Said The Tortoise to the Hare

Walking & Thinking

Who says old dogs can’t learn new tricks? Last fall I got tired of listing to my iPod playlist while working out at the Y and learned to download pod-casts to listen to. My favorites include Car Talk, Garrison Keillor, NPR topics, It’s All Politics (surprisingly fair and balanced!), and Planet Money, and it was on the latter, catching up, that I tapped into segment #316 from last fall entitled, “What If We Paid Off The Debt?”.

As most people know, the national debt is historically high, soaring past 100% of GDP because of two un-budgeted wars, the Bush II tax cuts and recession stimulus spending. Its unprecedented growth is the prime reason for the Tea Party’s angst and predictions of doom. So when I saw that subject, I tuned in. What I heard I thought worth repeating for you, dear reader, especially since economics is a subject that can use all the clarification it can get (IMO):

Planet Money has obtained a secret government report outlining what once looked like a potential crisis: The possibility that the U.S. government might pay off its entire debt.

It sounds ridiculous today. But not so long ago, the prospect of a debt-free U.S. was seen as a real possibility with the potential to upset the global financial system.

We recently obtained the report through a Freedom of Information Act Request. You can read the whole thing here. (It’s a PDF.) [Blogger’s note: I’ll gi

The report is called “Life After Debt”. It was written in the year 2000, when the U.S. was running a budget surplus, taking in more than it was spending every year. Economists were projecting that the entire national debt could be paid off by 2012.

This was seen in many ways as good thing. But it also posed risks. If the U.S. paid off its debt there would be no more U.S. Treasury bonds in the world.

“It was a huge issue … for not just the U.S. economy, but the global economy,” says Diane Lim Rogers, an economist in the Clinton administration.

The U.S. borrows money by selling bonds. So the end of debt would mean the end of Treasury bonds.

But the U.S. has been issuing bonds for so long, and the bonds are seen as so safe, that much of the world has come to depend on them. The U.S. Treasury bond is a pillar of the global economy.

Banks buy hundreds of billions of dollars’ worth, because they’re a safe place to park money.

Mortgage rates are tied to the interest rate on U.S. treasury bonds.

The Federal Reserve — our central bank — buys and sells Treasury bonds all the time, in an effort to keep the economy on track.

If Treasury bonds disappeared, would the world unravel? Would it adjust somehow?

“I probably thought about this piece easily 16 hours a day, and it took me a long time to even start writing it,” says Jason Seligman, the economist who wrote most of the report.

It was a strange, science-fictiony question.

“What would it look like to be in a United States without debt?” Seligman says. “What would life look like in those United States?”

Yes, there were ways for the world to adjust. But certain things got really tricky.

For example: What do you do with the money that comes out of people’s paychecks for Social Security? Now, a lot of that money gets invested in –- you guessed it — Treasury bonds. If there are no Treasury bonds, what do you invest it in? Stocks? Which stocks? Who picks?

In the end, Seligman concluded it was a good idea to pay down the debt — but not to pay it off entirely.

“There’s such a thing as too much debt,” he says. “But also such a thing, perhaps, as too little.”

The copy of Life After Debt we obtained reads “PRELIMINARY AND CLOSE HOLD OFFICIAL USE ONLY.”

The report was intended to be included in the official “Economic Report of the President” — the final one of the Clinton administration. But in the end, people above Jason Seligman decided it was too speculative, too politically sensitive. So it was never published.

The danger that we would pay off our debt by 2012 has clearly passed. There are plenty of Treasury bonds around these days. U.S. debt held by the public is now over $10 trillion.

The moral to the tale, I suggest, is that the sky is not falling because of the national debt, that debt is something that is part and parcel of what makes government work, and that a proper national debt serves the same excellent purpose for an economy as a hydraulic accumulator does for a hydraulic system, to use an engineering metaphor. A hydraulic pump transmits power to remote cylinders by applying pressure to the system, but just as an economy has its ups and downs the work done remotely varies wildly. Without an accumulator, basically an air-pressurized tank that smooths the load and supplies power in sudden down cycles, the system would quickly fail from pressure extremes.

This is a short story about only one aspect of a complex subject, the dismal science. I do not offer it as denial that our national debt is too large – it surely is, and it’s now larger than it was last fall. But I think it is interesting evidence that, unlike with family finances, some national debt is not only good but necessary, and that what is needed are long-term measures, not short-term panic.

There is a good reason why the report was never published – most pols don’t think the public is capable of understanding economic concepts.  What do you think?

“Slow and steady wins the race.” — Aesop

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About Jim Wheeler

U. S. Naval Academy, BS, Engineering, 1959; Naval line officer and submariner, 1959 -1981, Commander, USN; The George Washington U., MSA, Management Eng.; Aerospace Engineer, 1981-1999; Resident Gadfly, 1999 - present. Political affiliation: Independent, tending progressive as the GOP recedes from its Eisenhower roots.
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12 Responses to Said The Tortoise to the Hare

  1. “If you laid all the economists end to end they still couldn’t reach a conclusion” – George Bernard Shaw

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  2. jwhester says:

    A little perspective is always nice when one is agonizing over current events. My research suggests that most economists without an agenda easily recognize that national debt is not as simple as some like to make it. Certainly, the allegory to household budgets is not helpful except to those whose agenda is to transfer wealth to the already wealthy.

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  3. Jim Wheeler says:

    FYI, for a similar perspective on how government debt differs from family debt, check out this 3/9/2012 Gene Lyons column.

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  4. ansonburlingame says:

    Lyon’s, in my view, continues to get it wrong. What the government spend money upon is different than what families spend money upon. But the aspect of borrowing to spend the money, excessively, is the point.

    For example, borrowing money on fertizler in April to improve the crop harvested in Sept makes sense, UNLESS one borrows too much money for the fertilizer. Say the fertilizer costs $1000 and the crop is worth $2000. Does the farmer immediately repay the debt and “live on” the extra $1000 beginning in Sept. Fine if he does so. But what if he uses $1500 to “live on” and only repays $500 of the $1000 (plus interest) owed. And year after year he does the same, accumlating debt over an indefinite period of time.

    Eventually, he loses the farm.

    For 50 years the federal government has NEVER paid down on the debt. It has only paid the interest on the debt, by and large. And now the farm is in jepoardy with continued excessive borrowing to “live on”.

    Even Kenesyian Economics only suggests increased borrowing during a recession but not to continue such borrowing thru the “good times” as well. Yet a single federal administration has followed such dictates except for 4 or the 8 years during the Clinto administration and those were BOOM times, far better in terms of GDP growth than simply “good times”. And Clinton was almost forced to do so in balancing the budget by a GOP House (the first such House in 40 years).

    I would really like for Krugman to explain the “fertilizer” metaphor to me and others.

    Anson

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  5. Anson,

    I’m no Paul Krugman, but I’ll try to give you a little input on the “fertilizer” question. Here’s what I found on the net that helps explain the economics of farming, including, of course, the financing of fertilizer. Take corn, for example, somebody please.

    Fifty years ago, corn farmers harvested ear corn at a relatively high humidity content and stored it in corn cribs, where it would dry naturally. Sometime in the winter, the farmer would empty the cribs, pass the corn through a sheller, and haul the corn to the nearest elevator.

    These days, farmers shell the corn as they pick it. The corn goes into bins, where fuel is burnt to dry the corn. There’s a balancing act between picking early at a high moisture rate – which dramatically increases drying costs – and picking later at a low moisture rate. Picking drying corn, the ears are more likely to shell themselves and be lost on the ground. Not only do you lose corn that way, but it sprouts, and becomes a weed that needs to be eliminated the following season.

    Instead of hauling the corn to a local elevator, it’s probably hauled to a regional grain terminal, because railroads don’t want to deal with less than 100 cars of grain at a time.

    Farmers can accept the cash price for the corn, or they can store it and sell it later. The elevator pays a lower price than CBOT (Chicago Board of Trade) quotes, because they need to handle the grain and pay freight. Fifty years ago, the elevators almost universally figured on 5 cents per bushel margin – two cents in, two cents out, one cent profit – plus freight in setting their prices. Some farmers have semis, figuring that they can make more money delivering to a more distant terminal that pays more.

    Farmers are docked for foreign content – dirt, weed seed, etc., in their grain. If there is mold or mildew in the crop, the farmer may be docked severely, or the corn may be outright refused. Farmers delivering too-wet corn are charged for shrinkage and for drying costs. If it’s a little drier than necessary, though, there’s no premium. To a certain degree, the terminal will simply mix too-wet and too-dry corn to come closer to the optimal moisture content. The moisture migrates from the wetter corn to the dry corn, saving the terminal the expense of actually drying it, and allowing them to sell more water to their customers. The farmer can get docked or receive a premium for test weight, but there’s no premium for corn that has been grown in rich soil and is highly nutritious, as opposed to corn that has been grown in poorer soil with the aid of generous applications of ammonia.

    If a farmer chooses to delay the sale of his corn, he pays a storage each month, which is deducted from his check when he ends up selling his corn. If a farmer raises corn on someone else’s land, the corn is usually split 50/50 with the landowner, and the elevator treats it as two loads of corn instead of one.

    Farmers can sell their corn even before it’s raised. Having a guaranteed price reduces some risks to the farmer, but if the weather is lousy, everybody’s crop may fail. Prices may skyrocket, and he may need to buy back the crop he sold at a much higher price than he sold for.

    The government has, at various times, offered price support programs. The farmer has to jump through a lot of hoops, such as engaging in conservation programs. Corn may be stored in bonded storage, with the government loaning the farmer money on the crop. If the price remains low, the farmer has the option of forfeiting his crop instead of paying the loan off. If the price remains high, the farmer sells the crop and receives the difference between the sale price and the loan. (No, you can’t sell the corn, and take the money and run. The bureaucrats running USDA aren’t all that bright, but they aren’t *that* dumb.)

    What do farmers think of the farm programs? Well in 1963, farmers were asked to vote for or against two separate farm programs. They voted *both* down. Secretary of Agriculture Orville Freeman said, “Never again”, and by gosh, the USDA has kept its word. Never again were the farmers allowed to say “Go away and leave us alone.” The USDA pretty much does what it wants to – and there aren’t enough farmers in this country to amount to a political force.

    The subsidies for farmers aren’t really subsidies. The Agricultural Stabilization Service, as it was originally named, later joined with a conservation program so that that they could change the acronym to ASCS (Agricultural Stabilization and Conservation Service) is there to keep prices stable, not to keep them high. It doesn’t benefit farmers nearly as much as it benefits big companies like Kellogg’s, ADM, Cargill, and Quaker. Of course, the big companies all have lots of lobbyists.

    Many farmers decline to sell their corn by the bushel. This isn’t new, of course; the whiskey rebellion happened because farmers realized that it was cheaper to ship corn in the form of whiskey. These days, they ship their corn on the hoof, by raising swine. When corn prices are high, and pork is low, they sell their corn by the bushel, and when corn prices are low and pork is high, they buy a lot of extra corn to feed their expanded herds.

    Hope that helps.

    Herb

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  6. ansonburlingame says:

    Herb and Jim,

    No doubt that farming is far more complex today that years ago. Someone unable to do simple math in the situation above becomes a “lost ball in very high weeds” to succeed as a farmer today. Maybe that is why the “family farm” is going away. I would be hard pressed to achieve any form of profitiablity in the above example, PLUS know the “land” well enough to understand how to determine if my own corn was “wet or dry”.

    But all of that complexity in managing a corn crop is beside the point. It all comes down to money spent to grow and sell the final product, wet, dry, molded, or whatever, and how much one sells the product for, in the end. Simple checkbook math. Write all the checks to grow, pick and “move” the corn and then look at the final check received.

    If one cannot “live on” the difference to have a positvie balance of no less than zero balance when the process starts the next spring, then something must change or eventually one loses the farm.

    Tobacco was the “cash crop” where I grew up. I understood the process from planting seeds in beds to final sale in a warehouse in the early winter. That check cut by the warehouse after the sale of the crop in Dec was a matter of living or. borrowing to live until the spring. Some won and some lost and my father both insured such men and worked on the floor of the warehouse to mangage the final sale. As a young boy I watched the whole process and worked in various portions, planting, weeding, cutting, tying and moving 700 pound baskets of tobacco on the cold floor to the warehouse as a “boy”.

    I also have observed Kentucky now from a distance since tobacco subsidies went away a couple or more decades ago. Many of those potential farmers now work in the Toyota factory in my hometown.

    I like Georgetown better, then instead of now and those factory workers grow lots of mary jane today on their small and wooded plots of land, today.

    Anson

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    • Anson,

      Seems to me you’ve answered your own question re the farmer and the fertilizer. I was trying to make the point that farming, like any business, or even government, is vastly more complicated than deposits and withdrawals in a checkbook. In that regard, I strongly recommend that you consider H. L. Mencken’s admonition: “For every complex problem there is an answer that is clear, simple, and wrong.”

      Herb

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  7. ansonburlingame says:

    Com’on AGAIN Herb,

    Any business comes down to money in to grow, build or sell something and the “profit” (money out) from having done so. THAT is what “business” really boils down to, to make a profit to live on until the next cycle begins in the “spring” again, at least for a farmer, big, little, corporation or tenant farmer.

    My earlier “business” was ultimately getting a submarine to sea with a crew of men ready and willing to go to war if needed. The overall objective was quite simple and easy to understand. But achieving that objective was extraordinarily complex, almost unbelievably complex, technically, psychologically, etc.

    But in the end my success or failure in that “business” was viewed only in terms of the ability to “go to sea and be ready to accomplish the mission assigned”, up to and including the ability to go to war and win.

    Anson

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