Political Implications of Current National Debts

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[Ed. Guest post.]

Many major countries in the world now face with serious macroeconomic debt crises. United States, many countries in the Euro Zone, including Greece, are faced with these macroeconomic woes. Most of these countries are also resorting to various debt elimination strategies. This kind of debt situation has arisen from the fact that these countries have expended more than they earn. Here we discuss the debt crisis faced by some of these countries, along with its political implications.

United States, the largest national economy in the world is faced with unprecedented financial crisis. In fact, such a situation has arisen to push the country to raise the debt ceiling in order to avoid the unsavory incidence of default. In a major political decision, the Democratic government, led by Barack Obama, had raised the debt ceiling. This helped the country escape the risk of default.

It should be noted that it is not the first time that the country had to raise the debt ceiling. US government has raised the debt ceiling earlier too. Anyways, one important aspect of the US debt is that most of the debts of the country are held by the Chinese government. Moreover, though apparently the debt and deficit figure of the US looks pretty serious, but in actual practice this is not as serious as it looks like. This is mainly because of the undiminishing appeal of the US dollars among the global investors. US authorities are easily finding investors in US Treasury bonds. The Chinese government is also purchasing these bonds as US is the largest market for low priced Chinese goods.

However, the debt situation in Greece is not similar to the debt situation in the United States. Various national governments who have given loans to Greece are putting pressure on Greece to repay. IMF is pressuring Greece to adopt more austerity measures and to cut budget deficit through rapid expenditure reduction measures. However, this has resulted into serious political doldrums in the country. The present government is indeed facing tough times to cope with the crisis. Again, debt crisis in many Euro Zone economies, has brought to the fore the efficacy and the robustness of the formation of the Euro Zone as Euro as a common currency.

Pablo Garcia is an Associate Editor with Oak View Law Group. He has been writing on financial topics over the years with special focus on American and European economy. Pablo also takes interest in debt related issues and contributes articles on debt elimination to personal finance blogs.

Church and State

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Debating on the issue of gay marriage, someone asks, “How is the issue of the religious definition of marriage relevant in a society where church and state are separate?”

The separation of church and state is not the same thing as the complete divorcing of religion-derived preferences and democratic politics.  What the separation of church and state sought to do was clearly and unambiguously separate the two as institutions.  Remember that most Americans in the fourth quarter of the 18th Century originated, either directly or indirectly, from England, which at the time was governed by a head of state who was also head of church.  In many other European countries, such as Spain, the church, as an institution, was deeply involved, in a direct fashion, in domestic policy.

When church and state were delineated as two separate and unrelated institutions in the United States, I do not think there was the intention of completely separating American politics from religious belief.  If there were, then there would have to be an aggressive attempt to stamp out any voting done on the basis of religion-derived preference, which is impossible in a country where a large percentage of opinions are religion-derived.  The only objective was to give people of different religions an equal voice — a voice represented by their vote.

Is it thus legitimate to ban same-sex marriage on the grounds of religion?  Now we get into the problems involved with democracy and the tyranny of the majority.  Is it okay to deny a minority certain “rights,” or privileges, that have already been granted to others?

Fiscal Policy and Taxation

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In weighing whether Herbert Hoover’s presidency was characterized by austerianism or fiscal expansionism, Daniel Kuehn points to the fact that Hoover raised taxes.  Daniel concludes, in an absolute manner, that tax increases are a measure of austerity (and, I interpret austerity here to mean contractionism).  I am not so sure this is correct if you recognize that a period of depression is characterized by a pool of idle resources (unused means of production).  I think my analysis here is in line with the mainstream analysis.

I think that most economists agree that there comes into existence a substantial number of idle resources.  This may occur for a number of reasons, including: (1) means of production priced out of the market (price rigidity), (2) means of production left unused for the purpose of saving them for future use, (3) means of production left unused, because they are no longer useful, and (4) means of production left unused, because banks are failing to act as financial intermediaries (whether this is because banks have an incentive to sit on reserves, or because borrowers do not want to borrow).  What all of this means is that there is a pool of means of production that are currently “unused,” which means they are not being consumed towards productive purposes (i.e. screws are not being used to manufacture cars, instead they are just sitting there).

I think I more or less model the problem in the simple (and probably imprecise) supply and demand below,

 

 

 

 

 

 

 

 

The leftward shift in the demand curve represents a decrease in nominal aggregate demand (spending), and the price at the red line becomes a price floor — this is because prices are rigid (prices are not falling to the level at which there is a willing buyer).  We see that there is deadweight loss, or a number of resources left “unpurchased” (which, for all intents and purposes, means unused).

Keynes’ “socialization of investment,” better known today as fiscal expansion, aims at using these newly idle resources.  Government can do this in several ways, including: (1) outright government production programs (building dams, highways, et cetera) or (2) redistributing income to those who plan to use it.  The hope is that this will garner an increase in aggregate demand, through an increase in nominal expenditure.

Daniel’s claim is that this is expansionary only if it is funded by deficit spending.  Funding through taxes is, no questions asked, contractionary.  I am not sure if Daniel’s logic is different, but this is the reasoning I found on an online encyclopedia, “increase[s] in taxes provides the household sector with less disposable income that can be used for consumption expenditures, which then reduces aggregate production and employment and leads to further decreases in income, thus reducing inflationary pressure.”  I would replace “consumption expenditures” with just “expenditure,” to include productive expenditures.

However, within the context of depressed aggregate demand, this is no longer the case.  The entire problem is that nominal expenditure has fallen, which is caused by either a failure in financial intermediation (unused savings) or an increase in the demand for money (basically also unused savings).  If we abstract from real goods for a minute, the entire issue originates from the fact that there is a portion of aggregate income which is left unused.  If there is no intention of using this income, then taxing it and redistributing it does not seem contractionary.  In fact, it is expansionary, since it puts to use idle income.

Going one step further, there does not seem to be a difference between deficit and taxation financing — I admit here that I may be jumping the gun.  Once we put the means of production into the picture, we realize that what is really in question are these idle resources.  Whether you finance redistribution through taxes or borrowing (or monetary expansion), the ideal outcome is that all idle resources will be put towards productive use.  Even if the original owners retain idle income, they are precluded from using it to buy previously idle resources, because these are already being employed.

While their reasoning might be entirely different than mine, it is worth considering that any Keynesian who argues in favor of tax increases (on the wealthy) — such as Krugman — must not think that such policies are contractionary.

Pun Intended

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Playboy Magazine interviews Paul Krugman.  I have not read it all, although I estimate that it says what we already expected Krugman to say.  One thing I did read, though, is that Krugman considers we are in a depression (“But I say we’re still in a depression”) — take that!

On a different note, it is/was articles like this that made Playboy Magazine what it is.  It mixed physical with intellectual stimulation, and so it appealed/appeals more than brute pornography.  It is, in one sense or another, a more artistic, academic approach.  Personally, I prefer Foreign Affairs, but Playboy is probably better than the competing alternatives.

Immigration, Imperialism, and Racism

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It is midterms week!  As you can expect, I will be struggling to get everything done and then find time to publish here.  I have five midterms over the next five days (one on each day), and then I have another three spread over the following two weeks (which is not as bad).  Today’s midterm, incidentally, is for my U.S. Immigration Policy and Border Politics class.

Since I do not have time to get into depth on anything, I thought I would share a research idea for a possible thesis:

The United States’ pre-WWII immigration policies (namely, the 1924 Immigration Act) were shaped as much by the domestic experience with foreigners as it was by the United States’ military expansionism during the Progressive Era (~1898–17).  “Americans” constructed a national racial identity — white, English/Irish American — as a means of dehumanizing foreigners who did not meet these racial characteristics.  This, in some sense, legitimized many of the nation’s international military incursions.

To be clear, there is no research behind the thesis.  It is just an idea based on broad observation.  Does anybody know about the topic that could offer tips in any direction?

Quote of the Week

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Over the last half-century, Spanish growers have uprooted hundreds of thousands of ancient olive trees and replaced them with efficient, high-output modern groves  Many of these new trees were planted in the 1940s, 1950s, and 1960s under El Generalísimo Francisco Franco, the military dictator, who promoted large-scale olive cultivation in Andalucía and other parts of Spain as part of his program to free the country of dependence on foreign food imports.  More groves went in during the 1970s, when the Spanish government drew up a series of ambitious nationwide plans to renew the country’s oil-making infrastructure, and still more were planted in the years preceding Spain’s entry into the EEC in 1986, when Spanish farmers and oil-makers became eligible for generous agricultural subsidies.

— Tom Mueller, Extra Virgitinity: The Sublime and Scandalous World of Olive Oil (New York: W.W. Norton & Company, 2012), p. 146.

Interventionism in everything, even one of the family businesses.

A Question on Framing

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Daniel Kuehn is looking to re-frame the discussion on Hayek v. Keynes, or Austrians/Chicagoites v. Keynesians more generally.  His three points are: (1) all sides of the debate value the market, (2)the disagreement is in what government can/should do, and (3) moving away from the topic of government allocation.

First, I am not sure that (3) is really possible.  To some degree or another, we are talking about whether government can and should allocate the means of production.  This includes government actions such as price fixing schemes, and also more widely welfare programs that redistribute wealth from one income earner to another.  There is some element of market allocation that remains, but that element is obviously skewed by the replacement of the market’s system of distribution with the government’s.  This is what I am referring to in my article “Government Spending is Bad Economics,” which I feel that some people have not properly digested its argument.

Second, and more importantly, Daniel is looking to frame the discussion from his point of view.  I am sure that there are many Keynesians, Post-Keynesians, or whatever they like to call themselves, who disagree with where Daniel stands.  There are some Keynesians who are relatively market-oriented, and I would include economists such as Daniel and Brad DeLong.  There are some Keynesian economists who are not market-oriented, and many more who stand somewhere in between (such as Minsky).  Keynes’ economics, and those developed after him, have been interpreted in many directions — not just by his detractors, but also by his supporters.

This should lead to an additional point to Daniel’s three: know the context of the argument, in the sense of the author’s ideological agenda.  Someone like Hicks held a different social ideology than someone like Abba Lerner or even Paul Samuelson.  A more contemporary comparison may be made between someone like Joseph Stiglitz and Paul Krugman.  On this basis, it seems absurd to try to “frame” the discussion, when so many different ideologies are involved — it is not only political; there are disagreements on the role of government even between advocates of Keynesianism.

Things Anarchy Does Not Assume

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I’ve been getting in a few conversations with friends lately about anarchy, and they all seem to think anarchy is anything but a stateless society. They present it with a host of other assumptions and requisites. So here I am to dispel some popular misconceptions and rumors about a stateless society:

1. People become “good.”

A frequent objection to the stateless society is that anyone who desires it must be wrong about human nature and/or thinks humans are better than we are. They imagine we think of anarchy as a land of saints and angels. But of course this caricature isn’t true. Those anarchists who want what I want, i.e., a private property society, do not imagine that anarchy is only feasible if everyone is peaceful. It does not require them to have good manners or be forgiving. It’s just a society where every service is offered on the market.

2. People become “rational.”

Another objection comes up whenever I discuss the prospect of a stateless society with libertarian friends – they think it is unrealistic because it requires the whole population to suddenly become aware of the situation and throw off their chains. This isn’t true, either. Lots of ancient societies (like Classical Athens*) existed without a formal government and the citizens of these places are not Lysander Spooners or Murray Rothbards. They’re people. To be fair, of course, it can happen all at once and we should hope it happens that way, but anarchy is far more likely to come about by a series of gradual steps where people regain their freedom foot by foot. If the Ron Paul campaign sparked a 30 year “Revolution” and turned the hearts of Americans to liberty and small government, then we could see a drastic reduction of government.

3. Power or hierarchy are “bad.”

Lots of people interpret anarchy as the elimination of hierarchical social networks or something of the like. And there’s lots of left-anarchist or anarcho-collectivist literature like that – that seeks to do away with boss/worker relationships, for instance. The type of stateless society I advocate (which is a reason why we should use that term instead of anarchy very often) is a society where people make voluntary relationships with whomever they associate. It says nothing about power per se. Power can be an initiation of force, but it can also be intellectual, spiritual, or personal power. I do not oppose spontaneous organizations of individuals, even if they seem hierarchical or oppressive.

4. Chaos is preferable to order.

As with this assumption, there is literature that advocates destruction and lawlessness as a type of anarchy. For whatever reason, these anarchists are opposed to civil society and may perhaps, like Rousseau, wish to return to a state of nature. Anarcho-primitivists are known for their philosophical devotion to the “natural” world that existed before man started building instruments and tools. This must be familiar by now, but the support of a stateless society does not entail this. We do not have to be l’homme de la nature to be anarchists.

*Technically, it would be Archaic Athens.

Cellular Clashes

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Yesterday, I came upon an article which describes LightSquared’s plight in getting permission to enter the mobile phone market.  This is a great example of adverse possession, since technically the FCC is looking to block LightSquared’s entry on account of the fact that the part of the light spectrum the company is looking to use is extremely close to the spectrum used by GPS firms.  Because GPS networks pick up heavy signals from waves close to the spectrum they own (where the issue of adverse possession comes in), heavy use of these airwaves by LightSquared and other companies might create a large problem for GPS users (interference).

We can talk about economic efficiency, and how courts should rule.  But, a lot of people are crying fowl.  The article cites criticisms of the FCC on the grounds that it is protecting the GPS industry (since GPS companies would have to invest in technology to protect their networks from interference).  I would have thought that the strongest lobbying would have come from cellular phone companies, looking to protect their market from the literally wholesale competition of LightSquared.

What LightSquared is looking to do is to build a huge mobile phone network, and then sell rights for the network’s use on a wholesale basis.  For example, LightSquared might sell rights to WalMart, which would then sell cell phones operating on this network under its own brand name.  LightSquared would indirectly sell its product to customers through a large number of brand names, opening them to a huge potential market.  The threat to competitors is clear.

I am not saying that there is fowl play.  I really do not know, even if the FCC has a history of corruption (as most regulatory agencies do).  It could be that there is a national security issue at hand (interference on government GPS networks).  It seems to me, though, that given the huge budget LightSquared is willing to pit towards development of its network, it would be happy to subsidize — to an extent — development of technology meant to protect GPS networks (that is, solve the property rights issue through bargaining).  That the FCC seem so adamant in blocking LightSquared’s entry (indefinitely, according to the article) seems to scream fowl play.

Individual Prices and NGDP

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I have a third comment on the blogosphere discussion of Austrian business cycle theory, although it is more of a comment on money supply growth and NGDP targeting.  Oftentimes, it is difficult for me to talk about NGDP targeting and anything similar, because I disagree with the basic economics of the position (see my article: “Prices and the Demand for Money“).  This time, I have a more basic observation to make, and it may click more with proponents of NGDP targeting.

In his critique of Murray Rothbard’s  America’s Great Depression, Christensen writes,

Rothbard is arguing that US money supply growth was excessive during the 1920s. Rothbard’s own measure of the money supply  apparently grew by 7% y/y on average from 1921 to 1929. That according to Rothbard was insanely loose monetary policy. But was it? First of all, money supply growth was the strongest in the early years following the near-Depression of 1920-21. Hence, most of the “excessive” growth in the money supply was simply filling the gap created by the Federal Reserve’s excessive tightening in 1920-21.

What strikes me as fundamentally wrong in Christensen’s argument here is in relying on NGDP data for 1920–21 to decide what the “proper” NGDP of subsequent years should be.  The assumption is that since there is an “NGDP gap” in 1920 (caused by the recession), which is represented by the total fall in nominal expenditure, money growth must make up for this.  Thus, NGDP is targeted with the intention of stabilizing nominal spending.

My problem with relying on any sort of NGDP targeting over time is that it ignores changes in prices during that same time.  The prices of producers’ and consumers’ goods will change during a recession — if we assume a fall in NGDP, these prices will most likely fall.  Once an economy stabilizes, like it did in late 1921, there will be a new constellation of prices, most likely representing that fall in nominal expenditure.  The NGDP level of 1922, therefore, (just to use an example date) reflects the aggregate nominal value of all catallactic activity in the economy, which itself is based on these new prices.  So, even while NGDP might be lower in 1922 than it was in 1921, it does not mean that this new NGDP is “too low.”

What we can conclude from the above is that any monetary growth to increase NGDP after prices have stabilized is distortionary, even if NGDP has not nominally recovered from its fall in 1920.  This also tells me that what we should look at is the process of price stabilization (which is not the same thing as saying that we should target a price level; for me “price stabilization” refers to the process of price changes during a period of chaos to allow for economic calculation to take place), instead of just looking at aggregate values.  What is important is a return to normal catallactic activity, and ideas which jump-the-gun and propose some sort of income targeting tend to ignore the basics, because they do not have catallactic activity in mind.