Why do people worry about deficits? | Hacker News Reader

Why do people worry about deficits?

noahpinion.substack.com

22 pointspaulpauper19 comments

Every dollar of tax revenue we have to raise to pay the interest on the debt is a dollar that can't be left in our pockets, or diverted to more useful government programs.

Last year it was $522B, this year it's already been $562B and we still have one more fiscal quarter to go.

Exactly. The answer to Noah's question is barely two sentences long, and it runs something like "Because people saw how Austerity hurt Greek citizens, and people saw how low confidence hurt Greek businesses and governments". Lazy debt and currency management ultimately serves neither the desires of the pro-business nor the desires of the pro-social program political wings.

Greece does not have its own currency. Its situation was different.

At the time (2009), many economists expected Greece to bail out of the Euro, which is not an "optimal currency area", taking short term pain for long term gain. It didn't, instead opting for short term pain and long term pain.

Having your own currency doesn't really solve the problem. Sure in theory the US could inflate the currency enough to drastically reduce the value of outstanding debt. But we would still have to borrow going forward, and that level of inflation would drive T-bond yields through the roof. That will mean short and long term pain no matter what.

Lessons from the yields on Japan’s sovereign debt, their debt to GDP, and their historical and forward looking inflation indicate a different forecast.

https://www.bloomberg.com/markets/rates-bonds/government-bon...

https://en.wikipedia.org/wiki/National_debt_of_Japan

https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?location...

If there are more useful government programs. Just issue more bonds and pay for them. The idea that the government should refrain from finding useful programs until it’s paid off all its debt is absurd.

I never said they should pay off all their debts before spending another dime. But managing deficits is important for the reasons laid out. Cashflow management is important in any organisation.

There are two theories:

- We're borrowing money, and we'll need to pay it back. That's scary.

- Money is bits in a computer, and from the perspective of the US government, it's like video game currency. Debts and deficits are fiscal instruments.

Which of these is correct, or something else, is TBD. I think a big part of the question is who holds the debt. I'm a lot more worried about foreign debt, and I'm a lot less worried about debt as a financial instrument to pay interest on de facto savings accounts.

The 3rd option is that government is forced to keep interest rates near 0 forever, coupled with high inflation to keep debt levels in check. Onslaught of increasing wealth inequality continues into the future as the country declines into a Japan style economy of stagnation.

All right Noah, maybe I can shed some light. Economists call it seigniorage, but ordinary people call it printing money. And ordinary people intuitively perceive that printing money can't come without inflation. And they look around in their day to day life, and see inflation creeping everywhere. After only about 2-3 Trillion in printed money (but who's counting?). Add 3.5 T more, and how can inflation not creep up even more?

Any country that doesn't control its deficits doesn't last very long. It gets too weak to maintain its borders, and gets overthrown either by internal forces or by external forces.

It's same principle as eating fewer calories than you expend. You just waste away. Sooner or later you can't throw off that pneumonia, or you are too weak to defend yourself against thugs.

If the country's GDP growth is greater than the annual deficit, total debt can decrease. I don't think your analogy is right.

If the country's GDP growth is greater than the annual deficit, total debt can decrease.

Yes, but .... If the US is doing so well, why is the total debt increasing by at least about one trillion dollars per year?

(Actually if my memory is correct (I'm too lazy to look, but you can do it if you want), in 2011 the debt was 13 trillion, now it's about 30 trillion, so that's an extra 17 trillion in 10 years therefore the debt is growing at 1.7 trillion per year.)

Except debt has grown faster than GDP.

My point was: it depends, and analogies with static entities like organisms aren't useful.

Investors purchase Treasury bonds based on the fact that the US government always pays it back. At some point won’t the amount we pay back on the deficit crowd out other government spending?

Yes there is ultimately a maximum limit to debt service as a percentage of GDP. It can keep increasing for a long time but eventually we'll hit a crisis point when T-bond yields suddenly accelerate. At that point we'll be forced into an austerity program, and there will probably be some type of technical default.

If we were spending the borrowed money on investments that actually boosted GDP then it wouldn't be a problem. But increasingly that money is being used for current government operations. We're not gaining anything for the future.

> At some point won’t the amount we pay back on the deficit crowd out other government spending?

Why would it?

It would if there was a fixed upper bound on spending, but if there was, therr would be a hard cap on deficits to start with.

Heck, debt isn't even strictly necessary to finance government spending beyond revenue, that's just done as part of play-acting that the government isn't using its own fiat.

They're not worried about the deficit.

They're worried the people who are having the printed money hosed over them will vote for other people to pay it all back.

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