likely repatriation of the large foreign holdings of US dollars make the inflating a debt away larger a highly unstable solution. So although this option is open to the US, the potential costs are greater, investors understand this and so should not, rationaly expect it to inflate the debt away, especially if the cheaper option of rasing taxes remains.

By: John Quiggin

John Quiggin — Sat, 28 Aug 2004 22:37:42 +0000

giles, the US has an option not open (on the same scale) to the others you mention, namely inflation. If investors conclude that this is the option that will be adopted , US dollar interest rates will rise in anticipation. Another four years of current policies would, I think, convince most investors that inflation was the preferred option.

By: Giles

Giles — Sat, 28 Aug 2004 15:19:44 +0000

John to make an inevitability argument about US foreign debt you need to explain how either debt is going to become “unsustainable” – in other words that the US will become unable to meet its interest payments. This can happen either because the level of debt increases a lot or because the interest on that debt increases a lot. I don’t buy the level of debt argument simply because at current levels the US owes a lot less as a % of gdp than many other developed countries. The second line is that interest on its debts must inevitably rise; the typical argument that increased US demand for borrowing will push up the world interest rate. But again given that the stock of UK debt is nearly the same size as the US (and Germany isn’t too far behind either), the stock of US debt, even if it say doubled isn’t sufficient to push interest rates up by a significant %. In addition development in China and India and is likely to push the supply of savings up for the foreseeable future The third argument s that interest rates on government debt will “exogenously rise” – the most likely scenario being that risk premiums of developed country debt rises. But here the cause is unlikely to be the US but rather a potential default by a country like Italy (downgraded recently) or New Zealand (highest debt per captia GDP after Australia). So I’d look for these canaries to sing before expecting the US debt crisis to drop. But here I’d expect that the US is in a far stronger position to react in that it has ample leeway to do something – namely raise taxes significantly.

By: John Quiggin

John Quiggin — Sat, 28 Aug 2004 08:30:38 +0000

giles, it’s true that the US does better on the income account than you would expect from measures of net assets. Partly this reflects large recent issues of short-term debt at very low rates. On the time horizon issue, my claim is not that unsustainable debt levels will be reached within eight years on current policies. Rather it is that within eight years (and on current policies) it will be obvious to all that a crisis is inevitable. Once it’s obvious to all, the crisis must arrive.

By: fantazia

fantazia — Fri, 27 Aug 2004 22:36:34 +0000

Sorry, sloppy phrasing on my part – I meant to say “debt issued”.

By: Giles

Giles — Fri, 27 Aug 2004 20:55:31 +0000

“The US is not a net recipient of foreign income: this is why its current account deficit is negative.” By income I meant income from assets – not sales of goods and services. So there is no contradiction here – the UK reives a positive net income as it has net assets – but nonetheless runs a current account deficit. The point about the gross figure is that it’s the upper bound on the foreign debt and the US gross is lower than most other countries. Dont understand your point about how the US government can hold its external debt thoug – how – through emabassies?

By: fantazia

fantazia — Fri, 27 Aug 2004 20:22:19 +0000

Quite true, Giles, that the US’s gross external debt is, percentagewise, not particularly spectacular. However that was not the point you were making, vis-a-vis net recipient of foreign income (see your post at 03:44). The US is not a net recipient of foreign income: this is why its current account deficit is negative. It is also important to determine what percentage of the gross external debt is held by US government, as opposed to the private sector, as a healthy current account deficit vis-a-vis the latter does nothing for the solidity of the former. All this, mind you, is not to say I think John Quiggin is right; I’m inclined to favor your estimate of 10 years at least, rather than 5, before the deficit becomes really worrisome.

By: Giles

Giles — Fri, 27 Aug 2004 19:15:14 +0000

BTW Fantazia at the end of 2003 the gross US external debt was 2.9 trillion pounds (271% of GDP). The US gross external debt was 3.8 trillion pounds (59% of gdp). Germany’s was 1.8 trillion – 128% of Gdp.

By: matt weiner (aka someone)

matt weiner (aka someone) — Fri, 27 Aug 2004 18:50:12 +0000

Maybe the best-case scenario for Democrats goes like this: Kerry wins but the GOP holds Congress. Then, Kerry takes some steps toward fiscal responsibility—making sure that tax breaks don’t get extended—while having ice-cream and cake proposals get obstructed in Congress. In 2006 the Democrats run against the do-nothing GOP. One of Clinton’s problems in ‘94 was that it looked like he held Congress, but for most proposals Bob Dole had a veto, since he could ensure a Senate filibuster. That might not happen this time around.

By: El Gringo Loco

El Gringo Loco — Fri, 27 Aug 2004 18:43:28 +0000

The problem here is that Kerry doesn’t just need to address the fiscal imbalances in such a way that voters will forget about it by 2008. He needs make people forget about whatever he does in time for the 2006 midterms, or else the Republicans (who don’t exactly have trouble running against taxes) will make big gains and make it much harder for him to get his agenda through. This, after all, is the other part of the Clinton story that someone mentioned above: Clinton took deficit reduction seriously and promptly got zapped in the 1994 midterms. This problem will be especially acute if

By: El Gringo Loco

El Gringo Loco — Fri, 27 Aug 2004 18:42:52 +0000

The problem here is that Kerry doesn’t just need to address the fiscal imbalances in such a way that voters won’t remember the pain in 2008. He needs to make people forget about whatever he does in time for the 2006 midterms, or else the Republicans (who don’t exactly have trouble running against taxes) will achieve big gains and make it much harder for him to get his agenda through. This, after all, is the other part of the Clinton story that someone mentioned above: Clinton took deficit reduction seriously and promptly got zapped in the 1994 midterms. The risk of backlash will be even more acute if Kerry does what he really should do and raises taxes on people in the bracket below $200,000 as well. This is one policy issue Dean and Gephardt had right during the primaries and that Kerry and Edwards had wrong: We cannot salvage Medicare, provide health care of 45 million uninsured, rein in the deficit, and fight the war on terror just with the outlays from taxing the super-rich. America is in a lot of trouble right now, and getting out of it has to be a team effort. As long as U.S. voters punish any politican who doesn’t offer more cake and ice cream, I don’t really see these problems going away.

By: Giles

Giles — Fri, 27 Aug 2004 17:44:21 +0000

its not the deficit that matters its the size of the debt – about 6-7 trillion. I’ll give you the exact figure when my hard drive is up again.

By: fantazia

fantazia — Fri, 27 Aug 2004 17:38:42 +0000

Giles wrote: “yes – which implies payment(or interest) on debts < income (or interest received) on foreign assets” I very much doubt that, Giles. The US current account deficit is running at roughly 500 billion, and includes income recieved on foreign assets.

By: Giles

Giles — Fri, 27 Aug 2004 16:52:30 +0000

Is the [net]“debtor” the same entity as the “recipient of foreign income”? yes – which implies payment(or interest) on debts < income (or interest received) on foreign assets

By: Matt Weiner

Matt Weiner — Fri, 27 Aug 2004 16:22:04 +0000

I think Matthew Yglesias has been making the point that it is unwise for presidential candidates to propose specific deficit-cutting measures during the campaign. Voters like people saying that they’ll cut the deficit, but they don’t like hearing that program Y will get cut or that tax X will get raised (except perhaps tax X on the rich). So Kerry’s failure to offer specific grounds for enthusiasm about his budget managing may be strategic.
There’s a potential parallel here with Bill Clinton; IIRC during the campaign Clinton proposed various infrastructure programs and stimulus packages; his actual first budget was devoted entirely to deficit-cutting, which turned out spectacularly well. (It may be that unprecedented Republican obstructionism held up Clinton’s stimulus package, but they didn’t give him a single vote for the deficit-reducing bill either.)
Bush, of course, cannot make this argument, because he has been promulgating actual policies for the last four years, and these policies have led us from record surpluses to record deficits. That’s what the main argument for supposing that Kerry will be a better fiscal manager is—could he possibly be any worse? It’s like asking if Roosevelt was going to do a better job with the economy than Hoover had….