Tag Archives: economics

Does the US have a spending problem?

Compared to other countries, no. But if you think the US should be “exceptional” and that climate change is a hoax, maybe.

As House Republicans get closer and closer to forcing a debt-ceiling crisis that could result in the United States defaulting on commitments it has already written into law, American citizens need to raise their understanding of how all this works. Previously, I’ve written two posts on this theme: The first explained what the debt ceiling is and why we shouldn’t have one at all. (Only the US and Denmark have debt ceilings, and Denmark doesn’t play chicken with theirs. No other country inflicts these kinds of fiscal crises on itself.) The second looked at the history of the US national debt and how it accumulated.

Now it’s time to address the main argument House Republicans are making to justify playing chicken with an economic catastrophe: Sure, the US defaulting on its commitments would be bad, but it’s worse to do nothing, because our ever-increasing spending and debt is pushing us towards an even greater catastrophe.

In other words, a self-inflicted debt-ceiling crisis is the lesser evil. Steve Moore, the Club for Growth founder that Trump tried to appoint to the Federal Reserve Board, puts it like this:

The nation’s good credit standing in the global capital markets isn’t imperiled by not passing a debt ceiling. The much-bigger danger is that Congress does extend the debt ceiling, but without any reforms in the way Congress grossly overspends.

The first part of that claim is obvious nonsense: Not passing a debt ceiling certainly does imperil the US standing in credit markets. But let’s examine the second claim: Not just that the government spends more money than some people would like, but that doing so is pushing us towards a national catastrophe.

Spending. It’s a matter of simple fact that government spending and debt have gone up considerably — both in absolute terms and as a percentage of our annual GDP — in the late Trump years and since Biden took office. Basically, the Covid pandemic both cut revenue and required enormous government spending to avoid great public suffering while the private sector was largely shut down. The necessity of that deficit spending was a bipartisan conclusion; it happened under both Trump and Biden and was supported in Congress by members of both parties.

(Notice that the extreme right of the graph above is a projection to 2050, not something that has already happened.)

That increase in the debt built on a previous run-up during the Great Recession that started in 2007. Again, the stimulus spending and tax-cutting was bipartisan; it began under Bush and continued under Obama.

But looking forward, the US faces challenges that the two parties see differently. Democrats want the government to spend money on them, while Republicans don’t.

  • Democrats see climate change as a problem that requires a major restructuring of the economy, moving away from fossil fuels and towards energy from sustainable sources. However, climate change is a classic externality — a real cost that falls neither on the producer nor the consumer of fossil fuels — so the market will not make this shift without government intervention. Republicans deny that climate change is a problem.
  • Democrats want to shift healthcare — nearly 1/7th of the economy — from the private sector to the public sector. Medicare began this shift in the 1960s. ObamaCare continued it, and progressives like Bernie Sanders would like to complete it. Republicans would like to stop this shift, if not roll it back.

Abstract debates about “spending” are really about these two issues, plus the perennial question of how good a safety net the US should provide for its poor: Is it enough to keep people from starving in the streets, or should the government guarantee every American a decent life, whether they can find a job or not?

It’s worth noting that the other big government expenditure — defense — is largely bipartisan. In general, progressive Democrats would like to spend less on defense and MAGA Republicans more, but neither party has a consensus for major changes in our military posture in the world.

The politics of spending. The bill House Republicans recently passed reflected these priorities: It agreed to raise the debt ceiling for about a year (at which point we’d go through the same ordeal again), in exchange for

  • capping “discretionary spending” — basically everything but Social Security and Medicare — at FY 2022 levels and letting them increase by only 1% per year.
  • rolling back provisions in the Inflation Reduction Act to subsidize sustainable energy, while increasing production of fossil fuels

plus a few other things. The discretionary spending cap isn’t across-the-board, but also doesn’t specify the cuts. This allows Republicans to dodge when Democrats say they’ve voted to cut some popular program like veterans’ benefits. And of course, every program that gets exempted from the cuts means that deeper cuts will be needed elsewhere.

The White House has been attacking Republicans for proposing cuts to veterans’ care. Republicans in House leadership have responded that no cuts are intended. House Speaker Kevin McCarthy has promised he will protect the military from reductions, though the bill as written does not exclude them. And Kay Granger, the chairwoman of the House Appropriations Committee, has said border security remains a top priority.

This is a feature of our politics that I’ve noted before: The American people don’t really understand where government spending goes, so they support spending cuts in the abstract, while rejecting any specific list of significant cuts.

The two parties maneuver around that phenomenon: Republicans support vague spending “caps” that don’t specifically cut anything in particular, while Democrats try to pin them down. Do they want to cut defense? Veterans benefits? Health care? Education? No, of course not. They just want to cut “spending”.

Is government spending a problem? For Republicans, this is an article of faith, but it’s really not obvious. For example, look at Wikipedia’s list of countries by government spending as a percentage of GDP. (The US total accounts not just for federal spending, but state and local as well.)

As of 2022, the US was not an outlier in either direction, spending about 38% of GDP via government. That’s less that most comparable countries: the UK (45%), Germany (50%), Canada (41%), and France (58%) for example. But it’s also more than Switzerland (34%) and Israel (37%), and almost exactly the same as Australia.

And while government spending has been generally rising over the decades — it was less than 20% of GDP a century ago — the increase doesn’t look precipitous or out of control.

In short, if you argue that the US has a spending problem, what you’re implicitly saying is that we shouldn’t be like other nations. If you regard Germany or France as cautionary tales, then we need to cut spending before we wind up like them. On the other hand, if you envy countries like Denmark (49%), the Netherlands (45%), and Finland (54%) — Finland regularly comes out on top of polls about public happiness — then you can only shake your head at this “out-of-control spending” talk.

The ledger has two sides. So while the “spending problem” is debatable, it is obvious that the national debt is growing. Intuitively this seems bad (though I’ll push discussing how bad it really is off to a later post). But jumping immediately from a debt problem to a spending problem is sleight-of-hand. Spending 38% of GDP (or 50% or even more) through the public sector doesn’t necessarily create debt if we’re willing to pay taxes at that level.

Our debt problem (from the same Wikipedia list) comes from the fact that we’re only paying 33% of GDP in taxes. This is not high by comparison with other countries. South Korea pays 27% and Ireland 23%, but just about every other country we might compare ourselves to pays more: Germany 47%, Canada 41%, the United Kingdom 39%, and so on.

So it’s disingenuous to frame the debt as a national crisis, but take taxes off the table. In particular, the Trump tax cuts went mainly to corporations and the very rich, while adding trillions to the debt over a ten-year period. Most spending cuts are unpopular in themselves, but they’re particularly unpopular when you pair them with tax cuts, as in “We have to kick your cousin off Medicaid so that billionaires can keep the tax cuts Trump gave them.”

The private sector isn’t magic. Much of the debate about government spending is really about whether some necessary expense winds up in the public or private sector. We could, for example, cut government spending overnight just by closing all the public schools. Kids would still need to be educated, and most middle-class-and-above families would find some way to send their own kids to private schools (maybe with help from grandparents). Taxes could go down, but private expenses would go up.

Ditto for Social Security. We could end it an save everybody taxes. But you’d also have to worry about whether your parents or grandparents were starving, and maybe they’d have to move in with you.

All our highways could be toll roads run by private corporations. Taxes could go down, but you’d have to pay tolls.

The point I’m making here is that nothing magic happens when we move an expenditure from the public to the private sector or vice versa. Somebody still has to teach the kids, take care of the sick, and pave the highways. You don’t necessarily save anything just by paying those people out of a different piggy bank.

That observation is going to be important the next time we consider expanding national health care. Conservatives are going to freak out about the massive increase in government spending. “OMG! We can’t afford this!” But if the net effect is that taxes replace health-insurance premiums, we can. That’s the main reason government spending (and taxation) is higher in places like France and Germany: They’re buying stuff through the public sector that we buy through the private sector. People still wind up paying doctors and nurses to take care of them, but the money traverses a different route.

Spending and democracy. Finally, we need to recognize that the current situation results largely from what the American people want: The particular programs the government spends money are popular, while taxes are unpopular. The current spending and taxing levels were passed by the Congress the people elected.

The point of using the debt ceiling as a hostage-taking tactic is to circumvent democracy. Yes, the people did narrowly elect a House Republican majority in 2022, but Republican candidates ran on issues that have largely vanished from the House Republican agenda, like crime. They certainly did not run on a list of spending cuts, and in fact they still have not produced such a list, because they know it would be unpopular.

The American people have also elected a Democratic Senate majority and a Democratic President. (Both of those happened in spite of structural factors that allow Republicans to win without representing a majority of voters, like the small-state bias in the Senate and the Electoral College.) The Republican House should not get to control the agenda simply because they are apparently willing to push the economy’s self-destruct button unless they get their way.

So what should happen? The debt ceiling should play no role, and Congress should work out a budget for next year, adjusting both the taxing and spending sides of the ledger. Republicans should have a bigger say in the next budget than the last one, because they won the House majority. But both parties should publish their budget priorities and see how the American people like them.

So is there a spending problem? Not really. Not by international standards and not compared to what the people want. What the government spends money on may or may not be what you want it to spend money on. But that’s why we have elections.

How did we get $32 trillion in debt?

Your high school teachers probably didn’t tell you how big a role the national debt has played in American history.

President Biden and Speaker McCarthy met Wednesday to begin talking about next year’s budget, future policies on taxing and spending, and raising the ceiling on the national debt — which Treasury Secretary Janet Yellen says has already been reached and will become a crisis in a few months, probably by June.

Biden and McCarthy each framed their meeting differently. McCarthy presented it as the beginning of a negotiation over raising the debt ceiling, while Biden insists that (while he is eager to discuss the other issues), he will not pay ransom to House Republicans to avoid sending the United States into default.

President Biden made clear that, as every other leader in both parties in Congress has affirmed, it is their shared duty not to allow an unprecedented and economically catastrophic default. The United States Constitution is explicit about this obligation, and the American people expect Congress to meet it in the same way all of his predecessors have. It is not negotiable or conditional.

We probably haven’t heard the last of this issue, so I think it’s worth spending some time to get past the slogans and talking points. Four weeks ago I explained what the debt ceiling is, and came to the conclusion that it shouldn’t exist at all. The US and Denmark are the only countries that have a formal debt ceiling, and Denmark doesn’t play politics with its ceiling the way we do. In essence, the debt ceiling is a self-destruct button built into our government. Pushing the button would benefit no one, except possibly our enemies (though I doubt even China wants to see us default on the bonds it holds). But politicians can threaten to push the button (as McCarthy and his caucus are threatening now) to try to extract concessions. In essence, McCarthy is like the terrorist who hijacks an airliner and threatens to blow up the plane he is on unless his demands are met.

There is also good reason to believe that the Republicans are not acting in good faith, as I have regularly suggested in weekly summaries. They painted the national debt as an existential threat to America’s future during the Obama administration, and then conveniently forgot about it for four years under Trump. Now that Democrats have the White House again, debt is back to the top of their agenda.

But even after we recognize the bad faith and illegitimate tactics, we shouldn’t just ignore the issues Republicans are raising. (Once in a while, the airline terrorist might have a legitimate point, and his demands might be worth considering after the plane and its passengers are safe.) The strength of the Republican position politically is the American people’s intuition that this can’t go on forever. We can’t keep piling up trillions of new debt every few years. Or can we? What would go wrong if we did? And what warning signs should we be looking for, to know if or when we’ve pushed the debt too high?

I don’t want to obsess over this topic, but if Janet Yellen is right we have a few months to think about it before the crisis hits in June. So I have a series of articles planned, which will come out sporadically between now and then. The first was the debt-ceiling post I already mentioned. In this second post, I’ll look at the history of the national debt, which plays a bigger role in America’s story than your high school teachers probably led you to believe. (In general, high school history is bad at weaving economic history into its larger narrative.)

In later posts, I’ll talk about the various impacts people expect the national debt to have, and whether any of their predictions have manifested or show signs of manifesting anytime soon. And finally I’ll discuss what we might do if we were actually serious about getting the debt under control.

So let’s look at history:

English debt and colonial taxes. Prior to the Great Depression, just about all economists believed that government debt should be temporary. Once in a while, it was inevitable that some extraordinary event (like a war) would require more spending than a government could reasonably collect in taxes, and then it made sense to borrow. But once peacetime came, that debt should be repaid to quickly as possible. Big powers did not always do this, but that was a bad practice symptomatic of a failing state.

As we’ll see, it’s almost impossible to separate ideas about government debt from ideas about what money is. In the era of the American colonies, and for some while afterwards, money was gold or other precious metals. So when England took on debt to pay for the Seven Years War (1756-63, a conflict which included the French and Indian War in North America), the King was borrowing physical gold from people who owned it. (Today, we often forget the consequences of gold’s physicality. For example, rebuilding San Francisco after the earthquake of 1906 involved American and British insurance companies paying enormous claims. Gold had to physically move from London and New York to the West Coast, creating monetary shortages that led to the financial panic of 1907. The US created the Federal Reserve in 1913 largely to avoid similar monetary problems in the future.) (I’ll bet your high school American History class never connected the Fed to the San Francisco Earthquake.)

England’s attempt to repay its war debt led to the Stamp Act of 1765 and other taxes on the American colonies. This was part of the “taxation without representation” that brought on another war, the American Revolution.

As the American Revolution was happening, Adam Smith was revolutionizing economic thought, particularly the idea that national wealth meant the accumulation of gold. If gold were truly wealth, then the richest country in the world would be Spain, which had extracted huge amounts of precious metals from its American colonies. But instead, it had been England that prospered. A large chapter of The Wealth of Nations was devoted to urging England to rethink its colonial policy, particularly with regard to India. What if, rather than trying to extract goods, England managed India with the goal of creating a vibrant economy?

The ten-dollar founding father. One of the United States’ first political battles was over how to handle the debts of the Revolutionary War. Alexander Hamilton, the first secretary of the Treasury, had a fairly modern vision of the role government bonds could play in a banking system, as well as an expectation of the role foreign investment would play in developing the resources of the American continent. So he wanted the state war debts consolidated into a national debt, which he would be in no hurry to pay off, beyond keeping up interest payments.

Thomas Jefferson, whose battle with personal debt lasted his entire life (and was one of his excuses for why he couldn’t free his slaves), took a more traditional view:

Hamilton’s plan was highly criticized, most notably by Thomas Jefferson, who wrote to Washington in 1792 complaining about Hamilton’s ideology, “I would wish the debt paid tomorrow; he wishes it never to be paid, but always to be a thing where with to corrupt & manage the legislature.”

War debts. Jefferson’s successor James Madison pulled the plug on Hamilton’s Bank of the United States in 1811. But then the War of 1812 drove the national debt to the previously unimaginable sum of more than $100 million. Managing that debt led to the creation the Second Bank of the United States in 1816. Andrew Jackson liquidated the second bank in 1836, and used the proceeds to pay down the national debt (the last time the US has been virtually debt-free). That move created a sudden contraction in the money supply, leading to the Panic of 1837 and a subsequent depression. (The panic, in turn boosted American emigration to the new Republic of Texas. Southerners who had borrowed to buy land and slaves, and now could not repay those debts, could let the banks reclaim their land, but take their slaves to Texas where creditors could not follow them.)

Repaying debt as soon as feasible was still the conventional wisdom during and after the American Civil War. The war cost the United States about $5.2 billion, an awesome sum in those days. That cost was financed partly by borrowing; the national debt rose from $65 million to $2.6 billion. In addition, the government issued about $400 million in paper money not backed by gold or other precious metals, known as “greenbacks”.

This was widely seen at the time as a bad practice that only an emergency could justify, so after the war the government began gradually paying down the debt (to $2.4 billion by 1870 and $2.1 billion by 1900) and (more quickly) withdrawing the greenbacks from circulation. Once again, the result was a deflationary contraction that centered on the Panic of 1873, but continued for several years after — basically, a preview of the Great Depression. (Lots of events that show up in high school US History textbooks stem from this national trauma. One reason Reconstruction ended in the 1870s was that economic problems closer to home caused Northern Whites to lose interest in Southern Blacks. Subsequent fights over currency and coinage led to the Free Silver movement and William Jennings Bryan’s famous “Cross of Gold” speech in 1896.)

The debt leapt again during World War I, reaching $27 billion, but decreasing to $17 billion by the start of the Great Depression. (The numbers from my various references don’t match exactly, but do agree on general trends. I’m not sure why.)

Keynes and the Fed. After the Depression and World War II, when the debt exploded to $270 billion, John Maynard Keynes formulated a new theory of how governments should handle debt, focusing his attention on the business cycle rather than the war/peace cycle. Keynes saw capitalist economies as plagued by boom-and-bust cycles caused more by human behavior than by external forces like flood or famine. Government spending, in Keynes’ view, should be a counterweight to those cycles: In bust times, when everyone is hoarding their resources against an uncertain future, the government should borrow and spend to keep the economy moving. In boom times, when people are spending freely and borrowing against anticipated income that may never appear, the government should slow things down by running surpluses and paying off debt.

The Federal Reserve plays a similar role by managing the money supply through the banking system. It expands the money supply and lowers interest rates during busts and does the opposite during booms. (One fed chair said his job was to “order the punch bowl removed just as the party was really warming up”.)

The Fed era, and the abandonment of the gold standard in 1971, led to a new understanding of what money is. Today, dollars are no longer based on anything in particular. You can exchange a dollar for some other currency, but if you want gold or silver (or bitcoin), you’ll have to pay the market price, which varies wildly. Nixon is widely believed to have said “We are Keynesians now.” He could just have accurately have observed that all dollars are now greenbacks.

Today, dollars are little more than the way the international monetary system keeps score, and the Fed can create dollars simply by changing the numbers in its spreadsheet. This is why it is nonsense to talk about the US “going bankrupt” in any other way but Congress refusing to allow the Treasury to pay its bills (i.e., what McCarthy is now threatening). The US owes dollars, and dollars are whatever the Fed says they are. Worrying about the Fed running out of dollars to buy bonds from the Treasury is like worrying about the scoreboard at the Super Bowl running out of points.

The ultimate threat of fiscal irresponsibility (which we’ll get into in the next post in this series) is not national bankruptcy, but inflation combined with the much vaguer threat of people and countries and corporations choosing to drop out of the dollar-denominated economic system.

Similarly, Japan is not going bankrupt, because it owes yen that are defined by the Bank of Japan. Things are a bit more complicated for members of the European Union, because the individual members owe euros, which are defined by the European Central Bank, controlled by EU as a whole. (That’s how Greece got into trouble during the Great Recession. The ECB could have loaned Greece any number of euros, but chose not to.)

It has always been politically easier to increase spending and cut taxes than to cut spending and increase taxes, so in practice Keynesianism resulted in a slow-but-steady increase in the national debt, from $255 billion in 1951 to $475 billion in 1974. The Ford/Carter “stagflation” years pushed the debt up to $900 billion by 1980. Then came the Reagan-Bush years, when supply-side economists like Arthur Laffer promoted the (false) theory that tax cuts would pay for themselves by stimulating economic growth. (Laffer is still around and still preaching nonsense. There is a theoretical level at which high taxes so totally stifle an economy that cutting them would produce more revenue in the long run. But there’s no evidence American taxes are anywhere near that level, which is why tax cuts keep leading to deficits.)

The Clinton surplus. Because cutting taxes actually decreases revenue (duh), by the time Clinton took office in 1993, the debt was over $4 trillion and increasing rapidly. (Bush’s last budget, FY 1993, showed a $255 billion deficit, down from a then-record of $290 the previous year.) Bill Clinton and Republican House Speaker Newt Gingrich both saw the deficit as a problem, so a combination of restrained spending and increased taxes lowered the deficit every year, until FY 2000 showed a $236 million surplus. Clinton’s last budget, FY 2001, had a $128 billion surplus, and no annual federal budget has been in surplus since. (The Clinton/Gingrich plan refutes the Republican mantra that raising taxes can’t be part of deficit reduction, because Congress will just spend the new revenue. A combination of higher taxes and spending restraint is the only method that has ever successfully brought the budget into balance.)

Partly the Clinton surplus disappeared for Keynesian reasons, in response to the dot-com-bust recession of 2001. But also supply-side economics was back, and Bush II viewed tax cuts as a universal remedy for any economic ill. So the deficits did not disappear as the economy recovered, setting a new record of $413 billion in FY 2004, and still at $161 billion in FY 2007.

Trillion-dollar deficits. So a large structural deficit was already built in to the federal budget when the Great Recession started late in 2007. The FY 2009 budget deficit was already projected at over $1 trillion when Barack Obama took office in January of 2009, and his Keynesian stimulus package pushed it up to $1.4 trillion. Obama’s trillion-plus deficits of FY 2010 and 2011 were similarly justifiable in Keynesian terms, and they began to decline after the recession ended, getting down to $442 billion by 2015. The increases of the final Obama years were less justifiable, but Obama handed President Trump a growing economy and a $665 billion deficit in FY 2017.

Once again, though, tax cuts were supposed to pay for themselves and didn’t, so Trump proposed (and his Republican allies in Congress voted for) large and growing deficits in boom times, reaching $984 billion by FY 2019, the budget year that ended in September 2019, four months before the Covid pandemic hit the US.

When Covid shut down much of the economy, massive government spending prevented the cascading bankruptcies that characterized the “panics” of the pre-Keynes era. So Trump should be cut some slack for the $3.1 trillion deficit of FY 2020 and Trump/Biden should similarly catch a break for the $2.8 trillion deficit of FY 2021. Biden then cut the deficit to $1.4 trillion in FY 2022, and the current year, FY 2023 (ending September 30), is projected to have a $1.2 trillion deficit.

And that’s how the national debt arrived at the current debt ceiling of $31.4 trillion in January.

What harm does the national debt do? Intuitively, it seems like owing money can’t be good, and the bigger the debt, the worse it should be. But most people’s intuition is based on their experience of household finance, which differs from the US government’s situation in important ways (like that the government controls the currency it owes). So over the decades, repeated predictions of debt-induced apocalypse have not been fulfilled, to the point that it becomes hard to take them seriously.

I’m sure that if we could go back to, say, 1990, and tell economists then that the national debt would be $31.4 trillion in 2023, (rather than the $4 trillion they owed then), many would refuse to believe us. Surely the sky would fall long before the debt reached that level. And if it hasn’t fallen yet, what makes us think it ever will?

At the same time, though, people who model things have learned to be wary of infinity. The universe is full of patterns that work up to some point, but then stop. In aerodynamics, things change as you get close to the sound barrier. Air friction doesn’t seem like a big deal when you run, but if you fall from space it might burn you up. In physics, laws that seem perfectly sound in everyday life start failing near the speed of light. Maybe there’s something like that in economics, so that debt does no harm until some point X, and then things start to go wrong.

But where would X be? Measured in what units? And can we get any more specific about the “things” that might start to go wrong?

Those questions are where the next post in this series will begin.

The Debt Ceiling: a (p)review

The chaos surrounding the Speaker vote may be a preview of a far more consequential vote this summer.

As the House of Representatives endured round after round of voting for a new speaker, most of America probably didn’t take the turmoil all that seriously. It was just Congress being dysfunctional again, and we knew already that the next speaker would be a Republican. Obviously, Kevin McCarthy cared which Republican it would be. But why should we care?

The answer to that question is simple: The battle for the speakership probably doesn’t matter much in itself, but it’s a preview of future votes that will matter. Electing a speaker was the first of a handful of must-do items every Congress faces. The others — appropriating money to keep the government functioning and giving the Treasury permission to borrow money to pay the country’s bills — have very real consequences.

If the speakership was this difficult to decide, what’s going to happen when the other must-do items come up?

In each of those cases, the House is one of the three powers that need to agree; the Senate and the President are the others. So over the next two years, Kevin McCarthy, Chuck Schumer, and Joe Biden will occasionally have to go into a room and come out with an agreement they all support. That agreement will then need to get majorities in both the House and Senate.

Otherwise bad things will happen.

McCarthy’s precarious hold on the speakership makes him a difficult negotiating partner: If he recognizes that he represents only 1/3 of the power in the room and makes realistic compromises, he might well be deposed when he takes that agreement back to the Republican caucus that elected him. And whatever he agrees to, he may not be able to deliver the votes to pass it.

The upshot is that the other must-do items on Congress’ agenda may not get done, or may face lengthy delays. The two possible consequences of that inaction are a government shutdown and a debt-ceiling crisis.

Government shutdowns are a nuisance. Hitting the debt ceiling would be a disaster. There have been a number of government shutdowns over the years, including a 35-day shutdown just four years ago (when President Trump backed out of an agreement that didn’t include funding for his border wall). So most Americans have at least a vague understanding of what happens: The mail still gets delivered and Social Security checks go out, but hundreds of thousands of other government workers go home, creating work-backlogs that ultimately cost billions to resolve.

It’s a nuisance and a waste, but the country survives it.

But Americans have a much shakier understanding of a debt-ceiling violation, which has never happened. Twice — in 2011 and 2013 — a Republican Congress played chicken with President Obama over the debt ceiling, but disaster was avoided both times. (The debt ceiling was increased three times under President Trump, including once in 2019 after Democrats took control of the House.)

The main thing you need to understand about hitting the debt ceiling is that it would be a much bigger deal than a government shutdown, and would create havoc in both the US and the world economy.

What the debt ceiling is. The debt ceiling (or debt limit) is a legal cap on the amount of money the United States can borrow. It was established in 1917, and is a relic from an era when Congress didn’t have a budgeting process anything like the current one.

The current process is that Congress passes a budget with spending and revenue targets, and then passes individual appropriation bills within that framework. You might think that passing a budget with a deficit would automatically authorize borrowing to fill the gap, but it doesn’t. Having passed those bills, Congress can then refuse to raise the debt limit, creating a contradiction in the laws.

Other countries don’t do this. Only the US and Denmark have a debt ceiling, and Denmark’s political parties never play chicken with it.

Fundamentally, the US debt limit is just a dumb idea. Remember the various Star Trek episodes where the Enterprise’s self-destruct option played a role? The captain (and maybe some other officers) would have to go through a detailed authorization process to start the clock counting down. Our debt ceiling is like a self-destruct process that works the other way: Self-destruct will engage automatically unless the officers regularly go through some complicated process to stop it.

Arguably, Democrats should have abolished the debt limit while they had control of Congress, or at least raised it far enough to keep the issue at bay for another two years. The recent omnibus spending bill would have been the place to do it, but it was hard enough getting Mitch McConnell’s cooperation as it was.

The politics of the debt ceiling. For almost a century, debt ceiling debates were political theater without any real drama. It was an opportunity for the party out of power to bemoan the country’s fiscal health, and members of each house would cast symbolic votes against raising the ceiling. (Senator Barack Obama made such a speech and cast such a vote in 2006.) But everybody knew the bill had to pass, and it always did.

Occasionally other measures would get tacked onto a bill to raise the debt ceiling. In the 1980s and 1990s, a series of reforms to Congress’ budgeting process were added, like the Budget Reform Act of 1990. These were process bills (with bipartisan support) that made it more difficult to pass unbalanced budgets in the future. They did not directly raise taxes or cut spending.

That changed after the Tea Party wave election of 2010. In both 2011 and 2013, Republicans used the threat of breaching the debt ceiling to try to extort severe spending cuts out of President Obama.

Where is the debt ceiling now? The current ceiling (set in December, 2021) is a little less than $31.4 trillion, and the current debt is getting close to that number. There are certain accounting games (which I don’t understand) that the Treasury can play around the margins, but the best guesses are that if nothing is done, the limit will be reached sometime this summer.

What that means is that the Treasury will only be able to sell new bonds as old bonds come due. It will not be legal to sell bonds to pay for the government’s new financial obligations, like interest payments or salaries or Social Security benefits.

Recent annual deficits have been running at around $1 trillion (after peaking at $3.1 trillion in fiscal 2020, the last full year of the Trump administration). So assuming the economy perked along nicely in every other way, a post-debt-ceiling government would have to find $80-100 billion in cuts every month — and probably a lot more than that, because the economy would NOT perk along nicely, resulting in decreased revenues and increased obligations.

Think about the position that would put the Biden administration in: US law limits the revenue it can collect and obligates it to make certain payments (like Social Security benefits, salaries for our soldiers, and interest payments to bond holders). But if those numbers don’t balance and it is forbidden to borrow, there is no legal path for the administration to take. The laws contradict each other, so whatever he does, President Biden will be violating his constitutional duty to “take care that the Laws be faithfully executed”.

The US Treasury will be like a family that has to decide which bills to pay after they cash a paycheck. (“Is the WalMart payroll tax payment in yet? Oh, good, we can reimburse a few of those hospitals that have been taking care of Medicare patients.”)

The main effect on the world economy would result from no one knowing what US Treasury bonds are really worth. (Will the interest be paid? What happens when the principal comes due?) Banks around the world keep their reserves in US bonds, so many of them could become insolvent, starting a banking crisis. No one can predict how far that effect would snowball, as a bankruptcy here makes somebody else insolvent, leading to a new bankruptcy there.

Would Biden have any legal options? Maybe. Many possibilities were discussed in 2011 and 2013, but they’re all of the play-stupid-games, win-stupid-prizes variety. (Paul Krugman expressed this sentiment in more sophisticated Princeton-professor terms: “Outrageous behavior demands extraordinary responses.”)

One proposal that sounds like a joke, but was seriously discussed in 2013 was the trillion-dollar-coin. Apparently, a loophole in the law allows the Treasury to create platinum coins of any value.

The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

The intent was to allow the Treasury to make occasional commemorative coins for collectors. But desperate times …

So in this scenario, the Treasury mints a single trillion-dollar coin, which it then takes to a Federal Reserve bank and deposits in the government’s account. Presto! There is now money to meet the government’s obligations.

The general opinion of both the Obama and Biden administrations was/is that such a scheme is beneath the dignity of the United States. But you never know.

But if that’s what it takes …” There’s a school of thought that says hitting the debt ceiling is the lesser evil: Our steadily increasing debt is unsustainable, and if a crash into the debt ceiling forces the government to only spend what it takes in, that’s all to the good.

That debt’s unsustainability is debatable. (Japan’s national debt is two-and-a-quarter years’ GDP, and they show no signs of collapse. The US debt is one-and-a-quarter years’ GDP.) The important thing to note here is that Congress could balance the budget whenever it wants, by raising taxes and/or cutting spending. That happened at the end of the Clinton administration, so it’s not impossible.

The reason a balanced budget doesn’t happen is that the voters don’t really want it to. Balanced budget is a phrase that polls well, but when you get down to the details, people don’t want to pay higher taxes or give up their health insurance to make it happen. And while it’s not hard to find the occasional $600 hammer or bridge-to-nowhere in the federal budget, you’re not going to find a trillion dollars of that stuff, year after year.

Also, it’s hard to take Republican deficit hawks seriously when they ignored the deficit completely during the Trump years, and instead passed a budget-busting tax cut for corporations and the rich. (One thing I can guarantee you: If there’s a debt-ceiling or government-shutdown crisis sometime in the next two years, Republicans will say that tax increases are off the table.)

But suppose you are the rare good-faith Republican deficit hawk who is not just trying to create an artificial crisis for a Democratic president. What should you do? Convince the voters. You should try to build a popular majority around the idea of a balanced budget — a real balanced budget, with numbers backed by actual taxing and spending policies, and not just the words “balanced budget”. Then your popular majority could elect a House, Senate, and president to implement your balanced budget (which Republicans definitely did not do the last time they controlled all the levers of power).

What you shouldn’t do is stand over the self-destruct button and threaten to press it unless you get your way. That’s not democracy. That’s hostage-taking. It’s terrorism.

Hostage-taking? Terrorism? Really? Hostage-taking and terrorism are pejorative terms that are nothing more than insults if they’re not defined. So here’s what I mean by them: hostage-taking is a negotiating tactic based on threats rather than positive offers; in particular, the hostage-taker threatens to do something that does not benefit him or her, and usually claims that s/he does not want to do it.

So when a kidnapper asks for ransom to give your daughter back, at some level that looks like a trade: money for your daughter. But it’s not a positive offer, because the kidnapper is only offering to restore what he took away. The proposed final deal is that the kidnapper gets money, and (at best) you get back to square one, minus the money.

The alternative to the ransom is that the kidnapper will kill your daughter, which he claims he doesn’t want to do. (“I’m not a monster. I don’t enjoy killing little girls.”) So neither of you wants the kill-the-girl option, but the kidnapper is counting on the fact that you are so desperate to avoid it that you’ll do anything else instead.

Terrorism is a political tactic: the attempt to gain a political advantage through threats of destruction.

In the case of the debt ceiling, it’s instructive to read Republican speeches from previous debt-ceiling crises. In 2013, for example, John Boehner acknowledged that the US was on the path to defaulting on its debt if the ceiling wasn’t raised, and acknowledged on another occasion that “Yes, allowing America to default would be irresponsible.” But Republicans didn’t frame this looming disaster as a common peril that they and President Obama should work together to avoid. Instead, Obama should pay for their cooperation by making concessions without getting anything in return. According to Ted Cruz:

Republicans were looking for three things before raising the debt ceiling: a significant structural plan to reduce government spending, no new taxes, and measures to “mitigate the harm from Obamacare.”

So Obama should scrap his signature program while agreeing to spending cuts Republicans wanted, with no indication of any priority Republicans might compromise on. The upshot was just: “Do what we want, or the country gets it.”

Next summer’s crisis. A new hostage-taking crisis was in the background of this week’s speaker election. Nearly all the 20 Republican holdouts who blocked Kevin McCarthy’s election for 14 ballots were also supporters of the January 6 insurrection, and are now gearing up for debt-ceiling battle. They were terrorists two years ago, and they’re terrorists now.

McCarthy critic Rep. Ralph Norman (R-S.C.) said he wanted McCarthy to devise a debt-limit deal suitable to fiscal conservatives. “Is he willing to shut the government down rather than raise the debt ceiling? That’s a non-negotiable item.”

We can only hope that Norman and other Republican congressmen understand the difference between a government shutdown and a debt default, or that they will pay attention when someone explains it to them.

CNN reported being told by anti-McCarthy holdout Scott Perry that he had gotten a promise from McCarthy that he would oppose a clean debt-ceiling increase, i.e., one with no ransom demands. The procedural concessions McCarthy has made mean that he can be recalled as speaker if he doesn’t negotiate a high enough ransom. Jonathan Chait doubts that any amount of ransom will be enough.

Imagine a Republican Speaker — any Republican Speaker — figuring out a ransom that almost the entire caucus could agree on. The intraparty dynamics virtually guarantee that anything a Republican leader could agree to would immediately be seen on the far right as too little. All is to say that even if you think Biden ought to negotiate a debt-ceiling-ransom demand, it’s now a practical impossibility.

What the government spends money on. Like balanced budget, the phrase spending cuts tends to poll well in the abstract. There’s a widespread feeling — especially on the right, but also in the electorate at large — that the government spends too much money.

The problem is that most people who feel that way don’t have a clear notion of what the government spends money on. They imagine a budget full of foreign aid, welfare payments to people who don’t want to work, and boondoggle projects that don’t serve any purpose.

If you look at where the money actually goes, though, it’s clear that you can’t make a sizeable dent in federal spending without cutting health care, pensions, or defense. As the population ages, an ever-increasing amount of money will get spent on Social Security and Medicare.

When you understand the reality of federal spending, you see that any serious balance-the-budget deal that doesn’t include major tax increases will have to make significant cuts in Social Security and Medicare. And the Republicans have never run on that platform. “Cut Social Security and Medicare so that the rich can keep the Trump tax cuts” is an absolutely suicidal political platform. That’s why the only way to implement it is through terrorism. They’ll never get there through the democratic process.

The best-case scenario. The main power of the Speaker is to control what comes up for a vote in the House. But there is a way around it: a discharge petition. If a majority of the House members sign a petition to bring a bill to the floor, the Speaker has to allow a vote on it.

Republican Rep. Brian Fitzpatrick suggested that a discharge petition might be how the debt ceiling gets raised. It would only take five Republicans and all the Democrats to make that happen.

The problem, though, is similar to the problem of impeaching Trump a few years ago: The Republicans who signed such a petition would be marked for primary challenges and probably voted out.

Are there still five Republicans in Congress with that kind of courage? We may find out.

The Problem With Bitcoin


Sure, it doesn’t make sense, but no form of money does. The more serious problem is that it’s an environmental disaster.

The value of the digital currency Bitcoin, which has skyrocketed since its introduction in 2009, fell 30% in one day on Wednesday. Should that worry anybody?

The mystery of money. I’ve barely said a word about Bitcoin and its rival cryptocurrencies on this blog, mostly because I know I don’t completely understand them. In some sense, though, that’s neither their fault nor mine. Money in general is mysterious: Dollars only have value because we all think they do. If everyone else in the world decided your dollars were worthless, you’d have a tough time convincing them otherwise.

The reasons dollars should continue to have value are a bit circular: All over the world, people owe dollars, so they’re going to have to obtain them to pay their debts. Also, the US government wants you to pay your taxes in dollars, so you’re going to need a few at some point. (Though, if you lived entirely by barter or by trading some untraceable currency like Bitcoin, what would the government tax?)

The Federal Reserve can create dollars at will just by entering a credit on its balance sheet, and that’s hard to square with the idea of intrinsic value. After all, farmers can’t increase the grain supply by manipulating their accounting. If GM wants to produce more cars, it has to buy components, pay workers, and build them in physical reality; it can’t just change some numbers on a spreadsheet and announce a million new Chevy Malibus. Stuff of actual, usable value can’t be magicked into existence, but money can.

That mystery has been highlighted during the pandemic, when the government kept the economy going by giving people dollars, which it mostly borrowed from the Federal Reserve, which conjured those dollars out of nothing. But the food and whatnot people bought with that money couldn’t be conjured out of nothing, so common sense tells us there’s a piper to be paid somewhere. In response, the smartest economists in the world say, “Well, yeah. Maybe eventually.” (If they sound more like priests of the Money goddess than practitioners of a hard science, that makes historical sense: The word money derives from an aspect of the queen of the Roman gods. Roman money could only be coined in the Temple of Juno Moneta.)

Libertarians are quick to tell you that such government-conjured “fiat money” is all a bubble that will pop someday: Real money is gold, and any paper money not redeemable for gold is a sham. But gold is mysterious in its own way. We dig gold out of the ground, smelt it into purified ingots, and then bury those ingots again in bank vaults. Somehow this strange digging-up-and-reburying process is supposed to be the basis of the world economy.

I mean, gold actually does have a few uses in jewelry-making and dentistry and electronics. But every year the world produces about twice as much gold as it uses for any practical purpose, so there’s little prospect that we’ll need our vast accumulated hoards of gold anytime soon.

Alchemists used to dream of transmuting more common metals into gold, which, if you think about it, would be exactly like the Fed conjuring dollars. The quantity of usable goods in the world would not change at all, so how would this new gold represent new wealth? A similar precious-metal illusion is sometimes mentioned as a cause of the fall of the Spanish Empire. Spain’s economy came to revolve around extracting gold and silver from the New World, while England was leading the Industrial Revolution. So Spain acquired the appearance of wealth, while England built a modern economy.

Anyway, the purpose of this long preamble is to make sure you have the right context for thinking about Bitcoin. If you only know two things about Bitcoin, this is what you should know:

  • There is absolutely no reason why a bitcoin should be worth anything.
  • It shares that characteristic with all other forms of money.

The history of Bitcoin emphasizes both the potential and the insubstantiality of its value. Wired says that the first recorded Bitcoin transaction happened in 2009, when someone traded 10,000 bitcoins for two Papa John’s pizzas. Bitcoins peaked at over $64,000 each in April, and crashed down below $40,000 on Wednesday. But in spite of the crash, whoever sold the pizzas is still doing pretty well.

What a cryptocurrency does. Understanding what a bitcoin is involves you in all kinds of complicated cryptological mathematics, and is mostly unnecessary. (It’s like computers: You don’t have to know how they work to use one confidently.) As Paul Krugman put it Friday, “Money is a role, not a thing.” So we should start by thinking about what Bitcoin does rather than what it is.

In general, a currency is a means of exchange, and its purpose is to facilitate trade, so that you aren’t constantly negotiating how many chickens to give the dentist for Jennifer’s braces. Traditionally, currencies have involved some kind of physical token, like a coin or a bill. You spend the currency by giving someone the token, which allows them to spend it somewhere else. (That description itself represents a change that has happened in my lifetime. Decades ago, people would have said that the coin or bill is money. Now we realize that it’s a token representing money, which is inherently intangible.)

These days, most transactions are done digitally, through credit cards or interbank transfers. This allows you to order stuff from Taiwan without shipping coins or bills around the world. So I might buy an app from a game designer in Bangalore or a song from a K-pop band in Seoul without any tangible objects moving in either direction. That makes the transaction faster, cheaper, and more reliable.

This system works because there are parties we all trust who can vouch for us. The game designer has no reason to trust me, but he trusts Visa, which trusts me. Ultimately, stuff like Visa and PayPal and Venmo work because banks trust other banks, all the way up to the central repository of trust, the Federal Reserve.

The point of a cryptocurrency is to get the advantages of digital transactions, but to avoid trusting the Fed, some equivalent government entity like the Bank of Japan, or a giant corporation like Citibank or Apple. Corporations shouldn’t be trusted because they don’t even pretend to have a purpose higher than profit, and a government might have all kinds of reasons to debase its currency — arguably, the US has been doing that with these recent trillion-dollar deficits — so why not create a system that isn’t subject to such temptations?

Also, the Fed (or whoever) can keep track of transactions that go through its systems, which you might not like because you’re a drug dealer or a tax evader or just somebody who puts a high value on privacy. (Right now, Matt Gaetz is probably wishing he hadn’t used Venmo.) Central-bank-based digital transactions may be fast, cheap, and reliable, but you have to give up the anonymity of cash.

So that’s the hole a cryptocurrency is trying to fill: fast, cheap, and reliable transactions that are as anonymous as cash, and denominated in a medium not vulnerable to political debasement.

Disintegrating the Fed. Essentially, the banking system that centers on the Fed is a big ledger that keeps track of how much money each person has; dollars are just the units it uses. When I pay my electric bill (whether by check or electronically), I send a message to deduct dollars from my account and add them to the electric company’s. If we use the same bank, that bank changes the numbers on its ledger. If not, ultimately the Fed changes its ledger to deduct dollars from my bank and add them to the electric company’s bank; the two banks then figure it out from there.

Again, this involves trust. We all just assume that the ledger will be kept accurately. If the ledger couldn’t be trusted, we’d soon be back to exchanging physical tokens, or maybe even swapping chickens.

Similarly, Bitcoin has to function like a big ledger that keeps track of how many bitcoins people have. If I’m going to buy something with Bitcoin, the system has to verify

  • that I own the bitcoins I’m trying to spend
  • that after the transaction, I have fewer bitcoins and the seller I bought from has more.

Further, I need to have confidence that if I don’t spend my bitcoins, I will continue to own them. Also, that the system won’t suddenly create massive numbers of new bitcoins in other people’s accounts, which could flood the market and lower the value of my bitcoins.

Now, if that ledger were just a file somewhere, like a spreadsheet, it wouldn’t offer either of the advantages a cryptocurrency is supposed to provide: We’d still have to trust somebody to maintain and update the spreadsheet, and investigators could subpoena it to see what we’ve been buying and selling. So why not just let the Fed keep doing that?

Instead, the list of Bitcoin transactions is encrypted and public. You could download the data yourself, but you couldn’t make sense out of it. The list of transactions is constantly being updated and verified by thousands of independent “miners”, who earn bitcoins for their effort. Any one of them could try to insert a fake transaction, but the others would catch the discrepancy. So we’re not trusting them as individuals, we’re trusting the collective entity they form.

Advanced mathematics gets into the picture to guarantee anonymity. The algorithms that define the Bitcoin system are constructed in such a way that even the miners who verify the list of transactions don’t know what they mean. (A more complete — but still not really complete — explanation is at Investopedia.) The important thing is

  • With your key — like a password — you can prove that you own a bitcoin you want to spend.
  • Without your key, no one can generate a “balance” that says how many bitcoins you own.

The situation is summed up by a rhyme Neal Stephenson put into his futuristic fairy tale The Diamond Age in 1995.

Castles, gardens, gold, and jewels
contentment signify for fools
like Princess Nell. But those
who cultivate their wit,
like King Coyote and his crows,
compile their power bit by bit,
and hide it places no one knows.


What’s a bitcoin worth really? The reason the value of Bitcoin can fluctuate so much is precisely the fact that it’s untethered from physical reality. Other kinds of money are too, but there’s a difference: None of them were ever really new.

Think about it. Trading in precious metals evolved “naturally”. There was never a moment when some chieftain or pharaoh announced for the first time “OK, from now on, gold is going to be our means of exchange”.

Coins derived their value from the metals they were made of. Originally, a coin was just a standard unit of metal whose purity and weight was validated by the government that minted it. So when King Croessus minted his gold coins 2600 years ago, he didn’t have to tell people what they were worth; they were worth whatever that amount of gold was worth. If you didn’t believe that, you could melt it down.

Paper money piggybacked onto the coin system. A bank note signified that some bank had precious-metal coins in its vault, and they’d give them to you if you turned the note in. So (as long as everybody believed that promise) nobody had to answer the question “What’s a ten-pound note worth?”

By the time paper money stopped being redeemable for gold or silver — 90 years ago for the British pound — its value had a long tradition behind it. So while the currency of a stable government might inflate or deflate a few percent each year, it won’t swing up and down week by week the way Bitcoin does. (When I was growing up, before the inflation of the 1970s, the way to say that a person was financially sensible was that he or she “knows the value of a dollar.” Today, somebody who truly knew the value of a bitcoin would be a savant.)

Digital dollars, euros, and yen are still convertible to paper currency. That’s what ATMs do.

So the units in the Fed’s database (i.e., dollars) may be just as theoretically meaningless as Bitcoin, but they have continuity of value that stretches back into prehistory.

Bitcoin doesn’t. That’s why 10,000 bitcoins might buy two pizzas, or a 600-foot luxury yacht, depending on what people happen to think that day.

A yacht worth slightly less than 10,000 pre-crash bitcoins.

What caused this week’s crash? Anything that booms is likely to bust at some point, so the search for a “cause” never has a clear answer. But one precipitating event was that Tesla announced it will no longer trade cars for bitcoins. This disrupted the story behind Bitcoin in two ways:

  • According to its boosters, Bitcoin is supposed to become more and more accepted with time, until it becomes the premier means of exchange.
  • The reason Elon Musk gave for Tesla’s decision: Bitcoin mining soaks up a lot of electric power, much of which comes from fossil fuels, including coal. If Tesla is promoting Bitcoin, it’s undoing the positive environmental effect of its cars.

Krugman comments on the first point:

And nowadays we use Bitcoin to buy houses and cars, pay our bills, make business investments, and more.

Oh, wait. We don’t do any of those things. Twelve years on, cryptocurrencies play almost no role in normal economic activity. Almost the only time we hear about them being used as a means of payment — as opposed to speculative trading — is in association with illegal activity, like money laundering or the Bitcoin ransom Colonial Pipeline paid to hackers who shut it down.

He goes on to point out that 12 years is a long time in tech: Bitcoin is the same age as Venmo, and older than the iPad or Zoom. The fact that it hasn’t caught on yet is a really bad sign.

One reason for that failure to catch on is habit, and the fact that most people are not nearly so desperate to get out of “fiat currencies” as Libertarians think they should be. (That might change if the current burst of inflation turns into more than the temporary blip economists like Krugman are predicting.) But a second good reason is the fluctuation in the dollar-value of Bitcoin itself.

Imagine, for example, that you’re a contractor negotiating a deal to spend the next two years building a bridge. You’d be crazy to take your payment in Bitcoin, because no one has any idea what Bitcoin will be worth in two years. Similarly, imagine if you’d taken out a mortgage in Bitcoin at the beginning of 2020, when a bitcoin was worth about $10,000. By this April, you’d have owed six times as much (in dollar terms). If your salary were denominated in Bitcoin, you’d have taken a 30% pay cut Wednesday.

The only way this makes sense is if you are living in a complete Bitcoin system, where you can pay your workers (or your rent) in the same currency that you’re earning, so that your income and expenses rise and fall together. Otherwise you’re gambling, not participating in a productive economy.

Now, it’s not unusual for new technology to face this kind of chicken-and-egg problem. (It made little sense to be an early adopter of the telephone, for example, because there were so few people you could call.) Tech that succeeds is compelling enough to overcome that problem.

But Bitcoin doesn’t seem to be that compelling. Maybe you weren’t planning to buy a Tesla with your bitcoins anyway. The fact that you can’t, though, is symbolic.

Bitcoin and global warming. The deeper problem is that Bitcoin mining eats up an enormous amount of computer power, which in turns eats up an enormous amount of electrical power. The Guardian reports:

Cambridge’s Centre for Alternative Finances estimates that bitcoin’s annualised electricity consumption hovers just above 115 terawatt-hours (TWh) while Digiconomist’s closely tracked index puts it closer to 80 TWh.

A single transaction of bitcoin has the same carbon footprint as 680,000 Visa transactions or 51,210 hours of watching YouTube, according to the site.

The same Centre for Alternative Finances claims that Bitcoin uses more energy than many countries.


That problem is likely to get worse, because the system is designed to require more computer power with time.

As more people learn about bitcoin and mining—and as the price of bitcoin increases—more are using their computers to mine bitcoins. As more people join the network and try to solve these math puzzles, you might expect each puzzle to be solved sooner, but bitcoin is not designed that way.

The software that mines bitcoin is designed so that it always will take 10 minutes for everyone on the network to solve the puzzle. It does that by scaling the difficulty of the puzzle, depending on how many people are trying to solve it.

Of course, the carbon footprint depends on how the electricity is being generated. And that brings up a different problem: No one knows exactly where the mining computers are, or how their electricity is generated. And because there is no central authority controlling Bitcoin — that’s part of the point, after all — no one can enforce environmental standards on the miners.

It seems likely, though, that miners are setting up in places where electricity is cheap. And at the moment, that is likely to be where it’s easy to burn coal.

Now, you could imagine setting up Bitcoin-mining supercomputers on the vast plains of Oklahoma, and powering them with fields of windmills. But even that plan is environmentally questionable. The growth in sustainable energy is supposed to replace fossil-fuel energy, not power some new need that didn’t exist 12 years ago.

Fatal wounds? For what it’s worth — notice that I’m putting it out for free — I think the environmental problem is a fatal wound for Bitcoin. Maybe in a not-too-distant future, computation requires much less electricity, which is generated by solar arrays in orbit, so nobody cares about the computational burden of their digital currencies. But maybe not.

In the meantime, we’re not there.

Right now, for Bitcoin to catch on and rival the dollar, the yen, and the euro, it needs the kind of early-adopter enthusiasm that comes from people believing that they’re doing something cool. Twelve years ago, those two Bitcoin-purchased Papa Johns were the coolest pizzas in the world.

Now they’re not, and even Elon Musk realizes it. Maybe at some point, your friends would have been awed if you’d said, “Like my new Tesla? I bought it with Bitcoin.”

But with every day that goes by, you’re less and less likely to get that reaction, and more and more likely to convince people that you’re willing to destroy the planet for your own vanity. “Oh, you’re that kind of asshole.” (At the moment, the world’s most famous Bitcoin miner is Joel Greenberg. That kind of asshole.)

That’s fatal. Maybe not today or tomorrow, but soon.

This all says nothing about the underlying argument for some kind of cryptocurrency. Maybe trillion-dollar deficits really are evidence that the world’s governments and central banks can’t be trusted to maintain our money. Maybe there is room in the world for — or even a need for — a crowd-sourced money based on cryptographic algorithms.

But that currency is going to need a high level of coolness to beat the chicken-and-egg problem and catch on. And eating up a nation-sized chunk of the world’s energy output is not cool.

The Reagan Era is Finally Over


Biden’s speech and the response (or lack of response) from Republicans demonstrates that no one believes in the old nostrums any more.

The day Clinton surrendered. In the 1996 State of the Union, President Bill Clinton said, “The era of big government is over.” This has been widely marked as the moment when the Democratic Party surrendered to the Reagan revolution.

For the 12 years of the Reagan and Bush administrations, many Democrats in Congress had tried to hold the line. Then, after Clinton was elected in 1992, he set out to extend the legacy of FDR and LBJ by fulfilling the longstanding Democratic ambition to create some version of universal health care. After seeming popular at first, “HillaryCare” didn’t pass. Democrats were subsequently routed in the 1994 midterm elections, making Newt Gingrich the first Republican Speaker of the House since the legendary Sam Rayburn replaced the much-less-legendary Joseph W. Martin Jr. in 1955.

The lesson Clinton learned from that defeat was that Democrats needed to temper their ambitions. Subsequently, he worked with Gingrich to achieve goals that appealed to Republicans, like balancing the budget, ending “welfare as we know it”, passing NAFTA, and de-regulating the banking system (in ways that would blow up by 2008). There would be no more big-ticket proposals until ObamaCare in 2009. Democratic governance became little more than a kinder, more efficient version of Republican governance.

For most of the 20th century, Democrats had stood for an active government trying to solve people’s problems. FDR’s New Deal had given the country Social Security, unemployment insurance, and the minimum wage. LBJ’s Great Society had added Medicare, the War on Poverty, and the Voting Rights Act. But all that was over now. Clinton was not just refusing to advance, he was actively capitulating: “Big government” was itself a Reaganite phrase that would have been anathema to Democrats just a few years before. (To make a present-day comparison: Imagine what it would mean if major Republicans started denouncing “white privilege”.)

Meanwhile, Republicans continued to worship at the shrine of the Great Communicator. For three decades, the philosophy of the Republican Party didn’t waver: low taxes, less regulation, free trade, more spending for defense but less for social programs, and “traditional family values” — which mainly meant opposing abortion and homosexuality.

This constancy gave Republican candidates a significant branding advantage in campaigns. If you saw an R next to a politician’s name, you immediately knew what he stood for — even if you had never heard of him before. Democrats, conversely, had to put considerable effort and money into introducing themselves to voters, and explaining why they weren’t the “tax-and-spend liberals” Reagan had so successfully vilified.

That was the Reagan Era. Even if you hadn’t been born yet when he left office in 1989, you have been living in his era. Until Wednesday, when President Biden announced the end of it.

Two cycles. The Reagan Era did not end all at once. It took two complete election cycles to bring it down.

When Republicans started campaigning for the presidency in 2015, Reaganite orthodoxy still seemed solidly in control. Marco Rubio, for example, might talk about “new ideas”, but what he really meant was “new faces”. After listening to his stump speech, I wrote:

What in that plan does he think Jeb Bush will disagree with? Less regulation, lower taxes on corporations and the rich, less government spending, traditional family values, strong defense, aggressive American leadership in the world. How is that different from what every Republican has been saying since Ronald Reagan?

Rubio’s “new leadership” plea just meant that the old Reagan program needed a fresh young Hispanic spokesman, and that nobody really wanted another Bush vs. Clinton election.

But Trump upended all that. Occasionally he would wave in the direction of tax cuts and strong defense, but his real applause lines appealed to a rising white nationalist anger that Bush or Rubio could not speak for. (“Build a wall.” “Lock her up.”) Jeb Bush was “low energy” compared to the violence-promoting Trump. “Little Marco” was too mousy and too brown to stand up for the oppressed white working class.

An undercurrent of the Trump campaign was that Republicans had sold out white workers just as much as Democrats had. (In the other primary, Bernie Sanders was saying that Democrats had sold out workers just as much as Republicans had.) It was never clear just what time period the “again” in “Make America Great Again” pointed back to, but it wasn’t the Reagan administration. Maybe it was the 1950s, or the 1920s, or the Confederacy.

Trump’s speeches had a scatter-shot approach that sometimes could invoke big government positively. He told 60 Minutes that he would replace ObamaCare with a “terrific” healthcare plan that would cover all Americans “much better”. “I’m going to take care of everybody” he claimed, and “the government’s going to pay for it.”

Free trade was out and tariffs were in. And while he professed to be against regulation in general, he often threatened to interfere with American business in ways far beyond what Obama or Clinton had done. If Ford threatened to move a plant to Mexico, Trump said he would tell Ford’s CEO

Let me give you the bad news: every car, every truck and every part manufactured in this plant that comes across the border, we’re going to charge you a 35 percent tax — OK? — and that tax is going to be paid simultaneously with the transaction.

By 2020, the GOP was not even pretending to be more than a Trump personality cult. Their convention didn’t bother to write a new platform, because why weigh down the Great Leader with a specific policy agenda? Republicans would support Trump in 2020 — that’s all voters needed to know.

Supply-side economics. The beating heart of Reaganism was supply-side economics, as crystalized in the not-at-all-funny Laffer Curve, which started out as a drawing on a napkin and never got much more precise than that. The idea was that as taxes rose, economic activity shrank, with the result that sometimes a higher tax rate produced less revenue than a lower one. (At the extreme, it makes sense: If the tax rate were 100%, nobody would bother to make money.)

There was never a solid estimate of where the peak of the Laffer Curve was supposed to be, but Republicans uniformly believed that it was always at a lower rate than the current one. So tax cuts became the free lunch that economics wasn’t supposed to have: Cut taxes and the economy will grow so fast that the government will get more revenue. Everybody wins!

It didn’t work for Reagan or either of the times when Bush Jr. tried it. Lower taxes might goose the economy a little, but not enough to raise revenue beyond the previous projections. Invariably, tax cuts led to deficits.

So by the time Trump proposed a tax cut in 2017, supply-side economics had hit the same point Soviet Communism did during the Brezhnev Era: Everyone trotted out the old slogans, but no one really believed them. Trump cut rich people’s taxes because he was rich and wanted to pay less tax. McConnell and the other Republicans in Congress went along because their donors were rich and wanted to pay less tax. Mnunchin and various other hired experts might claim that it would be different this time, but soon Trump’s deficits began to approach $1 trillion a year, pre-Covid, at a time in the economic cycle when classic Keynesianism would call for a surplus. Obama had run trillion-dollar deficits to pull the economy out of the Great Recession. Trump was running them because … well, why not?

And the personality cultists in the GOP didn’t care.

When Covid hit, Trump realized that direct payments from the government were popular, and that no one cared about the deficit. So the deficit for fiscal 2020 (October, 2019 to October, 2020) clocked in at $3.1 trillion. During the fall campaign, Trump proposed another round of direct payments, plus infrastructure spending. The second round of payments passed after the election, at a lower level than either Trump or the Democrats wanted, but the infrastructure proposal never turned into a specific piece of legislation.

Biden. After Trump’s coup attempt failed and Biden took over, Republicans in Congress attempted to run the same play that had stymied Obama: Underfund and slow-roll everything, so that the economy will limp along and the new administration will be blamed.

On Covid relief, Biden decided not to play that game. He politely listened to a lowball Republican proposal that they probably would have backed away from anyway, and then pushed ahead with a reconciliation strategy (the same one Trump had used to pass his tax cut). The $2 trillion package passed quickly with only Democratic votes. It has been quite popular, and Republicans have at times tried to take credit for it, despite unanimously voting against it.

In his speech to a joint session of Congress Wednesday night, the President promoted two additional proposals — the American Jobs Plan and the American Families Plan, that together would spend over $4 trillion during the next ten years. The plans are funded by tax increases on corporations (rolling back part — but not all — of Trump cut in the corporate tax rate) and the rich (the top tax rate returns to its pre-Trump level, and capital gains are taxed as ordinary income for those making more than $1 million a year). Biden pledges not to raise taxes on those making less than $400,000 a year. The middle class, he said, “is already paying enough”.

This is all heresy against Reaganomics, which says that if taxes on the wealthy are kept low, they’ll invest their money more productively than government could, resulting in higher economic growth, more jobs, and increased wages. That was a formidable argument in the 1980s, and still had teeth even when it was used against Obama.

But no one believes it any more. Biden saw no need to give an elaborate justification for taxing the rich to build American infrastructure. Instead, he called supply-side economics by its liberal name, and brushed it off:

Trickle-down economics has never worked.

That simple statement is the bookend to Clinton’s “The era of big government is over.”

The true history of American infrastructure. It has now been more than two centuries since New York State began constructing the Erie Canal, which made Buffalo a boom town and promoted economic growth across the Great Lakes. Once cargoes from Lake Superior started floating down the Hudson, New York City soon replaced Philadelphia as the nation’s top port.

What the last two centuries have taught us is that the economy needs a mixture of public and private investment. The logic of that can get a little wonky, but the gist is that certain big investments, like the Erie Canal, the transcontinental railroad, the interstate highway system, or rural electrification, create what economists call “positive externalities”. In other words, they promote a general growth that no private-sector entity is broad enough to capture. (Even New York State failed to capture the growth its canal promoted in Chicago and Detroit.) So the private sector either will not build them at all, or will build them much too small and too late.

One result of Reaganism has been an under-investment in the public sector. That’s what Biden is trying to reverse. By taxing the rich, he is taking money from a bloated private sector to catch up on the public-sector investments that have gone begging for decades. Biden is betting that this shift will increase growth and create jobs — the exact reverse of what Reaganomics predicts.

In the official Republican response to Biden’s speech, Senator Tim Scott invoked trickle-down when he described Biden’s tax plan as “job-killing”, and predicted “it would lower Americans’ wages and shrink our economy”. If the Trump tax cuts — or the Bush tax cuts before them — had actually created jobs and promoted growth, as they were supposed to do, then it would make sense to predict that reversing them would kill jobs and stifle growth. But none of the promised benefits of Trump’s plan actually happened, so the jobs that it didn’t create won’t be lost when Biden goes back to pre-Trump tax rates.

Where is the Tea Party? Writing in Politico, conservative Rich Lowry waxes nostalgic about 2009, when “President Barack Obama created a spontaneous, hugely influential conservative grassroots movement on the basis of an $800 billion stimulus bill and a health care plan estimated to cost less than a trillion.”

Once upon a time, Joe Biden’s spending proposals would have launched mass demonstrations in opposition.

Little else would have been talked about in conservative media, and ambitious Republican politicians would have competed with one another to demonstrate the most intense, comprehensive resistance, up to and perhaps including chaining themselves to the U.S. Treasury building in protest.

But now, he laments, Republicans just want to talk about the border and cancel culture. No one is defending the Reagan orthodoxy, because no one believes in it any more.

Perestroika has come.

The corporate tax cut will never trickle down

The immediate benefits of the corporate tax cut have gone to stockholders and executives rather than workers. The long-term benefits will too.

Dropping the corporate tax rate from 35% to 21% was the centerpiece of the tax reform package Republicans passed (with no Democratic votes) and Trump signed late last year. They sold that cut with the argument that lower corporate taxes would stimulate investment: Rather than build that new factory in Indonesia or Vietnam, a corporation might site it in Iowa instead, creating new jobs and raising wages. So while it might look like the benefits would go entirely to wealthy shareholders, in the long run that money would flow to American workers. American households, Trump economic advisors claimed, would see their incomes go up by $4000 a year over the next 3-5 years.

For a few weeks, it looked like the trickle-down was happening: A number of companies responded to the tax cut by giving their workers a one-time $1000 bonus — small potatoes compared to what the companies themselves were set to rake in, but not bad if it represented a down payment on future wage increases.

But how long would it take those increases to show up? Well, not immediately, in spite of the well-publicized bonuses. And not in one quarter. CBS reported in April that the corporate windfall (financed by increasing the federal budget deficit) was mostly going into stock manipulations.

In the first quarter, corporate America committed $305 billion to cash takeovers and stock buybacks, more than double the $131 billion in pre-tax wage growth for both new and existing workers subject to income tax withholding, TrimTabs calculates.

Worse, the Bureau of Labor Statistics is reporting bad news for “production and nonsupervisory employees”.

From May 2017 to May 2018, real average hourly earnings decreased 0.1 percent

The Washington Post elaborates, saying that this category “accounts for about four-fifths of the privately employed workers in America”. It also provides this graph.

How long? But it terms of the tax cut, it’s still early days. Of course the process of building new factories and hiring new workers would take longer than just a few months. So when should we expect the corporate tax cut to trickle down? Two years? Five years? Ten?

What about never?In his Friday column, Paul Krugman explains why the tax-motivated new factories and jobs and higher wages aren’t coming, not immediately and probably not ever. He labels his argument as “wonkish”, meaning that ordinary people who aren’t economists may find it hard to follow. So let me interpret a little.

The vision of low corporate taxes creating new jobs with higher wages comes from the Industrial Era, the age of coal-powered textile mills and Henry Ford’s assembly lines. Business investment in those days was mostly big, heavy equipment that cost a lot of money and was meant to last for decades or even longer. (I live in an apartment in a converted textile mill. The mill was built in the 1820s.) Businesses were national (or more likely, local) in those days, so a company located in Akron or Dearborn paid taxes in Akron or Dearborn.

That’s not what the economy looks like any more.

Tax havens. The biggest corporations are multi-national, and they book their profits in whatever countries their accountants choose. One trick is to transfer a company’s intellectual property to a foreign subsidiary, and then pay massive royalties and licensing fees to that subsidiary.

The rights to Nike’s Swoosh trademark, Uber’s taxi-hailing app, Allergan’s Botox patents and Facebook’s social media technology have all resided in shell companies that listed as their headquarters Appleby offices in Bermuda and Grand Cayman, the records show.

When pieces of your product — an iPhone, say — are made all over the world, who’s to say what country the profit is made in? Your accountants say. And they all say the same things: You made your profits in a tax haven.

Indeed, a tiny handful of jurisdictions — mostly Bermuda, Ireland, Luxembourg and the Netherlands — now account for 63 percent of all profits that American multinational companies claim to earn overseas, according to an analysis by Gabriel Zucman, an assistant professor of economics at the University of California, Berkeley.

Think about it: When was the last time you bought something marked “Made in Luxembourg”? Multinationals don’t build factories and employ workers in low-tax countries, they just route their profits there.

Krugman looks at the profit-to-wage ratio of foreign firms and local firms in a variety of countries.

If places like Puerto Rico and Ireland were just massively more productive than the US or Germany — producing enormous profits with relatively low labor costs — that would apply to their local firms too. But it doesn’t. For local firms, the ratio of profits to wages stays pretty constant across the board. It’s only foreign firms that have managed to unlock the Irish productivity miracle — not with actual production that employs workers, but via accounting tricks that claim profits produced by workers in other countries.

In short, multinational corporations have benefited enormously from Ireland’s generous tax laws. Irish workers, not so much. And with time, the corporations get better and better at gaming the tax system.

So lower US corporate taxes may induce corporations to book more of their profits here, for what that’s worth. But that’s an accounting gimmick, not an actual change in economic activity.

But even with that illusion making the effect look bigger than it is, won’t lower taxes still motivate investment and create jobs? Why doesn’t that work? This is where Krugman gets wonkish.

What investment means now. In the Industrial Era, nothing was more solid than a factory. Henry Ford started building his massive River Rouge complex in Dearborn during World War I, and it’s still there. Once it made Model T’s; now it makes F-150 trucks. The US Steel complex in Gary is even older, going back to 1908. Firestone in Akron, Caterpillar in Peoria — the big Industrial Era companies were virtually synonymous with the towns where their factories were.

In the Industrial Era, corporate investment was long-haul investment. You bought land and erected massive buildings to house huge machines. You dug canals and built railroad spurs that came right up to the beginnings and ends of your production lines. The industrialists who made those investments were looking half a century into the future, or even longer.

But most corporate investment these days is far more ephemeral. Take Google, the second-most valuable company in the world. What does it make exactly? Where is its River Rouge or Gary Works? If it wants to create a new product, it may have to hire some extra designers and programmers. But what does it invest in? An office, some computers. The office could be rented, the computers will be obsolete in a few years. Ditto for Facebook. Amazon also needs some warehouses, and maybe some robots to move boxes around. In a few years the warehouses could be somewhere else and the robots will be replaced by better robots. It’s all short-term stuff.

Whenever a company makes an investment, it’s weighing its expected profits against two things: the cost of capital (for example, the interest rate it has to pay on the money it borrows) and the depreciation rate (how fast the investment becomes obsolete). In the Industrial Era, when a factory complex or a railroad might be around for half a century, depreciation was low. So the cost of capital really mattered. If interest rates dropped from 6% to 4%, all your calculations changed. Investments you’d been putting off suddenly made sense again.

But when the equipment you’re buying is going to be scrap in 3-5 years, the cost of capital doesn’t matter nearly so much. Cutting interest rates still motivates people to buy houses, because those are long-term investments. But it doesn’t motivate business investment much any more. Krugman looks at the huge interest rate spike of 1979-1982, when the Fed pushed rates up over 20%. Housing investment crashed. Business investment not so much.

If that was divergence was happening already in the early 80s, it’s even moreso now.

What’s that have to do with tax rates? Now comes the wonky part:

What does this have to do with taxes? One way to think about corporate taxes in a global economy is that they raise the effective cost of capital. Suppose global investors demand an after-tax rate of return r*. Then the pre-tax rate of return they’ll demand in your country – your cost of capital — is r*/(1-t), where t is the marginal tax rate on profits. So cutting the corporate tax rate reduces the effective cost of capital, which should encourage more investment.

Let’s work an example of that. Suppose global investors are looking for a 5% return on their investment after taxes. (That’s Krugman’s r*.) If the corporate tax rate is 35%, they’ll need to make a pre-tax return of 7.7%. (That’s 5%/(1 – .35).) So for every $1,000 you invest, you make $77, you pay 35% of your profit in taxes ($27), and you wind up with $50, or a 5% profit.

Now cut the tax rate to 21%. Now you only need to make 6.3% before taxes to wind up with 5% after taxes. For every $1,000 invested, you make $63, pay 21% in taxes ($13) and wind up with $50.

So in this example, the tax cut effectively reduces the cost of capital from 7.7% to 6.3%.

That would have been a big deal to Henry Ford or Andrew Carnegie. Jeff Bezos or Mark Zuckerberg prefer the lower rate, of course, but it doesn’t drive their decisions in the same way.

Hence Krugman’s conclusion: It’s not that cutting corporate taxes will have no effect on jobs or wages, but it’s going to work out to a huge loss of goverment revenue in exchange for a small number of jobs.

But the vision of a global market in which real capital moves a lot in response to tax rates is all wrong; most of what we see in response to tax rate differences is profit-shifting, not real investment. And there is no reason to believe that the kind of tax cut America just enacted will achieve much besides starving the government of revenue.

The end result. Krugman’s argument needs one more step, because he leaves one question unanswered: Why should you care if the government collects less tax revenue? OK, maybe the lost revenue flows mainly to rich shareholders and billionaire CEOs and only a few jobs are created. Maybe the overall effect on wages doesn’t amount to much. But if it’s something, isn’t that good? The taxman may bag a little less — or even a lot less — but why should American workers cry about that?

Over the last few decades, conservatives have done a good job of convincing many Americans that taxes just go down a rat hole and aren’t connected to the valued services government provides. (In states like Kansas and Louisiana, though, people are starting to see the relationship.) And for the moment, Republicans have stopped worrying about the budget deficits that they were so focused on during the Obama administration. Less revenue means bigger deficits, but, again, why should you care?

Because deficit phobia will be back someday. We are already looking at trillion-dollar deficits beginning in 2020, and that’s under the assumption that we aren’t in recession by then. (This economic cycle is already getting a little old; that’s why unemployment numbers are so low.) In any serious recession — and one always comes eventually — the deficit will top $2 trillion, which is much higher than the record Bush/Obama deficit of FY 2009.

There is only one pile of money big enough cover a shortfall like that: entitlements like Social Security and Medicare. (We could zero out the defense budget and still have a deficit.) When Republicans remember that they care about deficits, that’s where they’re going to look.

So American workers who cheer for the corporate tax cut are like Esau being grateful to Jacob for his porridge: In the long run, the tax cut they let the rich monopolize will cost them their birthright of Social Security and Medicare.

Does the Exploding Federal Deficit Matter?

Republicans claimed that Obama’s deficits were apocalyptic, but trillion-dollar deficits are fine now that Trump is president. What’s the right level of concern?

In his 2008 stump speech, John McCain used to say that accusing Congress of spending money like a drunken sailor was an insult to drunken sailors. McCain is an old Navy man, the son and grandson of admirals, so he was particularly well positioned to take offense. The line usually got a good laugh.

Out-of-control debt and spending was a standard Republican complaint all through the Obama years. The Tea Party’s original claim to being non-partisan was that they also accused the Bush administration of being wild spenders, abetted by K-Street establishment Republicans as well as Democrats. For almost a decade now, Republicans of all stripes have railed against the deficit. Some dark curse would steal away our economic growth, their economists’ spreadsheet errors told us, if the total national debt ever got close to the annual GDP. As a result, Obama’s budgets turned into an annual game of chicken, the second round of stimulus spending never happened, infrastructure continued to decay, and we were stuck with a sluggish economy that didn’t get unemployment back under 5% until 2016.

But then the Electoral College appointed Trump president, and now the Bush days are back again: Deficits don’t matter. We can cut taxes and raise spending and everything should be fine (until the next Democratic president takes office, at which time the party will be over and the national debt will once again be an existential threat to the Republic). So Obama cut his inherited deficit in half, while Trump is in the process of pushing it back up again. The latest estimate of the FY 2019 deficit is $1.2 trillion, possibly rising to over $2 trillion by 2027. [1] And that doesn’t count the infrastructure plan that Trump plans to release today.

That’s been the pattern since Ronald Reagan: Republicans blow up the deficit, and then pressure Democrats to deal with it — which they’ve done. Presidents are inaugurated in January, inheriting a budget that started in October. Together, Clinton and Obama shaved more than a trillion dollars off the deficits of their entering year. But that was no match for the $1.7 trillion that Reagan and the two Bushes added to their entering deficits.

President entering deficit exiting deficit change
Trump -666 ??? ???
Obama -1413 -666 +747
Bush II +128 -1413 -1541
Clinton -255 +128 +383
Bush I -153 -255 -102
Reagan -79 -153 -74

(Numbers from thebalance.com. Negative numbers are deficits, the lone positive number a surplus.)

The GOP has never owned up to that pattern in its rhetoric, though. As Reagan was entering office, he scolded Congress about runaway debt.

Can we, who man the ship of state, deny it is somewhat out of control? Our national debt is approaching $1 trillion. A few weeks ago I called such a figure, a trillion dollars, incomprehensible, and I’ve been trying ever since to think of a way to illustrate how big a trillion really is. And the best I could come up with is that if you had a stack of thousand-dollar bills in your hand only 4 inches high, you’d be a millionaire. A trillion dollars would be a stack of thousand-dollar bills 67 miles high. The interest on the public debt this year we know will be over $90 billion, and unless we change the proposed spending for the fiscal year beginning October 1st, we’ll add another almost $80 billion to the debt.

So what did he do? He cut taxes, raised defense spending, and never ran an annual deficit less than $100 billion, peaking at $221 billion in FY 1986. In total, he added another $1.4 trillion to the national debt.

Trump is following the same script. In the short run, it’s good politics. Everybody likes a tax cut. If the increased spending means that the defense industry in your area starts hiring again, your local highways get resurfaced, or you don’t have to deal with cuts in Medicare, Social Security, CHIP, or whatever other government program your family relies on, then you’re happy. Compared to something immediate and personal, like whether you have a job or your kids can get the medical treatment they need, the federal deficit seems like an abstract, remote problem.

And yet, it’s hard to escape the nagging feeling that we can’t get something for nothing. If the government keeps spending and stops collecting taxes, it seems like something bad ought to happen eventually. But what?

Bad analogies. One problem we have in thinking about this question is that our national conversation about debt has been polluted by a really bad metaphor: The government’s budget is like your household budget.

The deficits-are-good-politics part of that analogy works. If you’re the budgeter in your household, and you suddenly decide that running up a big debt is no big deal, you can make everybody pretty happy for a while. The kids can get the Christmas presents they want. When nobody feels like cooking, the family can eat at a nice restaurant. That big vacation you’ve dreamed about can happen this summer rather than sometime in the indefinite future. If the job is getting to be too big a hassle, your spouse can just quit. It’s all good.

Until it’s not. Eventually, the household metaphor tells us, the bills will have to be paid, and then bankruptcy looms. And that’s where the analogy breaks down. Your household spending spree can’t go on forever, but it wouldn’t have to end if your bank simply cashed all your checks and never bothered you about the fact that your account is deep in the red. That’s the situation the U.S. government is in: The bank is the Federal Reserve, and it can (and will) simply honor all the checks the government writes.

Pushing the household analogy further, you might ask: But what happens when the bank runs out of money? In the case of the Fed, that can’t happen, because dollars are whatever the Fed says they are. For example, one of the ways the Fed dealt with the financial crisis that began in 2007 is called quantitative easing, which is defined like this:

Quantitative easing is a massive expansion of the open market operations of a central bank. It’s used to stimulate the economy by making it easier for businesses to borrow money. The bank buys securities from its member banks to add liquidity to capital markets. This has the same effect as increasing the money supply. In return, the central bank issues credit to the banks’ reserves to buy the securities. Where do central banks get the credit to purchase these assets? They simply create it out of thin air. Only central banks have this unique power.

Several countries’ central banks did this, but none more aggressively than the Fed, which created $2 trillion just by typing some numbers into its central computers. Since there’s no limit to the number of dollars the Fed can create this way, it can buy as many bonds as Congress wants to authorize. So there’s no limit to what the U.S. government can spend.

Consequently, anybody who talks about the U.S. government going bankrupt is just being hyperbolic. The government can refuse to cover its debts (that possibility is what the debt-ceiling crises of 2011 and 2013 were about), but it can’t be forced into bankruptcy. [2]

So what really goes wrong? You know something has to, because otherwise the government could just make us all rich.

The government’s debt gets financed in two different ways, and they correspond to the two things that can go wrong: high interest rates and inflation.

One way the debt gets financed is that investors buy government bonds. You may own some yourself, and if you have a 401k, probably some of that money is invested in mutual funds that own some government bonds. Banks or corporations with extra cash may hold it in the form of government bonds.

Investors like U.S. treasury bonds because they pay interest. But like every other market, the market for treasury bonds works by supply and demand. If the supply of bonds zooms up (because the government is borrowing more money), they won’t all get bought unless something attracts more investors. In this case, the “something” is higher interest rates. The more the government needs to borrow from investors, the higher the interest rate it will have to pay.

Since the U.S. government can’t go bankrupt, investors would rather loan to it than to just about anybody else. So the only way you or Bill Gates or General Motors can get a loan is to pay more interest rate than the going rate on treasury bonds. So the government borrowing more money can result in everybody paying higher interest rates: Your mortgage rate goes up, your credit-card rate goes up, businesses that want to borrow money to expand have to pay higher interest rates, and so on. If interest rates get high enough, people and businesses will stop borrowing, the ones who can’t cover the higher interest payments will go bankrupt, and the economy will fall into a recession.

The 50-billion-mark note of 1923.

The other way the government deficit gets financed is that the Fed can buy the bonds itself, creating dollars out of thin air to do so. This is the modern-day analog of governments paying their bills by printing money, and it can have the same result as when the German government printed money in the 1920s: inflation. It makes sense: dollars are part of a supply-and-demand system too, so increasing the number of dollars should decrease how much each of them can buy. [3]

Except … Notice that I keep using words like can and should. What makes economics such a hard subject is that simple reasoning like this doesn’t always pan out. Sometimes when the Fed creates more money, the economy just soaks it up. If the economy has unused capacity — if, say, there are idle mines and factories, and unemployed workers who want jobs — the extra money might just bring all that back to life. If more people start working and spending, producing and consuming more goods and services, then the normal function of the economy requires more money. So the money the Fed creates might not cause inflation. And if investors are having trouble finding attractive alternative investments — as they do when economic prospects are iffy for everybody — they might be happy to loan the government more money without a higher interest rate.

In other words, sometimes there really is a free lunch. The government can borrow more money, make a bunch of people happy, and nothing bad happens.

That’s how things played out during the Obama years (and also during Reagan’s administration). The national debt went up substantially, the Fed created trillions of dollars, and yet both interest rates and inflation stayed low. (In Reagan’s case, interest rates were at record highs when he came into office, and went down from there.) Conservative deficit hawks kept predicting that the sky was about to fall on us, but it didn’t. [4]

What about now? The reason we got away with running such big deficits during the Obama years was that the economy was in really bad shape when he took office in 2009. Left to its own devices, the economy looked likely to go into a deflationary cycle, where money stops circulating and suddenly no one can pay their debts: Businesses go bankrupt, so workers lose their jobs and creditors don’t get paid. That causes them to go bankrupt, and the whole vicious cycle builds on itself.

Classic Keynesian economic theory says that the government should run deficits during busts and surpluses during booms. [5] That way the overall debt stays under control and the economy grows without violent swings up and down. That’s what the record $1.4 trillion deficit in FY 2009 (the Bush/Obama transition year) was for: It provided some inflationary pressure to balance the deflationary pressure of the Great Recession. The government played its Keynesian role as the spender of last resort, and so money kept flowing. Without that stimulus, things could have been much worse.

But the situation right now is very different. For the last several months, the unemployment rate has been 4.1%, the lowest it has been since the Goldilocks years of the Clinton administration. We’ve never run a trillion-dollar deficit during a time of economic growth and low unemployment, but we’re about to.

In this situation, we’re unlikely to get the free lunch. The free lunch happens because productive capacity is just sitting there, waiting for new money to bring it to life. If you need more workers, you don’t have to hire them away from somebody else, you can hire them off the unemployment line. When a business increases its orders, its suppliers don’t have to build new plants or pay overtime, they just start running their factories on their regular schedules rather than at a reduced rate.

When the economy is already humming, though, all the increased inputs come at a higher cost. Somewhere there are going to be bottlenecks, places where supply can’t be increased easily, and so that limited supply will go to the highest bidder at an increased cost. Those price increases ripple through the system, and you have inflation.

Inflation hasn’t shown up yet, though interest rates have already started to rise. Back in September, when passing a tax cut still seemed unlikely, rates on the 10-year treasury bond were barely over 2%. Now they’re a little under 3%. The stock market doesn’t submit to interviews, so no one can say exactly why the Dow Jones Index dropped 2800 points in 9 business days. But traders are often citing worries about inflation and interest rates.

Only hindsight will be able to tell us whether the markets are over-reacting. But there is a limit to how much debt the government can pile up without bringing on inflation and high interest rates. We just don’t know what it is.

[1] The last $400 billion on that estimate (the white box in the chart) comes from two temporary changes that Republicans assure us they intend to be permanent: the part of the recent tax bill that benefits individuals and some taxes that were part of the Affordable Care Act that have since be delayed. So Republicans can claim the deficit will only (!) be $1.7 trillion in 2027 if they admit that the long-term tax cut was really just intended for corporations.

[2] Somebody out there is asking: “What about Greece?” During the last decade, the Greek government has had a series of major financial crises that revolved around not being able to finance its national debt. Why won’t that happen to us?

The difference is that Greece doesn’t have a true central bank that controls its own currency. Greece is part of the euro-zone, so when it runs a deficit, it needs to borrow euros. Euros are controlled by the European Central Bank, a pan-European institution that feels no obligation to buy the Greek government’s bonds.

[3] That’s what goes wrong with the government making us all millionaires. The first thing you’d probably do if you became a millionaire is hire somebody to do some cleaning. But the people you’d be trying to hire are now millionaires too, so they’re not going to work for the same rate you’d have paid them before.

In addition to what I’ve described, inflation and interest rates can also interact: If investors expect the dollars they’ll be repaid in the future to be worth less than the dollars they’re loaning out now, they’ll want a higher interest rate to make up the difference. The value of the dollar in other currencies also comes into play: Inflation pushes the value of the dollar down, while higher interest rates prop it up. Things get complicated.

[4] The showdown that led to the 2011 debt-ceiling crisis was foreshadowed by Paul Ryan’s report “The Path to Prosperity“, which called for drastic reductions in government spending.

Government at all levels is mired in debt. Mismanagement and overspending have left the nation on the brink of bankruptcy.
The cause for Ryan’s alarm was the $1.2 trillion deficit in Obama’s proposed FY 2012 budget. That’s virtually identical to the FY 2019 deficit Ryan has voted for.

[5] In 1937, John Maynard Keynes wrote: “The boom, not the slump, is the right time for austerity at the Treasury.” In actual practice, we’ve usually run big deficits during busts and smaller deficits during booms. But the overall principle is the same.

Visions of a Future Gift Economy

Cory Doctorow’s recent novel Walkaway imagines a world where scarcity is unnecessary and generosity is a feasible way of life.

When you take a mountaintop view that lets all the gritty details blur into insignificance, most of our political arguments come down to two visions of how an economy might function. We might have a capitalist market economy, where good things are scarce and people compete to obtain them (and possibly fail to obtain necessities like food or medical care). Or we might have a socialist command economy, where central planners figure out how the work all of us do is going to produce the goods and services all of us need.

Our current economy is a blend of the two — a mostly capitalist economy sitting over a socialist safety net that is maintained by a tax-supported central government — and our endless political debates are about where the capitalist/socialist boundary should be. Do we want higher taxes and a sturdier safety net, or lower taxes and a flimsier safety net?

There is, however, a completely different third vision, which for most of human history has sounded kind of crazy: an anarchist gift economy, in which people compete not to obtain scarce goods, but to give the most impressive gifts.

Christmas dinner. Gift economies already exist in little niches, on very small scales. For example: the pot-luck family Christmas dinners I remember from when I was growing up. If you approached the dinner like the homo economicus of capitalist theory, you’d bring the minimal dish to get yourself in the door, and then pig out on what everybody else brought. The obvious result, as any economist could predict, would be a tragedy of the commons: Everybody would bring less and less as the years went by, until Christmas became a celebration of scarcity rather than abundance.

If such an outcome didn’t kill Christmas entirely, it would probably lead to a socialist revolution: A central planning committee would make sure we all got enough to eat by telling everyone exactly what to bring, specifying quantity and quality very precisely, and checking that no one cheated. So food would be plentiful again, but even so, the joy of the season might get lost.

In fact, though, neither of those things ever happened. Instead, my aunts competed with each other to bring the most appealing dishes, probably secretly hoping that everybody would eat their food first and only eventually get around to sampling what the other aunts brought. The way you won Christmas wasn’t to get the best deal for your household, it was to give the best gift. As a result, the common table was anything but tragic; we all stuffed ourselves and there was plenty left over.

Sweat and scale. Critics will ask how that example scales up, and they’ll have a point. The general human condition was laid out thousands of years ago in Genesis: “In the sweat of thy face shalt thou eat bread.” Ever since we got kicked out of Eden, good things have required work, and work has been disagreeable. Christmas dinners are one thing, but in general nobody’s going to do the world’s work voluntarily, just so other people can have nice stuff.

Imagine, for example, being a New York gentleman shopping for a shirt around 1850 or so: The raw cotton has come from slaves working under the lash, and has been turned into thread and cloth and finally a shirt in factories where teen-age Irish immigrant girls get respiratory diseases from breathing the lint spewed out by the big machines. None of them would have put themselves through that just to give you a shirt.

And yet, as technology hands more and more of the economy’s grunt work off to machines, gift-economy niches are expanding, especially in any area that involves information or the internet. Wikipedia is a darn good encyclopedia. Linux is a top-notch operating system. They both required huge amounts of human effort to create, but they’re gifts; they exist (and are continuously updated) because people want to make themselves useful, even if they’re not paid for it. [1]

Facebook and other social-media platforms are a fascinating hybrid of economic models: Mark Zuckerberg got fabulously wealthy by putting a capitalist interface around a gift economy. Nobody (other than maybe a few of his personal friends) uses Facebook because they want to interact with Zuckerberg. We use it to see the interesting, clever, and entertaining things other people post for free. Like my aunts at Christmas, we compete with each other to provide more and better free content. The ads that have made Mark a zillionaire are the friction that we tolerate for the chance to give and receive each other’s gifts.

Goods and services. Still, Linux-programming nerds are a special case, and a real economy is more than just clever tweets or cute cat videos. What about services that require time and effort here and now? Will people provide that for free?

Yeah, they will. Look at retired people, especially professionals who did something more interesting than purely physical labor. Often they keep doing similar work on a smaller scale for nothing. Retired public school teachers teach art classes at the community center, or mentor at-risk students one-on-one. Retired business executives give free advice to small start-ups. Retired doctors and nurses help out at free neighborhood clinics, or go off to disaster areas like Haiti after the earthquake or Puerto Rico after the hurricane.

When you ask such people why they stopped working for pay, the answer usually isn’t that they wanted to do nothing; it’s that the jobs available were too exhausting and constraining. The workplace wanted too much out of them, or left too little room for the parts of the job they most enjoyed. Young people describe the same situation from the opposite side: It’s not hard for them to think of ways to use their talents to help people and make stuff, or even for them to get excited about doing so. What’s difficult is figuring out how to get paid for it.

Anyone involved with a volunteer organization knows that people will even step up to do physical labor as long as there’s not too much of it. If you require long hours of drudgery day after day, you’ll have to pay somebody. But if you want a bunch of people to paint the new school or clean out the church basement, you can usually get that done by volunteers. If not for the thought that some big corporation would be making money off of us, I could imagine people volunteering to help at UPS during the holidays, as long as we could do it on our own terms. “Hey, I’m not doing anything Tuesday. You want to go deliver some Christmas presents?”

Material goods. OK, but what about real stuff? Physical things are different from information or services.

But not as different as they used to be. 3D printing is still in its infancy, but it looks like a bridge between the information-wants-to-be-free world of the internet and the sweat-of-thy-face world of physical objects. Most of what you can make now falls under the broad heading of “cheap plastic crap“, but you only have to squint a little bit to see future printers that are more like general fabricators: They’ll use a greater variety of materials, and weave them together on smaller and smaller scales, until we have something approaching the replicators of Star Trek.

In the future, you might acquire a shirt by getting your torso scanned, choosing from a set of designs somebody posted free to the internet, and having your general-purpose home fabricator assemble the shirt molecule-by-molecule, using one or two of your worn-out shirts as raw material. No slaves. No wheezing red-haired girls. Just energy (which you might have gotten free from the wind or sun), computing power (so cheap that it’s barely worth accounting for), and gifts from other people.

It’s a stretch, but you can imagine even food working that way eventually: Get some organic molecules by throwing your grass clippings into the fabricator, and take out a beef stroganoff — or maybe at least some edible substance that is tasty and nutritious. In the meantime, people love to garden or raise chickens or tend bees. A lot of them happily give their surplus away. At the moment, that’s not nearly enough to feed the world. But such small-scale producers might come a lot closer if they didn’t need to have jobs or sell their produce for money. If you needed traditional food merely as a garnish, and got your basic nutrition elsewhere, the gift culture might provide it.

In short, some desirable things — beachfront homes, original copies of Action #1 — might always be scarce and remain part of a market economy. But it’s possible to imagine the market and gift economies switching places: Markets might become niches, as gift economies are now.

Capitalism and the surplus population. Compare the gift economy’s trends to what technology is doing to the capitalist economy. Picture a capitalist economy as a set of concentric circles: The innermost one consists of the relatively small number of people who increasingly own everything. They can afford to get whatever they want, so there has to be a next circle out, consisting of the people who produce goods and services for the rich: food and clothing, obviously, but also yacht designers, heart specialists, estate planners, physical trainers, teachers for their kids, bodyguards, and so on.

It takes a lot of people to provision a single oligarch, but if the central circle is small enough, the next one out will still be just a fraction of the general population. Those second-circle people may not be rich like the central circle, but they will need to be paid enough to buy a number of the things they want. So a third, even larger circle of people becomes necessary to produce goods and services for them.

And so on.

It would be pleasant to imagine that these circles expand forever, each new circle spreading the wealth to the next circle out, until everybody can be paid to do some useful work. But as the inner circle gets smaller and smaller, and as more and more work is done by machines, probably the process ends long before it includes everybody. So you wind up with a final outer circle of surplus population: people the economy has no real use for. It’s not that they have no skills or don’t want to work or have some moral failing that makes them unemployable. It’s just math. The people with money can get everything they want without employing everybody, so a lot of other people wind up as ballast. [2]

If you’re a bleeding-heart type, you might get sentimental about those surplus people. But put yourself in the shoes of an oligarch: The prevailing moral code won’t tolerate just letting the extra people starve, so somebody has to maintain them through either charity or taxes, even though they’re entirely useless. Imagine how you must resent all those parasites, who have no connection to your productive economy, but still want to be supported by it! [3]

Now we’re in the world of Cory Doctorow’s Walkaway.

Walkaway. The novel takes place in the late 21st and early 22nd centuries, by which time several of the trends we can see now have gone much further. Large numbers of people compete for a relatively small number of jobs, and the people who get those jobs are increasingly desperate to keep them. If you weren’t born rich, getting enough training to compete for the good jobs involves taking on debts that you may never get a good enough job to pay off. The economy has contracted around a few major economic centers, leaving large sections of the U.S. and Canada virtually empty.

Increasing numbers of people who get fed up with this situation “go walkaway”: They set out for the empty areas, hoping to find a way to make a life for themselves outside the “default culture”, which the Walkaways come to call Default. Fortuitously, the UN has responded to a variety of refugee crises over the decades by developing technologies that make it easy to establish settlements quickly: cheap wind and solar generators, small fabricators you can use to make bigger fabricators, shelter designs that don’t require skilled construction, and so on. Computing power and internet connectivity are easy to set up, and from there you can get whatever expert advice you need from professionals who find their Default jobs unfulfilling.

Walkaway settlements display that unique combination of order and anarchy you may recognize if you’ve spent any time at Burning Man or an Occupy encampment or working on an open-source project. There are elaborate social processes aiming at consensus, but if you can’t resolve a conflict you walk away from it: Take a copy of the source code and go create your own version of Linux if you want; maybe other programmers and users will come to like your vision better, or maybe not.

The Walkaway lifestyle is a mixture of hardship and abundance. The prevailing aesthetic is minimalistic, but everything you actually need is freely available. If somebody really wants your stuff, let them have it and go fabricate new stuff. If a group of assholes shows up and wants to take over the settlement, walk away and build a new settlement.

Doctorow’s most interesting insights involve the values implied by Default and Walkaway. Default is based on scarcity, and a person’s claim on scarce goods revolves around having special merit. [4] So everyone in Default is constantly striving to be special, to convince themselves that they’re special, and to prove their specialness to others. The hardest thing to adjust to in Walkaway is that you’re not special; you’re like everybody else. But that’s OK, because everybody deserves a chance to live and be happy.

Without spoiling anything, I can tell you that three things drive the plot:

  • An oligarch’s daughter goes walkaway, and he wants to reclaim and deprogram her.
  • Researchers at “Walkaway U” (a loose collection of scientists who mainly need computing power and don’t want their research controlled by oligarchs) solve the problem of simulating brains and uploading a person’s consciousness into software, thereby creating a version of immortality. Not only do the oligarchs want this technology — that would be easy, since nobody is keeping it from them — they want it to be expensive intellectual property that only they can afford to use.
  • Default culture is starting to fall apart, as more and more of the people it relies on stop believing in it. [5]

Default had tried to ignore Walkaway, and then to smear it as a dangerous place full of rejects and criminals. [6] But the plot-drivers cause Default to start seeing Walkaway as a threat.

Reflections on scarcity. One thing I take away from the novel is to be more skeptical of scarcity. Systems tend to justify themselves, so it’s not surprising that a system based on managing scarcity would concoct ways to create unnecessary scarcity. Much of our current culture, I think, revolves around making us want things that only a few people can have. [7] The vast majority that fails to acquire these things are defined as losers, and they/we deserve whatever bitter result they/we get.

Ditto for the idea that work is disagreeable. Maybe we’re making work disagreeable. Because good jobs are scarce, employers can demand a lot and treat workers badly. If, instead, we could fully engage everybody’s talents and energies, maybe the work we each needed to do wouldn’t be that demanding. We might even enjoy it.

So I’m left with a series of provocative questions: What if scarcity isn’t the fundamental principle of economics any more, or won’t be at some point in the near-to-middle future? What if God’s post-Eden curse — “In the sweat of thy face shalt thou eat bread” — came with a time limit? What if our sentence is up?

[1] This blog is a gift: no subscriptions, no ads, no click-here-to-donate buttons, not even a means to collect and sell your data. It’s really this simple: I want to write it and I hope you enjoy reading it. If you want to do me a favor in return, spread my gift to your friends.

[2] Once this process gets started, a vicious cycle makes it worse: The larger the surplus population, and the more capable people it contains, the more competition there is for the available jobs. This drives down wages, and shrinks all the circles further. For example: The less the second circle gets paid, the fewer goods and services it can command. Consequently, the third circle doesn’t have to be as big. And so on.

[3] In case you’re struggling to put words around the flaw in this way of thinking, I already did: The mistake is the assumption that the oligarchs own the world, and that a baby born into poverty has no claim on either the natural productivity of the planet or the human heritage that created technological society. The oligarchs assume they are the sole rightful heirs both of the Creator and of all previous generations of inventors.

[4] Characters in the novel dispose of the “meritocracy” view of capitalist society very quickly: The view is based on circular logic, because “merit” is defined by whatever the system rewards. So Donald Trump is on top because he has merit, but the only observable evidence of his merit is the fact that he’s on top.

[5] The collapse of Soviet Communism is probably a model here. The Soviet system maintained the appearance of vast power right up to the last minute. When people respect you mainly for your power, the first signs of weakness quickly snowball.

[6] Recall the mainstream reaction to Occupy Wall Street.

[7] The archetypal example of this is the the Prize in Highlander: “In the end there can be only one.” Reality TV tells us this story over and over: The Bachelor will pick only one woman. Only one performer will become the next American Idol. And so on.

Just What We Needed: More Inequality, Bigger Deficits

Trump’s tax plan is designed to help the little people.

Congress still needs to fill in key details, but the general direction of the Republican tax-reform plan is so clear that no conceivable details can change it.

For decades now, Republicans have been dancing a two-step on taxes and spending:

  1. Cut taxes a little bit for most people and hugely for the very rich, promising that economic growth will make up the lost revenue.
  2. When the lost revenue stays lost, claim that the resulting deficits are an existential threat to the Republic, necessitating previously unthinkable spending cuts.

The result of the two-step is a set of policies that could never pass as a unit. Kansas, for example, would never have voted to cut schools and highways to make rich people richer, but that’s how Sam Brownback’s fiscal revolution worked out. When George W. Bush’s tax cuts turned Clinton’s record surpluses into record deficits, his proposed solution was not to admit the mistake and restore the Clinton rates, or even to say that we couldn’t afford the wars in Iraq and Afghanistan any more, but to propose “entitlement reform” — privatizing Social Security and reorganizing Medicare and Medicaid as defined-benefit programs.

Now, as Republicans try to shake off their ObamaCare-repeal failure and move on, the music is starting again. “A-one, a-two, cut rich people’s taxes …”

Trump promised it wouldn’t be that way this time. All his tax-reform rhetoric has been about jobs and middle-class families, and he often says or implies that people like him will have to sacrifice. Wednesday in Indianapolis, he said:

Our framework includes our explicit commitment that tax reform will protect low-income and middle-income households, not the wealthy and well-connected. They can call me all they want. It’s not going to help. I’m doing the right thing, and it’s not good for me. Believe me. [1]

A few weeks ago, when he began the tax-reform push by speaking at the Loran Cook Company in Springfield Missouri, he said:

Tax reform must dramatically simplify the tax code, eliminate special interest loopholes — and I’m speaking against myself when I do this, I have to tell you. And I might be speaking against Mr. Cook, and we’re both okay with it, is that right? It’s crazy. We’re speaking — maybe we shouldn’t be doing this, you know? (Laughter.) But we’re doing the right thing. (Applause.) True.

Not true, as it turns out. There are still a lot of details missing — so far all we have is a nine-page “framework” document (with not that many words on each page), not a bill that could be analyzed precisely or voted into law — but everything that has been nailed down points in the direction of big cuts for Trump himself and people like him. It’s hard to imagine any set of details that could reverse that course.

Here are some things already specified:

  • The corporate tax rate drops from 35% to 20%, and corporations get to write off their capital investments faster. That’s a big win for the people who own corporations.
  • “The committees also may consider methods to reduce the double taxation of corporate earnings.” In other words: either another write-off for corporations or a big tax cut for people whose income is mostly corporate dividends.
  • Multi-national corporations would no longer be taxed on overseas profits, and profits currently held overseas to escape U.S. taxes could be repatriated at a low rate.
  • The seven current individual tax brackets, running from 10% to 39.6%, become three brackets: 12%, 25%, and 35%. The bottom rate goes up and the top rate comes down.
  • The alternate minimum tax (which applies mainly to the wealthy, and is the main tax Trump himself paid in the one year we know anything about) and the estate tax (which no estate smaller than $5.5 million currently pays) go away.
  • Income from businesses organized as something other than corporations — sole proprietorships, partnerships, and S-corporations (collectively known as “pass-through entities”) — is currently taxed at the individual rates, which could be as high as 39.6%. That gets cut to 25%. Given the way Trump’s hotels are structured or could be structured, this also would be a big win for him. (You could imagine rich people dodging the 35% tax rate by re-organizing their finances so that all their income comes via pass-through entities, but the framework promises Congress will write rules to prevent that from happening. It doesn’t provide any notion of how such rules might work.)

Specifics are supposed to be filled in by “the tax-writing committees” of the House and Senate “through a transparent and inclusive committee process” that is supposed to produce a complete bill sometime in November. They are the Krampuses assigned to deliver all the lumps of coal now that Santa (the nine-page framework) has distributed the sugar plums. The tax-writing committees are supposed to find and eliminate enough special-interest deductions to keep the revenue loss manageable and make the final product “at least as progressive as the existing tax code” so that it “does not shift the tax burden from high-income to lower- and middle-income taxpayers.” They will do that in the face of what promises to be the most expensive lobbying effort ever by special interests intent on keeping their loopholes. Because that’s what tax-writing committees have historically been so good at: imposing pain on special interests whose lobbyists have vast sums of money to throw around. [2]

That’s the general drift of the framework: If you’re rich, your benefits have been spelled out. Benefits to the rest of us are promised in some feel-good rhetoric, but it’s hard to imagine exactly what they’ll be. After all, somebody has to pay taxes, don’t they?

Analysis. The pattern we saw during ObamaCare repeal was that Republicans in Congress wrote the bills without Democratic input and kept their details secret for as long as possible. When the details appeared, they fulfilled none of the feel-good rhetoric Trump and others had been dishing out to the public: All that stuff about more people getting better coverage with lower premiums was ancient history by the time the actual bills were available for inspection, as was the promise that people with preexisting conditions would still be protected.

In particular, the number-crunchers at the Congressional Budget Office were kept in the dark as long as possible. Graham-Cassidy was voted on without CBO analysis, and the bill the House passed was only analyzed later. When analysis did come out in time, and documented just how far the proposal in question was from the promises it was supposed to fulfill, McConnell and Ryan pushed to vote before the public had a chance to process the implications.

So far, tax reform is on that track. The lack of detail in the framework prevents any definitive analysis. We don’t, for example, know exactly when the 12%, 25%, and 35% rates apply. You could imagine a bill where the 25% rate doesn’t kick in until your income reaches $1 million, so middle-class people would all pay 12%. Or it could start applying at $10, and everybody would pay 25% or more on virtually all their income beyond the standard deduction. Those are the kinds of “details” we’re still missing.

The Tax Policy Center tried to analyze anyway, making reasonable assumptions about how the details will shake out. (Neither of the possibilities I described in the previous paragraph is at all reasonable.) When the 9-page document didn’t specify something, they consulted statements by Trump officials, or documents like Paul Ryan’s “A Better Way“. Given that kind of speculation, the numbers they came up with shouldn’t be taken as gospel, but TPC’s analysis does throw the burden of proof back on Trump and the Republicans: Don’t just dismiss it, tell me where it’s wrong. [3]

TPC’s analysis says that taxpayers in the top 1% would see their after-tax incomes rise by 8.4%, and the top .1% by 10.2%, while the benefit to other taxpayers would be on the order of 1%. [4] Some upper-middle-class/lower-upper-class taxpayers would actually pay more tax, and (due to inflation) the number of people facing a tax increase would rise each year, until by 2027, it wouldn’t just be a few exceptional cases: The 80-95% income percentiles would see a net tax increase as a group.

Deficits. During the Obama administration, Republicans and their allies in the right-wing media often claimed that our rapidly-increasing national debt would bring on some economic catastrophe in the near-to-medium future. That fear is all gone now. It’s as if Democrats had announced in 2009 that under Obama we could go back to burning all the fossil fuels we want.

They haven’t changed their tune because the debt problem has cleared up. For a while it looked like it might. The annual deficit did hit alarming levels in FY 2009 (the year of the budget Obama inherited from Bush), and then headed down for several years afterward.

In raw numbers, the deficit bottomed out in FY 2015 at $483 billion, nearly a trillion less than 2009’s $1.413 trillion. But then it started rising again, hitting $585 billion in FY 2016, and an estimated $693 billion in FY 2017, which ended Saturday. The current CBO projections, with no tax cuts, say that the annual deficit will pass $1 trillion again in FY 2022, and keep rising thereafter.

So if you think the deficit is a real problem — not everybody does — you ought to be seriously worried.

But Trump and the congressional Republicans aren’t worried, at least not now that the red ink is gushing from their own budgets. So why not cut taxes?

The original story was that the tax cut would be deficit-neutral, i.e., whatever revenue it lost by cutting rates, it would regain by eliminating loopholes. But deficit-neutral tax cuts are no fun; to really get the party started you need cuts that nobody pays for.

So Senate Republicans are now preparing a budget resolution (the first step in a reconciliation process that would allow the final bill to pass the Senate with 50 votes), that allows a $1.5 trillion loss of revenue over ten years. And that’s just the current state of the bidding. Why not make it higher? Why not fill the budget with accounting gimmicks that allow the real cuts to be even bigger? (TPC estimates the lost revenue at $2.4 trillion in the first decade, $3.2 trillion in the second. Again: Republicans shouldn’t just scoff, they should explain why TPC is wrong.)

The same budget proposal gets the timing wrong on the two-step: It proposes a $450 billion cut to Medicare now. Silly, Medicare cuts are supposed to wait until after the tax cuts are in place and growth falls short of your projections.

Can they pass it? ObamaCare repeal is a cautionary tale of how Republican legislative efforts can fail, despite their apparent control of both houses of Congress and the presidency. In the Senate, reconciliation is a narrow path that eliminates many of the features conservatives want, and Republicans can only afford two dissenters (unless they manage to attract some Democrats). In the House, the Freedom Caucus has the power to hold a bill hostage until it is loaded up with provisions guaranteed to alienate moderates. (They’ve already started maneuvering.)

On the policy side, the similarities should be ominous to anybody who wants this to pass: The rhetoric selling the idea of the program has been populist, but the actual bill will be elitist: The rich will profit, the middle class will get a pittance (probably only temporarily), and the deficit will skyrocket. That will set up new “emergency” proposals to slash benefits the middle class would never have agreed to sacrifice to the rich, if the tax cuts hadn’t created an artificial budget “emergency”.

Eventually, the details will have to come out, and there will be well-founded analyses that Republicans can’t just brush off. When that happens, the public will turn against the bill, as it turned against the various forms of ObamaCare repeal. Red-state Democrats who have seemed open to tax reform (Heitkamp, Donnelly) will have plenty of cover when they stand against the final bill: They supported the middle-class tax cut Trump talked about in the beginning, not the upper-class giveaway it turned into.

Then Republicans in Congress will face a familiar question: Are they willing to vote against their constituents in order to follow their ideology, keep a promise to their donors, please Trump, and avoid going into the 2018 election cycle with zero accomplishments? For most of them, the answer will be Yes. But maybe three senators will balk.

[1] I’m not the only person to notice that Trump has what poker players call a tell: When he says “Believe me”, he’s lying.

[2] You could tell I was being sarcastic, right?

[3] Trump is also making assumptions and claiming specific outcomes for specific people. Wednesday he named a working couple in the audience and said they would save $1,000 next year under his plan. At this point, his opinion is just as speculative as TPC’s.

[4] Of course, that’s 1% of a much smaller number. If your income of $50 thousand goes up by 1%, that’s $500. If your income of $50 million goes up by 10.2%, that’s $5.1 million.

Three Misunderstood Things 7-24-2017

This week: census, environmental regulations, coal jobs

I. The census

What’s misunderstood about it: How can counting people be a partisan issue?

What more people should know: A lot rides on the census. The Census Bureau knows it gets the answers wrong, but Republicans have a partisan interest in not letting it do better. In 2020, it’s being set up to fail.


When the Founders wrote the Constitution, they knew the country was changing fast. New people were pouring into America — some coming by choice and others by force. If Congress was going to represent these people into the distant future, it would have to change as the country changed. So somebody would have to keep track of how the country was changing. That’s why Article I, Section 2 says:

The actual Enumeration shall be made within three Years after the first Meeting of the Congress of the United States, and within every subsequent Term of ten Years, in such Manner as they shall by Law direct.

Congress has implemented that clause by setting up the Census Bureau, which tries to count everyone in America in each year that ends in a zero. You can look at this as a rolling peaceful revolution: Via the census, states like Virginia and Massachusetts have gradually surrendered their founding-era power to new states like California and Texas.

No doubt you learned in grade school that counting is an objective process that produces a correct answer — the same one for everybody who knows how to count. But in practice, when a bunch of people count to 325 million, agreement starts to break down. Now imagine that you’re counting a field full of 325 million cats, most running around and jumping over each other, and a few actively hiding from you. How do you come up with an answer you have faith in?

That’s the Census Bureau’s fundamental problem: Americans won’t stand still long enough to be counted, and some are actively suspicious of anybody from the government who comes around asking questions. Inevitably, then, not everybody gets counted, and some people get counted more than once. This is not a secret; the Census Bureau admits that it gets the wrong answer.

That might not be so bad if the errors were random, but they’re not. Basically, the more stable your life is, the more likely you are to be counted correctly. If, for example, you’re still living in the same house with the same people that a census worker counted ten years ago, they’re going to count you again. But if you’re sleeping on your friend’s couch for a few weeks while you’re waiting for a job to turn up, and thinking about moving back in with Mom if you can’t find one, then you might get missed.

Stability isn’t a randomly distributed quality. The LA Times spells it out:

The last census was considered successful — that is, the 2010 results were considered to be within an acceptable margin of error. But by the Census Bureau’s own estimates, it omitted 2.1% of African Americans, 1.5% of Latinos and nearly 5% of reservation-dwelling American Indians, while non-Latino whites were overcounted by almost 1%. The census missed about 7% of African American and Latino children 4 or younger, a rate twice as high as the overall average for young children.

But that raises an epistemological question: How do you know your count is wrong if you don’t have a correct count to compare it to? And if you have that correct count, why not just use it?

The answer to the first question is statistics. Imagine, for example, that you’re trying to count all the species that live in your back yard. You go out one day and count 50. Then you go out longer with a bigger magnifying glass and find 10 more. Then the next couple of times you don’t find anything new. But then you find two. Are you confident that’s all of them now? What’s your best guess about how many are really out there?

Now extend that to every yard in the neighborhood. Imagine that after each household does its own count, you all converge on one yard for a more intensive search than you’d be willing to do on every yard. That search finds even more new species. Now how many do you think you missed in the other yards?

Statisticians have thought long and hard about questions like that, and have a variety of well-tested ways to estimate the number of things that haven’t been found yet. If you apply those techniques to the census, you get more accurate estimates of the total.

So why not just use those estimates? Two reasons:

  • It sounds bad: Ivory-tower eggheads are using a bunch of mumbo-jumbo Real Americans can’t understand to invent a bunch of blacks and Hispanics that nobody has ever seen.
  • Republicans have a partisan interest in keeping the count the way it is.

The Census determines two very important things: how many representatives (and electoral votes) each state gets, and how hundreds of billions of dollars in federal money for programs like Medicaid and highway-building get distributed among the states. The miscount gives more power and money to mostly white (and Republican) states like Wyoming and Kansas, and less to a majority non-white (and Democratic) state like California. Within a state, Republican gerrymandering works by crowding Democratic-leaning urban minorities into a few districts, leaving a bunch of safely Republican rural and suburban districts. That minority-packing is even easier to do if a chunk of those people were never counted to begin with.

The 2020 census is already headed for trouble. The Census Bureau is being underfunded, taking no account of the fact that it has more people to count than last time. Plans to modernize its technology went badly. And it is currently leaderless: The bureau chief resigned at the end of June, and Trump has nominated no one to replace him.

So we’re set up for an even bigger uncount of minorities this year. And that’s got to make Paul Ryan happy.

II. Environmental regulations

What’s misunderstand about it: Many people believe that a clean environment is a costly luxury.

What more people should understand: Externalities. That’s how well-designed environmental regulations can save more money than they cost.


Nobody should come out of Econ 101 without an understanding externalities — real economic costs that the market doesn’t see because they aren’t borne by either the buyer or the seller.

Pollution is the classic example: Suppose I run a paper mill, and I use large quantities of chlorine to make my paper nice and white. At the end of the process I dump the chlorine into my local river, because that’s the cheapest way for me to get rid of it. Because I use such an inexpensive (for me) disposal process, I can keep my prices low. That makes me happy and my customers happy, so the market is happy too. Any of my competitors who doesn’t dump his chlorine in the river is going to be at a disadvantage.

The problems in this process only accrue to people who live downstream, especially fishermen and anybody who wants to swim or eat fish. They suffer real economic losses — losses that are probably much bigger than what I save. But since their loss is invisible to the paper market, nothing will change without the some outside-the-market action — like a government regulation, a court order, or a mob of fishermen coming to burn down my mill.

Now suppose the government tells me I have to stop dumping chlorine. I have to find either some environmentally friendly paper-whitening technique or a way to treat my chlorine-tainted wastewater until it’s safe to put back into the river. Either solution will cost me money, and I will have no trouble calculating exactly how much. So you can bet there will be an article in my local newspaper (which now has to pay more for the newsprint it buys from me) about how many millions of dollars these new regulations cost. The corresponding gains by fishermen, riverfront resort owners whose properties no longer stink, and downstream towns that don’t have to get the chlorine out of their drinking water — that’s all much more diffuse and hard to quantify. So the newspaper won’t have any precise number to weigh my cost against. Chances are its readers will see the issue as money vs. quality of life. They won’t realize that the regulations also make sense in purely economic terms.

That’s an abstract and somewhat dated example, but similar issues — and similar news stories — appear all the time. The costs of new regulations are borne by specific industries who can calculate them exactly, while the benefits — though very real — are more diffuse, and may accrue to people who don’t even realize they’re benefiting. (Companies are very aware of what they’ll have to spend to take carcinogens out of their products, but nobody ever knows about the cancers they don’t get.) But that doesn’t mean that the benefits aren’t bigger than the costs, even in dollar terms.

The best example from my lifetime is getting the lead out of gasoline. If you were alive at the time, you probably remember that the new unleaded gasoline cost a few cents more per gallon. Spread over the whole economy, that amounted to billions and billions. What we got out of that, though, was far more than just the vague satisfaction of breathing cleaner air. Without so much lead in their bloodstreams, our children are smarter, less violent, and less impulsive. The gains — even in purely material terms — have been overwhelmingly positive.

III. Coal jobs.

What’s misunderstood about it: What happened to them? Environmentalists are often blamed for destroying these jobs.

What more people should know: No doubt environmentalists would kill the coal industry if they could. But the real destroyers of coal jobs are automation and competition from other fuels.


Coal miners are the heroes of one of the classic success stories of the 20th century. Mining was originally a job for the desperate and expendable, but miners were among the first American workers to see the benefits of unionization. Year after year, coal mining became safer [1], less debilitating, and better paying, until by the 1960s a miner no longer “owed his soul to the company store“, but could be the breadwinner of a middle-class family, owning a home, driving a nice car or truck, and even sending his children to college. Sons and daughters of miners could become doctors, lawyers, or business executives. Or if they wanted to follow their fathers into the mines, that promised to be a good life too.

However, the total number of coal-mining jobs in the United States peaked in 1923.

Was that because Americans stopped using coal? Not at all. Coal production kept going up for the next 85 years.

The difference was automation. Mines employed three-quarters of a million men in the pick-and-shovel days, but better tools allow 21st-century mines to produce more coal with far fewer workers.

If you take a closer look at that employment graph, you’ll notice a hump in the 1970s, when coal employment staged a brief comeback. That corresponded to the Arab Oil Embargo of 1973 and the increased oil prices of the OPEC era. For decades after that, coal was the cheaper, more reliable energy source. Americans who dreamed of energy independence dreamed of coal. In a 1980 presidential debate, candidate Ronald Reagan said:

This nation has been portrayed for too long a time to the people as being energy-poor, when it is energy-rich. The coal that the President [Carter] mentioned — yes, we have it, and yet 1/8th of our total coal resources is not being utilized at all right now. The mines are closed down. There are 22,000 miners out of work. Most of this is due to regulation.

However, all that changed with the fracking boom. Depending on market fluctuations, natural gas can be the cheaper fuel. Meanwhile, the price-per-watt of renewable energy is falling fast, and is now competitive with coal for some applications. So if a utility started building a new coal-fueled plant now, by the time it came on line a renewable source might be more economical — even without considering possible carbon taxes or environmental regulations.

The dirtiness of coal is a huge externality (see misunderstanding II, above), so regulations disadvantaging it make good economic sense. Looking at the full cost to society, coal is the most expensive fuel we have, and should be phased out as soon as possible.

Statements like that make good fodder for politicians (like Trump or Reagan) who want to scapegoat environmental regulations for killing the coal industry. However, dirty coal is like the obnoxious murder victim in an Agatha Christie novel: Environmentalists are only one of the many who wanted it dead, and other suspects actually killed it.

[1] The number of coal-mining deaths peaked at 3,242 in 1907. In 2016 that number was down to 8. As a comment below notes, though, that doesn’t count deaths from black lung disease, which are on the rise again.