You can stop looking for the dumbest thing anyone will say today, for Arnold Kling already found it:
Brad Setser writes,
Facts are facts. The US has already proved it can raise over $1.5 trillion in a single year [in Treasury borrowing]
That is a the sort of statement that could come back and haunt someone. It is along the lines of the guy jumping out of a building from the 10th floor, passing the third floor and saying, “It’s all fine so far.”
Kling’s response is perfectly fine, but I’d like to offer my own.
It is true — at least thus far — that the federal government can run any budget deficit it likes — no matter how large — by conducting as many Treasury auctions — no matter how large — as are needed to fund those deficits. But as with any auction, indeed as with any economic transaction, the question is, “At what price?”
One of the few remaining things that the United States Government still cannot do is force people to buy a government bond. It must still entice buyers to purchase its bonds, the same way that anyone entices a buyer — with a sufficiently attractive price.
With any bond, government or otherwise, the price is really just a function of the interest rate paid on that bond. A borrower, government or otherwise, must offer a sufficiently high interest rate in order to attract lenders (i.e., bond buyers).
So when Setser says, “the US has already proved it can raise over $1.5 trillion in a single year,” he’s not really saying anything at all. Of course the U.S. could raise over $1.5 trillion in a single year in the past. And of course the U.S. could raise over $1.5 trillion in a single year in the future. The question is: At what price? At what interest rate?
Setser also conveniently ignores the pesky fact that we are talking here not only about interest rates, but also about interest payments. I presume Setser is aware that the federal government must actually make cash payments to the holders of Treasury securities. Those payments are not mere accounting entries on a notebook in West Virginia. They are real cash outlays that must be made to the bondholders — $450 billion per year and climbing. And those outlays have real economic effects.
Admittedly, it has been rather easy to dismiss the relevance of interest rates to fiscal policy debates over the past few years. But that is only because China’s Communist thugs have been stupid enough, for long enough, to loan our government money at ridiculously low interest rates. And so long as Beijing remains stupid enough to continue doing so, then our response should be: “Great! Keep it coming!”
(Those who actually care about China’s ever-swelling holdings of U.S. government debt tend to focus on other, less intellectually robust issues, such as “sending jobs overseas” — or, worse, primitive Buchanan-style xenophobic populism. Such people are almost as stupid as China’s Communist thugs.)
Even Setser acknowledges this:
China’s reserve growth is likely to slow, and over time so will its Treasury purchases — even if they haven’t yet. China isn’t going to add close to $70b to its short-term Treasury holdings forever; the pace of China’s purchases will slow. That isn’t a major problem though, not so long as it happens gradually.
“So long as it happens gradually.” Famous last words. I suppose cancer isn’t a major problem either — so long as it happens gradually. Question for Setser: Is this “gradually” enough for you?
Finally, let’s assume that we indeed find other buyers for the ever-more-expensive government debt. Let’s even assume that these new buyers are real, red-blooded Americans and not “job-stealing foreigners.” Are those American Treasury buyers likely to be poor, or even middle class? Or are they likely to be the wealthy? Greater deficits mean greater debt, which means greater interest payments on that debt, which means greater income transfers from those with lower incomes (who pay the taxes) to those with higher incomes (who receive the interest payments).
And this plan is the cornerstone of what liberals consider “enlightened fiscal policy.”
Astonishing.
Previously:
–CRS Recommendation: The National Debt
–CRS Recommendation: Foreign Holdings of Public Debt
–Government Bringing Back 30-Year Bond
–Defining “Balanced Budget” Down
