Delong's Macro Slides

Sixty-Odd Slides

Nobody Can Repossess The United States

ThinkProgress:

Last night on The Daily Show, Jon Stewart was joking about the debt limit debate and cracked that we’re so worried about the federal government being unable to pay its bills that we have to park it around the corner so that the Chinese don’t repossess it. Joking aside, this highlights a misconception among the public: that federal debt, particularly foreign ownership of foreign debt, is bad because foreign countries can use it as leverage to take over the U.S. I think this confusion arises because most people fail to realize the fundamental difference between personal debt and government debt. Most individuals who have debt have secured debt, that is that the loan they got to buy their car or house is backed up by the car or house itself. If the individual doesn’t pay, the asset gets repossessed. Government debt, on the other hand, is secured only by the promise that the government will pay when it promises to. People who buy debt in the form of U.S. Treasuries are not buying an ownership interest in the U.S. All they get is a promise. So the Chinese can never cash in their holdings in Treasures by repossessing parts of the U.S. But there seems to be paranoia, particularly on the right and from organizations like the Peter G. Peterson foundation, that the U.S. government’s debt opens us up to weakness because of the idea that debt holders are buying up U.S. debt in order to take over the country. This misconception is based on a fundamental confusion between personal secured debt and government bonds.

Cheaper Than Cash

Modeled Behavior:

Paul Krugman points out again that interest rates have failed to rise despite heavy borrowing by the Treasury. He uses nominal rates but I think the point is better made using real rates and bar graph.

What this highlights is that real rate of return on government 5 year government securities is now negative. You want to stop and absorb that because I think it’s a bigger deal than most people realize.

Suppose the government had two choices. It could either pay for infrastructure improvements as it went along out of tax revenue or it could borrow money build the infrastructure now and then repay the money with tax revenues.

Ordinarily the question would be, does the advantage of building quickly outweigh the cost of the interest.

However, right now the interest cost is negative. The government saves money by borrowing now rather than waiting and paying cash. Let me say again because I have noticed that this goes against so much intuition that its hard for many people to wrap around when I first say it.

The government will wind up paying more if it decides to pay cash for a project than it will if it decides to borrow. This is irrespective of the return on the project itself or the advantages of avoiding delays or anything like that. It is simply that the cost of borrowing is negative.

It is cheaper than paying cash.

There’s Something About Money

ThinkProgress:

...the language around money is very confusing. People say things like “Mark Zuckerberg has $9 billion” when what they mean is that Mark Zuckerberg has an equity stake in Facebook that’s worth $9 billion. Which is to say that normally when we’re talking about “money,” we’re talking about the accounting value of real assets. But monetary policy is much more about shortages of the medium of exchange. People say things like “the money has to come from somewhere,” which makes very little sense if you think about it literally. Real resources have to come from somewhere. And in a deep recession, real resources are left idling over the country. But to mobilize the real resources may take more money. Print up some dollar bills and start handing them to unemployed people to go do things, and real output will rise. The dollars come from the U.S. Mint, which is the only place they can come from. Or imagine if all the ATM machines and credit and debit card swipers in the state of California stopped working. All the workers, skills, shops, offices, equipment, skills, etc. would still be there, but output would collapse as people started hoarding the existing supply of currency.

Public And Private Employment

The US government has shed half a million jobs since Obama took office despite a growing US population.
ThinkProgress:

Since the overall scale of private sector employment is much larger than the government sector (and rightly so), it’s difficult to get a chart that shows anything if you look at the raw numbers. So instead, this lines indexes both sectors to where they were in January 2009 when Obama took over:

What you see is that if you look at the private sector you see a fairly “normal,” albeit severe, recession. Private sector employment tumbles precipitously for a while, then hits bottom, and then starts growing consistently. And for a while, the public sector also behaves “normally,” growing at the same slow and steady trend it was growing at before the recession and providing a kind of countercyclical stabilizer. Thus, during the final year of George W Bush’s administration we actually saw a substantial rebalancing away from private sector work and toward public sector work. But since sometime in early 2009, the trend level of government employment has been sharply downward. That’s a trend that was interrupted by the census, but now looks very clear. It reflects the fact that the federal government hasn’t provided adequate aid to states and localities and the fact that conservative governors have preferred layoffs to tax increases. But even if the governors had different policy preferences, the macroeconomic impact of state/local policy would still have had to have been toward contraction and austerity.

But the federal government could have avoided this. Many policymakers seem to be consoling themselves with the Reinhardt/Rogoff finding that recovery from severe financial crises are typically very slow. But I’ve always thought the correct interpretation of that finding is that the policy response to severe financial crisis is typically inadequate. State and local governments are engaged in austerity budgeting because they’re not getting the federal aid they need. But the federal government isn’t running in to some kind of objective borrowing constraint.

The Ratings Agency Problem

ThinkProgress:

Perusing Michael Spence’s The Next Convergence: The Future of Economic Growth in a Multispeed World yesterday, I was struck by this offhand remark about the origins of the financial crisis:

The problem in the period leading up to the crisis was that this portion of the financial system was only lightly or ineffectively regulated. Packages of loans were rated improperly, in part because of incentive problems: the originators and securitizers paid the rating agencies. Another aspect was complexity. The rating agencies didn’t understand the products and their risk characteristics. The combination of complexity and adverse incentives turned out to be toxic in the extreme.

The rating agencies continue to have just as much power and prestige as they had before the financial crisis that they helped create:

...as you can see in “Europe Faces Tough Road on Effort to Ease Greek Debt”:

Europe turns from its latest short-term fix for Greece to planning a longer-term bailout for the debt-plagued country, the ratings agency Standard & Poor’s indicated Monday how difficult it would be to offload some of the cost of rescuing Greece onto creditors without also provoking a default that could shock the global economy. [...] But S.& P., responding to a French proposal to have banks give Athens more time to repay loans as they come due, seemed to leave little room for maneuver. The proposal would amount to a default, S.&P. said, because creditors would have to wait longer to be repaid and the value of Greek bonds would effectively be reduced.

The upshot here is that if S&P deems a given resolution of the Greek issue to constitute a “default,” then that triggers a bunch of other consequences. How much money the holders of Greek bonds get has real-world consequences. But how ratings agencies score the plan has other consequences, over and above those consequences. The ratings agencies, in other words, are not only still in business their whims need to be taken seriously in national capitals. Firms, municipalities, and even some of the smaller states are still largely at their mercy. They continue to drive headlines, as in “Moody’s Sees Much Bigger Local Debt in China” and in general continue to be some of the most important firms in the world. It’s a system that seems to me to be broken in a more profound way than anything as simple as a conflict of interest here or a failure to understand there.

China’s Stimulus

ThinkProgress:

Word from Prime Minister Wen Jiabao :

The thrust of China’s response to the crisis is to expand domestic demand and stimulate the real economy, strengthen the basis for long-term development and make growth domestically driven. We have implemented a two-year, Rmb4,000bn ($618bn) investment programme covering infrastructure development, economic structural adjustment, improving people’s well-being and protection of the environment. As a result, 10,800 km of railways and about 300,000 km of roads have been built and 210m kW of installed capacity for power generation have been added. We have boosted support for science and technology including by encouraging companies to carry out technological upgrading and innovation. More than Rmb1,000bn have been spent in rebuilding after the Wenchuan earthquake. In the affected areas, quality infrastructure and public facilities were constructed, and 4.83m rural houses and 1.75m urban apartments were rebuilt or reinforced. The quake-hit areas have taken on a new look. We are working to improve the balance between domestic and external demand, with the share of trade surplus in GDP dropping from 7.5 per cent in 2007 to 3.1 in 2010. China’s rapid growth and increase in imports are an engine driving the global recovery.

Now obviously what Wen doesn’t add to that is “and a lot of this new construction is pretty wasteful.” But the reality is that it is. People often say that China has a billion people. But it doesn’t. It has over 1.3 billion people. China is about as close to having a billion residents as the United States is to having eleven residents. Consequently, when you try to implement a very large scale government stimulus package in such a large scale country, you end up with, yes, a lot of waste. Hence the stories of ghost suburbs and so forth that you see in the press. That said, the question of waste ought to be in part a question of what is it that’s being wasted. Is China running out of concrete? Running out of steel? Running out of glass? No. It’s a waste in the sense that, in theory, that manpower and material that went into building it could have been used to build something else.

Compare that to the United States where we’ve done much less in the way of expansionary policy. The result has been much less waste. Instead, we’ve had years of mass unemployment. But that, too, is a waste. It’s millions of people sitting around feeling depressed and demoralized watching their job skills slowly but surely erode. It helps economize on concrete, but at the expense of wasting human potential. I don’t think we came away with the better deal.

Interest Payments On Excess Reserves

ThinkProgress:

Banks lend the money out. But they’re not allowed to lend all the money out. They have to hold some in reserve, and the quantity of money they need to hold is set by regulators. A bank, however, always might want to hold even more money in reserve. But if you look at history, it’s clear that American banks have never had any interest in holding on to so-called “excess reserves” until in the fall of 2008, the Federal Reserve started paying a small amount of interest on such reserves:

The stated reason for this policy makes very little sense to be. Allegedly, Ben Bernanke started paying interest on excess reserves in order to signal that in the future he might pay even more interest on excess reserves in order to soak up excess liquidity in case we end up with an inflation problem. But why does he need to pay a small amount of interest now in order to be able to pay a large amount of interest later? The underlying point of the interest on excess reserves policy is that such interest payments are contractionary. And at the moment the Fed is supposed to be engaging in expansionary policy. Why not go back to the long-settled tradition of paying zero percent interest? Why not pay attention to Sweden’s success in setting this as a negative number? Alternatively, if the view is that a giant increase in bank reserves is desirable (it makes the system safer, whatever) why not raise the required reserve level?