by Joseph M. Firestone, New Economic Perspectives
This is the fourth in a series of commentaries on Bruce Bartlett’s recent testimony to the Senate Budget Committee. I appreciated his testimony and his critical evaluation of the idea that there is a public “debt crisis” in the United States. I also agree that there is no debt crisis. However, I was disappointed that his views, for the most part, did not show the across the board relevance to most aspects of the “debt crisis” of the fact that the United States is a fiat currency sovereign.
In the previous three posts, I’ve outlined the many contexts in which the fiat currency sovereignty of the United States is relevant to showing that the idea that the United States has or can have a debt crisis is just bunk. In this post, I’ll continue my discussion of Bruce Bartlett’s testimony in the same way.
13. There is no 90 percent of GDP threshold for debt that must be avoided at all cost. This was the popular interpretation of a famous paper by the economists Carmen Reinhart and Kenneth Rogoff. . . . However, recent research and correction for coding errors in the Reinhart-Rogoff paper now show no threshold effect.. . . This is not to say that debt never reduces growth, only that it depends on circumstances, such as the trajectory of debt and other factors.
The claim arising out of the Reinhart-Rogoff work was that past the 90% debt to GDP ratio threshold, there was a negative relationship between increasing an increasing ratio and economic growth.
As I’ve explained here, however, there’s no reason coming from the Reinhart-Rogoff (R-R) data to believe that the debt-to-GDP ratio has a negative impact on growth. But even if there were, then for fiat sovereign nations the most immediate remedy for a high debt to GDP ratio is to create money while paying back the debt as it falls due, without issuing new debt to replace the old or to perform new deficit spending. So, those proposing austerity policies as a remedy for the R-R 90% threshold relationship were ignoring that immediate remedy open to fiat sovereigns like the United States, the United Kingdom, Australia, Japan, and others.
But getting back to the R-R data set, ironically it doesn’t support the threshold hypothesis, because their data set is terribly biased in its incompleteness, and was constructed to try to prove that there was a negative relationship between the debt-to-GDP ratio and economic growth. There may well be a relationship between debt-to-GDP ratios and economic growth in nations lacking non-convertible fiat currencies and floating exchange rates, and/or having external debts in currencies they cannot issue.
However, the R-R data set didn’t include those variables, so that analysis of these variables can’t be done without augmenting the data set. In such non-fiat sovereign nations, MMT theory suggests that Government Budget Constraints (GBCs) on deficit spending, such as those we find in Eurozone nations would create a negative relationship between debt-to-GDP ratios and growth.
In fiat sovereign nations, we might also have the presence of an indirect relationship between variations in the debt-to-GDP ratio and economic growth through the actions of politicians who believe in austerity ideology pulling back on government deficit spending and consequently having a negative impact on economic growth through that mechanism. But to test for that self-fulfilling prophecy, and also for the negative relationship in nations subject to a GBC, someone will, again, have to augment the R-R data set and re-analyze it to include currency regime variables
In addition, there is a need to build on the biased and incomplete R-R data set to begin to test alternative hypotheses about the effects of austerity and different types of fiscal and monetary policy on different outcome variables and on feedback relationships from those outcome variables to economic growth and much more. When Matthew Berg and Brian Hartley say:
“We suggest that simultaneous equations models may offer a way forward on the “frontier question” of causality”
they are also saying that other possible causes of both economic growth and debt-to-GDP ratios must be included in richer theories of economic dynamics, if one wants to understand the place of both growth and debt in the broader context of all the important goals that matter to people, and their ideas about public purpose.
Why wasn’t there a greater outcry from progressive activists and economists when the R-R study first appeared and they failed to make their data available for re-analysis and replication? After all, everyone who read the R-R work and who knows even a little about quantitative analysis in the social sciences could see that it was based on a very superficial two-variable cross-country global data analysis, and that any result they reported had to present a false picture of causality across so many heterogeneous economic and monetary systems.
This is true because you can’t provide a thorough analysis of causality between two cross-country variables without including additional variables and doing time series analysis at the national level to establish causal ordering and partial out spurious correlations. This fact about analysis has been well-known in the social sciences for at least 50 years. How could social scientist reading the study ignore it?
MMT economist Randy Wray has called the R-R study “crap.” He’s right; for the reasons just listed, it was crap from the get-go. It presents an argument of partisan advocacy, not one of economists making a conscientious effort to get at the truth.
So, again, why was it challenged so little until the critiques provided by Thomas Herndon and his colleagues appeared in 2013? I think there’s really no mystery here. Neoliberal elites wanted to believe in the austerity fairy tale for various reasons, including perhaps a desire to widen the wealth gap between the very rich and the middle class, and also a belief that belt-tightening in welfare states has moral value for the population subjected to that belt-tightening, though not for them, of course. So, they needed a study that seemed to show a negative relationship between debt to GDP levels and economic growth, and, needing it, they went ahead and funded one they thought might fill the bill.
Whatever the reason for the lack of early widespread criticism of the R-R work, such criticism did not occur for three long years. And partly as a result of this dog who never barked, millions around the world have lived with economic hardship lasting for years. Millions lost their homes. Millions went into bankruptcy, and many thousands needlessly died from lack of medical care, stress-induced alcoholism and violence, pure despair, depression, and suicide, and many more are still dying today, across the world.
14. To the extent that we have a debt problem, the principal cause is unfunded wars, not benefits for the poor, elderly and disabled. One can easily argue that the national debt is simply the cost of past wars adjusted for the associated interest expense plus postwar costs such as for veterans’ benefits. . . . Thus far, the wars in Iraq, Afghanistan and other post-9/11 conflicts have added $1.6 trillion to the national debt.. . . Future costs for these operations are estimated at $4 trillion to $6 trillion. . . . Polls show that Americans blame wars more for our debt problems than domestic spending. . . . In my opinion, it is irresponsible to start wars without raising taxes so that all Americans are invested in the fighting.
I agree with this statement, but I’m not sure it’s relevant to the “debt crisis”, except in its final sentence, because if their really is a debt crisis, it doesn’t really matter that it was caused by wise or unwise war, we’d still have to cope with it now.
Fortunately, however, Bruce Bartlett was right the first time. There is no crisis, except a political one.
First, Bruce Bartlett could have indicated in plain terms that the cumulating federal deficits accompanying federal debt issuance and the growth of the debt have been the source of all private sector wealth (net financial assets) since the beginning of the Republic. And so, the pubic debt, at this point, corresponds to net private wealth, which would not have existed without it, and which would cease to exist if we actually tried to pay down the debt by using the method of surpluses.
How do we know this? Again, this is a consequence of the sectoral financial balances. accounting identity, which tells us that government deficits are non-government surpluses. Cumulatively, federal deficits are the only possible source of financial assets given to the non-government’s private sector in the aggregate, which isn’t ultimately matched by a private sector aggregate liability.
That’s because the government is the only agent that can add financial assets to the private sector without receiving a matching liability from it. If there were no deficits coming from the government, then there would be no financial assets going to the private sector. If all the financial assets were destroyed by taxation and, no net financial assets were added to replace them, then there would be net financial assets or aggregate financial wealth in the private economy at all.
Of course, some in the private economy would have net financial assets while others would have net financial liabilities matching these assets. But in the aggregate, there would be no financial wealth existing at all. Is that really what those who advocate for surpluses want? And, if so, how would they feel about being the people in the private sector whose financial net worth was negative, while those who aren’t in favor of repaying the debt through surpluses were given a positive net worth?
In my next post post, I’ll complete this evaluation of Bruce Bartlett’s testimony.