Is it sensible to fret about public debt’s rise during the pandemic? A debate with Todd G. Buchholz on Pairagraph

Is public debt a bomb about to explode taking us down? Or is fretting about public debt a tactic for preparing public opinion for a new austerity drive that will cause debt to grow even faster?

Read my debate with Todd G. Buchholz organised by (see here for the original publication)

Todd G. Buchholz’s opening salvo

I wish I could believe that the tooth fairy really flies from pillow to pillow, that Elvis still lives, and that government debt doesn’t matter. Some people manage to believe in all three, and I’m sure they sleep better at night. I’m also sure that whenever confronted with absurdities, they can concoct all sorts of theories that seem plausible after a few drinks or puffs of suspect vegetation.

But to the rest of us, the U.S. and many of its G7 cohort look not just ill but veering towards broke. To offset the COVID-induced Great Cessation, the Federal Reserve and Congress have pumped in staggering sums of stimulus, fearing that the economy would otherwise sink like a dense dumpling in a bucket of broth at a 1930s soup kitchen. The 2020 budget deficit will hit about 16 percent of GDP, and the ratio of debt to GDP is hurdling over the 100 percent mark, numbers not seen since Franklin Roosevelt was photographed with a cigarette holder jauntily protruding from his patrician lips.

Assuming we eventually defeat COVID and do not devolve into a dystopic Terminator scene, can we avoid the fiscal cliff? Some people think we should not care about such things and that governments can keep borrowing without limit, as long as the central bank prints money. Such debt apologists are not necessarily original thinkers. They have many forerunners, some of them buried in the rubble of ancient Greece, where 4th century BC municipalities defaulted on debts to the Temple of Delos.

Want a more recent example? Take a flight to broken Venezuela, where debt is twice the GDP level and inflation should be displayed using scientific notation. In the 1960s and 70s, UK officials listened to such advice and recklessly borrowed. The country suffered raging inflation and a sinking currency. It was called the “sick man of Europe” (a phrase first applied by Czar Nicholas I to the crumbling Ottomans). In 1976, in an extraordinary conversion, Labour Prime Minister James Callaghan begged the IMF for a bailout, performed a fiscal about-face and declared to debt apologists, “I tell you in all candour that that option no longer exists.”

The age-old refrain from debt apologists is, “we owe the money to ourselves.” Two replies come to mind. First, we don’t just owe money to ourselves. About one-third of U.S. debt is in the hands of foreigners, including a trillion dollars to the Chinese. Second, even if we look solely at debt held by Americans, we should ask, “Who is we?” The lenders who in good faith bought U.S. Treasuries are not the same individuals who would benefit from tearing up the bonds or stomping their value down to nothing through inflation. This is a fallacy of composition.

A debt is a claim on the future. If you think it is imaginary, ask Elvis to sing Jailhouse Rock when he stops by your place tonight.

My first rejoinder

It takes great foolishness to be relaxed about mounting debt. But, then again, smart persons recognise that debt is to capitalism that which hell is to Christianity: Grossly unpleasant but absolutely essential, since without it the system (economic system or Christian belief system) does not work. So, yes, worrying about hell is part and parcel of being devout just as losing sleep over debt is the sensible thing to do under capitalism, especially during a crisis as great as the present one.

But, I am told by believers, freaking out about hell is not the best way to avoid ending up there. Hell, like debt, is a mere symptom of doing the wrong thing. And the wrong thing to do in a great depression, of the sort we are experiencing now, is exactly what Todd Buchholz is doing now: To freak out about public debt, carefully avoiding a single word regarding the private debt menace looming as families and companies face bankruptcy.

Too smart to put it in his own words, Todd whips up fear of public debt hoping that his readers will reach, all by themselves, the ‘obvious’ conclusion that it is time for austerian public spending cuts for the purpose of reining in the budget deficit.

It is not hard to mislead the public into this conclusion. When the going gets tough in our private lives, with our incomes tanking, you and I have a duty to tighten our belts and to say no to new loans. However, private finances are a terrible basis for thinking about public finance.

You and I are blessed with a wonderful independence between our expenses and our income. When, in response to being in the red, we cut down on our expenses, our budget goes back into the black because our income is independent of what we spend. Tragically, the Treasury is not blessed with this splendid independence between its tax revenues and public expenditure.

Suppose Todd succeeded in pushing everyone into an austerian mindset yielding budget cuts. At a time of falling private expenses (both on consumption and, more ominously, on investment), a subsequent reduction in public spending will mean that the sum of private and public expenditure will fall even faster. But what is this sum? National income! Thus, GDP falls faster when states cut spending in a middle of a slump – a catastrophe for families and companies.

So, by all means let’s worry about debt. But let us first understand that, in a recession, debt will drown us if, like Todd, we focus exclusively on public debt. Put differently, the more government tries to balance its books now, the harder it will be for persons and firms to balance theirs and, as a result, total debt will rise faster as total incomes fall further.

For this reason, a special place in hell (and possibly debtor’s prison!) is reserved for those who whip up fear of public debt in order to lure good, unsuspecting people into the fallacy of austerity.

Todd G. Buchholz’s reply 

My mother and children were so proud to hear that the former finance minister of Greece thinks I belong in Hell! I sure hope I end up in the first circle with Socrates and Plato, rather than the 8th circle, with government agents who rack up reckless debt and leave their citizens dumpster-diving for gyro sandwiches.

I think it’s wonderful to debate Yanis Varoufakis during the autumn season, a time of pumpkins, corn, and hay, because Yanis has based his entire reply on a flimsy straw man. He accuses me of furtively favoring cruel spending cuts during the year of COVID. In fact, earlier this year just as the plague hit the U.S., I publicly supported vast aid and proposed in The Wall Street Journal a targeted stimulus plan to help the hardest hit workers in the economy. The Wall Street Journal draws over 40 million readers. I must be pretty bad at being sneaky. So let’s move beyond fact-free fields of rhetorical straw.

Will Yanis ever think the time is ripe for government officials to scrutinize government debt? Or must we wait until a cataclysmic crisis hits, as in Venezuela, a place that likes his self-described “erratic Marxist” advice? Yanis jets around the world warning about climate change. I’m pretty sure he wishes we started facing up to that challenge a few years earlier. The longer we wait, the bigger burden to come, right?

During the 1990s Canada and Sweden faced dreadful financial crises, wiping out millions of jobs, because they scoffed at debt. In 1992, Sweden’s central bank had to raise interest rates to 500% to protect the currency from frittering away, after politicians doubled their borrowing. Both countries then began to responsibly shave back spending, and their economies boomed.

During the 1990s, the U.S. created about 18 million net new jobs, a bonanza kicked off by a courageous spending pact between President Clinton, a Democrat, and a Republican congress.

In the next ten years, Medicare and Social Security trust funds will run dry, which could spark automatic cuts of 10-25% for the elderly. Wouldn’t it be a good idea to do something about this sooner, and avoid much pain and cruelty?

If caring about such matters now places me in one of Dante’s rings, count me in. I’ll wear SPF 50 and, best of all, I’m sure I’ll make some memorable new friends. Hey Yanis, hop on your motorcycle and come along!

My second rejoinder

And there you have it: Once again, a commentator’s public fretting over public debt proved the prelude to calls for cuts to Medicare and Social Security – the closest Todd’s response came to a policy proposal on how to tackle public debt. Todd thus confirmed my prediction that, with his opening piece, he was whipping “up fear of public debt hoping that his readers will reach, all by themselves, the ‘obvious’ conclusion that it is time for austerian public spending cuts for the purpose of reining in the budget deficit”.

“Will Yanis ever think the time is ripe for government officials to scrutinize government debt?”, Todd asks. This is an odd response to a piece whose opening sentence was: “It takes great foolishness to be relaxed about mounting debt.” And it is even odder that Todd chooses to ignore the nuanced point I made that “debt will drown us if, like Todd, we focus exclusively on public debt”. Alas, it all makes sense if Todd’s aim were to keep quiet on how private debt will explode if the government cuts public spending, especially on Medicare and Social Security, in the present environment. It is also instructive that the best examples of successful spending cuts he could muster are Canada and Sweden in the 1990s: two relatively small open economies that managed to prevent spending cuts from damaging their private sectors courtesy of the exuberant growth of the US and the global economy at the time.

Am I worried that Medicare and Social Security are unfunded in the medium term? Absolutely. Is Todd worried by the explosion of corporate debt which, together with an upsurge of financial engineering since the pandemic struck, pushed US non-financial business debt to 80% of US GDP and made a weakened private sector fully dependent on unsustainably low interest rates? It seems not, judging by his choice to say not a word regarding private debt, despite my prodding.

Ending on a personal note, Todd has chosen to lecture on the perils of public debt probably the one-person that needs it least. As a one-time minister of finance of the most bankrupt European state, whose people are suffering a decade-long depression as a result, public debt reduction is my obsession. Alas, unlike Todd, I truly care about public debt, rather than using it as a scarecrow to push for public spending cuts, especially on Medicare and Social Security, which guarantee an escalation of the debt crisis in the midst of our current debt-deflationary crisis. (Between 2011 and 2014, Greece reduced state pensions by 40% and cut public spending by 17% of GDP. The result? Public debt shot up from 130% to 180% of national income.)

If Todd seriously thinks that the 1990s Canadian and Swedish fiscal consolidation is the right fiscal policy model for the US federal government today, he is advocating in favour of the playbook that led Greece to debt-bondage. The people of the United States of America deserve better than that.