Should the government create a law that requires Congress to balance the budget?

[EconGuy]

A law, no. An amendment to the constitution yes. A law would not be enforceable (by the Supreme Court) enough to allow for quick decision making when other bills were written, so it would fail and backfire and make things worse. The next Congress could repeal a law, but an amendment would be more difficult to repeal. If we amended the Constitution then lawmakers would have a means of steering all of the results and could hope to truly balance the budget.

What I think would happen is that Congress would, under a requirement to balance the budget, shift expenses (and therefore power) to the states.

Probably just read the posts above.

 

[Nakosis]

Do you think there is a better alternative?

Allowing natural competition.

Quite right, as I said, the limitation on spending is productivity. Inflation happens when demand exceeds supply. However, I think one of the mistakes that most people make is they underestimate the worlds capacity to absorb net new dollars without creating inflation.

Further, domestically, how might you measure that capacity?

One way it to look at a chart that measures how much capital resources that companies report they own relative to how much of those resources are being utilized. Under utilization generally means that productivity could increase without expensive capital investment.

View attachment 81116

Both charts show the same thing, the point is there is a buffer between utilization and capacity, at least domestically.

Ok, but utilization is also limited by the market. If there is limited demand for your product then there is no reason to use the full capacity or your resources. So there are other factors involved which would need to be accounted for to make this information useful.

First, let's be clear, the entire world experienced inflation as a result of COVID because, as you can see from the chart here in the US, there was a pretty massive dip is capacity utilization. This caused massive disruption and lead to shortages. That said, companies were also profit taking, in that their increases in prices exceeded their costs. Of course just as the wage spirals in the late 1970's lead to price increases, companies are causing cost spirals as their inflate costs and pass those costs on to each other. Competition is supposed to prevent this, but given the consolidation in private space that's taken place over the last 30-40 years, we now have just a handful of companies controlling, for example, most of our food.

View attachment 81117

Thus it only takes a handful of decisions at the highest levels to increases prices though corporate policy (i.e. there isn't enough competition.

Evidence?

Comparing all recent periods of inflation with the one that took place during COVID is revealing.

View attachment 81118

As you can see labor AND net input costs have contributed less to inflation than the surge in cooperate profits. That's not to say that I think corporations are bad, I just think as a nation we've done a poor job regulating them and are now (litterally) paying for it.

We agree that monopolies are bad. However government policies often support certain monopolies. For example governmental bailouts, subsidies given by the government to companies like Nestle and Pepsico allowing them to undercut the competition.

Nestlé received more than £487,000 to invent an energy-efficient machine for making chocolate, while PepsiCo was awarded £356,000 to help develop new ways of drying potatoes and vegetables to make crisps.
Nestle, PepsiCo and others 'use public funds to develop harmful snacks'

Large companies have the money to invest in individual political campaigns to support favorable governmental policy.

No, there aren't. That's called austerity, where the solution to running out of oxygen in a room is to choke people so they stop using it, rather than just add more oxygen. Sure both accomplish the same thing, but one causes immense suffering for most of the population.

And yes, in real terms there are enough resources to ensure that austerity isn't necessary.

I'm not talking about austerity measures. I'm saying that we can use tax revenue as a way to measure the effectiveness of government spending policy.

I admit that is a complex question, but to give you a simple answer....Unemployment is a good measure. U6 unemployment measures how many people are looking for work and cant find it. You could also look at the number of jobs in a region relative to how many people are out of work.

Of course you'd have to keep an eye on the capacity utilization chart and limitations on real resources, especially energy which is volatile speculative market that has an outsized influence on inflation.

In other words, if there are people looking for work and work that needs to be done, your economy is probably unbalanced unless there are other structural issues. If there are, the solution is to address those issues (whatever they are).

Sure, the more key indicators used to monitor governmental spending the better. I don't see the problem of using tax revenue as one of these key indicators.

That's right, taken in a vacuum "throwing" things around won't ever work, at least sustainably.


If you and I are going to agree on what the fix is, we'd first have to define what the goals we believe are goals that should be pursued by our government and in the private sector. Only then could we evaluate our opinions in the context of what is happening in the country.

I don't know what the fix is. What I'm saying is we should use a number of key indicators, like unemployment and tax revenue to monitor the effectiveness of the policies in place. So someone comes up with an idea to "fix" the economy. Policy "X". IMO we should then use a comprehensive set of indicators to monitor the effectiveness of that policy. I don't see the problem of using tax revenue as one of them.

But, Congress cannot enact tax increases on the people that have most of the money (and are driving most of the inflation) because of how much those politicians rely on the donations of the people they need to tax in order to control inflation. So instead the job falls to the Fed who thinks they have any control at all.

Why can't congress enact taxes excess profits? Unless you are referring to the cronyism which exists. My answer to that would be to provide a comprehensive set of indicators to the public to show the effectiveness of political policy. Which policy is effective and which politicians supported those policies.

Of course people are continually surprised that all of this money isn't creating run-away-inflation (though people like Peter Schiff has been telling anyone who will listen we're right on the cusp of a spending fueled inflation collapse to anyone who will listen over the last 20 years).

I think obviously these monopolies supported by the government are taken large amounts out of the general economy. I suppose you could see this as a good thing. Letting the monopolies do the job of limiting inflation so the government doesn't have to except of course the idea of how this governmental spending gets distributed into the economy. If we are not monitoring the tax revenue then the money can "disappear".

The point is, when you balance the budget you ensure that your economy cannot grow, it is locked in at the moment you balance the budget. But population doesn't stop, so in 30 years when the population increases by 100,000,000 people they are going to be competing for the same number of dollars as there were the day the decision was made to balance the budget.

We both know the government can print more money if needed. It goes into debt doing so. Money out vs money in is simply an indicator of how well that money is being distributed.

Sure you can sell 100,000 movie tickets. 10 people show up to watch the movie. All of those tickets out there. The debt to the theater, the seating it is obligated to provide remains. Seems obvious they sold tickets to the wrong movie.

Balancing the budget would initially cause private sector borrowing to go up (pre-2008 like, until the private sector was maxed out and the system would crash and make 2008 look like party time.

Again, I'm not talking about cutting spending. I'm talking about monitoring the effectiveness of that spending. Without monitoring the return, all of that money can disappear into monopolies supported by the government.

So you can have subsidies but the government should get a return from the economy on that investment.

(Sorry I had to cut parts out to fit forum character limits.)

 

[EconGuy]

Allowing natural competition.

How do you feel about Limited Liability laws? There's nothing "natural" about laws that protect business owners from losing their private wealth in the event their business is sued (non-criminal). Monopoly laws, something else that's not natural, but as you've already acknowledged isn't a good thing.

Economies aren't natural, they are by their nature entirely contrived. That said, in order to adequately address the question of how each of us thinks our economy should be organized, I think it necessary to define what outcomes we think are worth pursuing. Only then can we evaluate what we say we support, for example we agree that monopolies are bad, why? Because I think I can speak for you when I say that we both see competition in the market as a good outcome.

That said, I agree that there are probably laws and regulations that don't accomplish the goals that were initially envisioned when they were created. I would be all for a formal process of reviewing laws and regulations on businesses to ensure that they are still meeting the goals they were intended to achieve and that the outcomes are positive.

Ok, but utilization is also limited by the market.

Totally agree, but let's go deeper, the "market" doesn't consume, people do. Every person has a capacity to consume. Consumption is made up for needs and wants.

The first step in consumption is income. The more people that have income, the more people can consume, first their needs and then their wants.

If you are in favor of limiting how much people rely on government for their needs, there are two ways (generally) to accomplish it. Decide that people should fin for themselves and expect nothing, or create policies that will attempt to ensure that people have work at a minimum rate that they can provide necessities for themselves.

But again, it really matters what you think, as a society we should value and how you prioritize those values.

For example, do you think children should have access to life saving medical care regardless of their parents capacity to pay? If the answer is yes, then accomplishing that goal has "unnatural" consequences.

Thus, unemployment, as I said previously is a good bellwether for determining the health of an economy. The more people are employed, the greater their capacity provide for themselves. Now how much capacity is utilized depends on a lot of factors I won't delve into here, but the point of the capacity utilization chart I showed before was simply to point out, that, capacity has historically not been our problem.

If we have unemployment but historically underutilized capacity, then government creating and consuming resources, raw, labor and capital resources should not cause widespread shortages that would result in unusually high levels of inflation. We are simply putting labor resources to use. For example, why not use government resources to fix broken infostructure? It would employ people and fix the problem we have in the US with our broken infostructure.

If there is limited demand for your product then there is no reason to use the full capacity or your resources.

1. What determines demand? The capacity to consume.
2. What determines the capacity to consume? Income.
3. What determines income? Having a job.
4. What determines if there are enough jobs for everyone who needs one? Back to #1

Not to mention that you can look at this another way.

Why do we need to increase utilization? Because there are things that need to be done and spare resources to get them done.

Like what?

Crumbling infrastructure
Young people who want an education but cannot afford it
Homeless people
People who need medical care but cannot afford it

Of course I'm being intentionally vague here to keep things short. Every one of these suggestions would require a lot more questions be answered, but the point is, there are things that need (depending on who you ask) to be done and the nation has the capacity to provide it.

For example governmental bailouts, subsidies given by the government to companies like Nestle and Pepsico allowing them to undercut the competition.

I can agree with that to some extent. Unfortunately, the time to evaluate the government influence on monopolies or other effects of bailouts in is not when the economy is on the brink of disaster. That said, it could be argued that the deregulation that caused the need for bailouts is the result of reduction of rules put in place by government and removed by a system that believes that money is speech and that money is used by special interest. The solution, IMO, is that, in some circumstances that owners or leadership in companies be held responsible rather than getting cut huge checks and bonuses when companies are losing money.

Large companies have the money to invest in individual political campaigns to support favorable governmental policy.

Which brings up a great question.

Whose fault is it that government is manipulated, the manipulated or that manipulator?

The answer is, it's complicated.

But here's what I do know. The idea that eliminating government will solve the problem of manipulation is naïve. Manipulating people is what power does. The only mechanism the average person has to be protected against that kind of manipulation is government.

So while I could be convinced to agree that the government can be complicit in the manipulation of the average person, the problem isn't "government" per-se, but the incentives within the government system that allow it. For example, allowing people who hold high ranking positions to move to the private sector in order to subvert rules they were formally responsible for enforcing is something that it's hard to believe I even have to say, isn't a good idea. Same with people moving from government to lobby for companies using connections made while in government.

No the problem isn't "government", it's the corruption of government by people who have no sense of right and wrong. It's the idea that profit is above the welfare of people, country or morality. Of course culturally we have to demand these things and until we do, we're going to have these kinds of problems.

I'm not talking about austerity measures. I'm saying that we can use tax revenue as a way to measure the effectiveness of government spending policy.

In order to maintain some context, let me quote what I was responding to, you said:

Well two things. The government would choose to take money out of the economy to limit things like inflation.

But, that is austerity. Talking money out of an economy causes hardship and unemployment.

That said, there are other factors here we need to consider to address this question correctly.

The only time austerity should be employed is when demand exceeds a nations capacity to supply either because there is a massive labor shortage or a massive materials shortage. In the case of materials, the next question should be, would targeted spending address the shortage? For example, if we run out of microchips, would diverting spending to address the shortage resolve the problem? If yes, then reducing spending will only make that problem worse, not better. But this is an anecdotal example. We could engage in a whole thread about the causes and solutions to inflation.

I don't know what the fix is. What I'm saying is we should use a number of key indicators, like unemployment and tax revenue to monitor the effectiveness of the policies in place. So someone comes up with an idea to "fix" the economy. Policy "X". IMO we should then use a comprehensive set of indicators to monitor the effectiveness of that policy. I don't see the problem of using tax revenue as one of them.

But, again, all of this has to be placed into a context of goals and accomplishments. If I go to work and am simply told to "work" without knowing what success looks like, then how can I work effectively? This is the problem I have with these sorts of conversations. People want to do things, but assume we know what it is they want to accomplish and the context they want to accomplish it in.

In other words, If I think that healthcare should be provided to people who can't afford it, then I've made a policy decision and my other actions can be judged in the context of that policy desire.

All that said, how does collection of tax revenue as a metric of success work? When federal government taxes it takes money away from the private sector, how is that a metric for success?

Why can't congress enact taxes excess profits? Unless you are referring to the cronyism which exists.

Exactly. Too many people have been convinced in the idea of supply-side economics. The idea that in order for the middle class to do well, companies have to have low taxes, few regulations, things like "right to work" and be allowed to discourage if not outright prevent worker organization.

And to your point, I think a little nuance here is needed. There are realized and unrealized profits. The wealthy avoid taxes by getting paid in investments rather than cash. An investment isn't really profit" until it is realized (sold). So keeping it in a state that is unrealized gives the wealthy the benefit of of equity without the inconvenience of having to pay taxes on the millions or 100's of millions of dollars in wealth. When a wealthy billionaire wants to buy a $42 million dollar mansion or yacht, they don't cash in stock and buy it because they'd have to take out $65 million to have the $42 million (because they'd have to pay taxes). What they do is take out a loan for the $42 million and pay very low interest (because there is little risk). Why borrow? Because if the rate is 5%, that's still a lot less money than they'd pay in taxes if they realized gains by selling stock (which would be 30% or more), not to mention the $65 million they should have taken out to have $42 million to spend remains as an interest bearing investment, and assuming it is properly invested, the interest earned on the money they didn't have to take out, $65 million, will earn, let's say 7% (conservatively) meaning that the interest on the money that would have been needed to have $42 million to spend is greater than the interest charged by the bank.

This is why taxes on the wealthy at one time reached close to 90% Because you need a statutory rate that high for the real rate (the rate paid after deductions and other means of tax avoidance) would be less than 1/2 that.

Like you I ran out of room, so I'll continue, stand by.

 

[It Aint Necessarily So]

@EconGuy Thanks for this:

A question I've asked and haven't been able to answer is what is the average citizen's equity in America, by which I mean not his private property's value, but what is his share of the commonwealth worth offsetting his $253,686 debt to America? That is, what is the value of everything in America owned collectively divided by the number that own it and compared to that debt? Whenever I Google public holdings, I get information about stocks, which I'm calling private property, since they represent individual wealth, which one can take with him if he opts out of American life as I have.

Can you supply that data? What's a ticket to the show (citizenship) worth apart from abstract value? I'm talking about what my share of the assets and liabilities I left behind is worth.

=========

And would you agree that that debt represents a real expense to every taxpayer even if not a nickel ever goes to paying it down? If that $253K per taxpayer results in an interest payment, that's tax dollars collected but not spent on taxpayers' needs.

• $32,700,000,000,000 debt / 253,700 $/taxpayer = 129,000,000 taxpayers

"In 2022, the federal government spent $476 billion on net interest costs on the national debt."

• $476,000,000,000 interest/year / 129,000,000 taxpayers = $3700 per taxpayer per year in government expenditures that cannot pay police or build roads, meaning that the taxpayers either need to pay the extra or accept fewer government services for their current taxes.

What could they do with that much money every year if they didn't have to give it to the government to send to foreign banks? That's very real cost per taxpayer even without ever getting a bill for the debt or its interest.

 

[EconGuy]

My answer to that would be to provide a comprehensive set of indicators to the public to show the effectiveness of political policy. Which policy is effective and which politicians supported those policies.

What's more important, raising tax revenue or affordable housing, affordable medical care, affordable education? Any policy that measures success should look at these indicators. But, of course all of these things should be in the context of the broader economy.

So, looking at government debt we see:

And national income:

Of course this is just a broad measure meant only to counter your point. Only a small percentage of people in this forum have $583k in assets when measuring that against their debt. Do we have a distribution of wealth problem? I think so, but that is a thread that if anyone wants to address I'd encourage breaking it out into it's own thread.

I think obviously these monopolies supported by the government are taken large amounts out of the general economy. I suppose you could see this as a good thing.

I'm not entirely sure what you mean here, but I don't see monopolies in the private sector as a good thing with a few exceptions. Access to water and energy should be controlled by government (note I didn't necessary say "run" by government. The point is, there are some industries that competition is difficult, but I think we probably agree that competition should be encouraged and using private industry to control something like inflation isn't what we should be going for as a nation.

If we are not monitoring the tax revenue then the money can "disappear".

Most people think that federal government spending works like this:

It does not. If it did, money in the economy could never increase.

It works more like this:

Where:

I = Investment
G= Government spending
X = Exports

and

S = Savings
T=Taxes
M=Imports

There is no circle. One is an inflow, like a faucet, the other is an outflow, like a drain. If the "tub" in this analogy is the economy, and the best economy is one where the tub is filled right to the top without overflowing, then when I say balance the economy not the budget, this is what I'm talking about. The only two variables here the government is directly in control of, are taxes and spending, the inflow and outflow of dollars. I don't care how many go in or out if the tub level (economic health) is being maintained at what most people might agree is good.

We both know the government can print more money if needed. It goes into debt doing so. Money out vs money in is simply an indicator of how well that money is being distributed.

Of course, and that's the point of this thread. To ask people if they think balancing the flow of money in vs money out (a balanced budget) is good. I'm saying that a balanced budget is bad because it ignores the economy for the sake of a number.

That said, I'm not sure what you mean here by distribution. I think money is poorly distributed in our economy, but again, that's probably best left for another thread.

Sure you can sell 100,000 movie tickets. 10 people show up to watch the movie. All of those tickets out there. The debt to the theater, the seating it is obligated to provide remains. Seems obvious they sold tickets to the wrong movie.

This is a great example. However, the theater example is limited because we know that seats in the theater are static. But let's say the tickets we sell are to ride the Metro Train.

If more tickets are sold than the system can handle, the revenue form additional sales could be used to buy more trains. The limitation at that point is the potential for increased capacity. That's the argument I'm making about the economy. Spending isn't limited by a fiscal budget where money in should equal money out, rather, look at the economy and markets. Is there spare labor? Is there more natural and capital resources that are unused or underused? If yes, than the addition of money money wont, as a rule, result in inflation because inflation happens when demand exceeds supply.

Again, I'm not talking about cutting spending. I'm talking about monitoring the effectiveness of that spending.

Good, then this has been a very long discuss to realize that we are in agreement. That said, the first thing we have to do is agree that spending or money isn't the limitation.

Once we agree, now we have to determine what we goals we should support, for example should people who cannot afford healthcare have access to it? If yes----->

How do we accomplish that goal?---->

Find ways to lower the cost of healthcare

Or

Increase money to people who cannot afford it

Or

Both

Your proposal is right on target. If we think healthcare is good, how is money spent being used to accomplish that goal? Are there more effective ways to accomplish the goal? Do we change what we're spending money on, or is it time to re-evaluate the system as a whole?

Awesome convo. I hope other people find it interesting and aren't afraid to join in.

-Respectively

EG

 

[Shaul]

Your question cannot be answered since the wording of the hypothetical law isn't given.

 

[EconGuy]

First, it's really weird that the forum has your post, at least on my screen on top of the my post that you are replying too....

Can you supply that data?

This? www.debtclock.org

And would you agree that that debt represents a real expense to every taxpayer

Remember that dollar debt and assets in this context all equal zero.

In other words, you start with zero and you break zero into 1 and -1.

I like visuals. This might be a stretch, but let's see how this goes......(deep breath).

Here is a lawn with nothing on it.

There are no piles of dirt (surplus) and no holes (deficit).


Here is a lawn with a hole in it:

We took nothing, no holes, no piles of dirt, and turned into two things. A pile of dirt and a hole. One thing into two. They are equal and offset.


The point here is that people need to understand that debt in a fiat system is always a debt/ asset pair. You cannot have dirt without a hole, you cannot have dollars without debt.

The government in the context of this image is the owner of the yard. The government digs the hole (debt) and circulates the dirt (dollars).

If you bring some of the dirt back, the government won't have a pile of dirt, it will just have a smaller hole. In fact, if you brought all of the dirt back, the government still wouldn't have any dirt, it just wouldn't have a hole. We'd be back to the top pic.

So why does anyone think that the government has to fill the hole, at all, ever? Is there some limitation on the size of the hole (remember we're talking in metaphors here).

Practically speaking, the government would dig this hole as deep as it needs to.

The limitations exist entirely on the private sides ability's to use the dirt.

Now to your question

Does the debt represents a real expense to every taxpayer?

At the risk of seeming pedantic, I need to know what you mean when you say debt and the word real.

But I'm going to try to answer your question so you don't think I'm trying to defect.

The debt and our system of money is enterally contrived. As such it is a system, just like the rules of a game, set up to accomplish some goal or state of affairs that most of us agree we'd like to see.

As such it is "real" only in the context of that system. Is a "foul" in baseball "real"? In the context of baseball it is.

Now to the question of the expense. for every taxpayer.

The answer is no. It is not a real expense for every person, keeping in mind I don't really know what you mean by real).

If we take $1 million dollars and spread it across 1 million people, in that context, the answer would be yes.

But, if 500k people, the bottom 50% had $4 and the next 40% had $26 and the top 10% had $690,000 then I'd expect the real expense to be in line with the real assets.


But I'm eager to hear you response as I want to clarify my answers when I have a better idea what you are asking.

"In 2022, the federal government spent $476 billion on net interest costs on the national debt."

• $476,000,000,000 interest/year / 129,000,000 taxpayers = $3700 per taxpayer per year in government expenditures that cannot pay police or build roads, meaning that the taxpayers either need to pay the extra or accept fewer government services for their current taxes.

What could they do with that much money every year if they didn't have to give it to the government to send to foreign banks? That's very real cost per taxpayer even without ever getting a bill for the debt or its interest.

Ahh, there is a misnomer here. Let me see if I can help (goes digging for sources).......

Now, let's break this down....

Right off the top, 42% of the money paid on the debt is earned as income by people here in the US, like me. I hold US bonds as part of my investment portfolio.

18% is paid to the Federal Reserve. Wait, what??? Almost $20% of $476 billion in interest payments are paid to the Fed!!!!!!!!!!

Not to worry, the Fed returns 94% of all of it's profits back to the US government. The other 6% is used to pay for operating costs and fixed dividends to regional banks. In other words, almost all of that money is the US government's money.

Source: Federal reserve remittances to the US Treasury

about 9% is paid out in Social Security benefits to people in the US.

6.3% are paid in US retirement funds.

And it's not until this point we starts seeing money paid to foreign interests that total roughly 1/3.

So take some comfort in knowing that 66% of all the money the US government paid out stayed here in the US. And while this chart doesn't get into the underlying investors, the single largest investor in US government bonds is the US government. In other words, the government owes about 1/3 of the debt to itself. It sounds stupid, but it's really done this way for accounting purposes.


Now you didn't ask this question, but if you stop and think about the time we're in right now, that being a period of high inflation, the Fed is raising interest rates with the goal of slowing the economy while simultaneously higher rates are forcing the government to add interest income back into the economy. That is $316 billion dollars is being shoved into an economy we're told has too much money. Of course that money is going into the hands of people with enough money to invest it in the first place, which explains why Wall St. is doing well, while average Americans can afford a home because rates are so high.

I hope that helps and, again, look forward to your reply.

-Cheers

EG

 

[EconGuy]

Your question cannot be answered since the wording of the hypothetical law isn't given.

Is there a hypothetical law (and you get to choose here) in which a balanced budget would be a good thing given the current state of our economy?

 

[Shaul]

Is there a hypothetical law (and you get to choose here) in which a balanced budget would be a good thing given the current state of our economy?

If it were a "good thing" that would logically mean a good thing for the economy too. Wouldn't it?

 

[EconGuy]

If it were a "good thing" that would logically mean a good thing for the economy too. Wouldn't it?

Well, the economy is a system that is created to accomplish some goal or state of affairs that those that are given (or claim) power would like to actualize.

So saying something is good for the economy really doesn't make a lot of sense if we think about it. Just like saying a rule change in the game of soccer is "good for soccer". In reality is it good for the people who enjoy soccer.

Similarly, things that are good for the economy should be good for the people who participate in it.

 

[Shaul]

Well, the economy is a system that is created to accomplish some goal or state of affairs that those that are given (or claim) power would like to actualize.

So saying something is good for the economy really doesn't make a lot of sense if we think about it. Just like saying a rule change in the game of soccer is "good for soccer". In reality is it good for the people who enjoy soccer.

Similarly, things that are good for the economy should be good for the people who participate in it.

This still doesn't address my original point about the question being unanswerable due to the hypothetical law. In order to fulfill the predicate such as law would require 1) elimination of Congressional power to borrow and 2) probably eliminating the use of fiat currency. Either that or terms similar to those in the Swiss constitution.

 

[EconGuy]

This still doesn't address my original point about the question being unanswerable due to the hypothetical law. In order to fulfill the predicate such as law would require 1) elimination of Congressional power to borrow and 2) probably eliminating the use of fiat currency. Either that or terms similar to those in the Swiss constitution.

Ok, so I'll play along just to see where this goes.

The law would require government revenue to be equal to expenditure.

And borrowing, or the sale of bonds would still be allowed in such a system as the sale brings in revenue which would allow for increased expenditure.

And why would you need to eliminate the use of currency? That doesnt follow.

And I'm not familiar with the Swiss constitution.

 

[Shaul]

Ok, so I'll play along just to see where this goes.

The law would require government revenue to be equal to expenditure.

I presume you meant revenue greater than or equal to expenditure. Which isn't clear either. Both revenue and expenditure are nebulous.

And borrowing, or the sale of bonds would still be allowed in such a system as the sale brings in revenue which would allow for increased expenditure.

The sale of bonds is a liability, not an asset. They don't "magically" create wealth which can be spent.

And why would you need to eliminate the use of currency? That doesnt follow.

I never wrote to eliminate currency. I wrote to eliminate fiat currency. The currency would need to be backed by something of intrinsic value (exempli gratia, gold). Otherwise the government (Congress) through its power to mint would simply use that as a means to circumvent the balanced budget requirement.

And I'm not familiar with the Swiss constitution.

Swiss constitution (English translation)

You will want Chapter 3 in particular, Fedlex
Notice that it requires several parts which would be needed together.

 

[It Aint Necessarily So]

I need to know what you mean when you say debt and the word real.

Thanks for all of that.

By real I mean is there an actual cost to average Americans caused by the national debt, or is it something that doesn't affect them because they aren't getting a bill to pay. I calculated a cost to citizens to service the interest on that debt. Do people actually receive less or pay more because of that? If so, the cost is "real."

 

[EconGuy]

I presume you meant revenue greater than or equal to expenditure.

Correct

Both revenue and expenditure are nebulous.

In what sense?

The currency would need to be backed by something of intrinsic value (exempli gratia, gold).

Otherwise the government (Congress) through its power to mint would simply use that as a means to circumvent the balanced budget requirement.

All money in a fiat system is created.

The sale of bonds is a liability, not an asset. They don't "magically" create wealth which can be spent.

Sure, but all transactions have two components, you're ignoring 1/2 of the transaction.

When the government sells a bond it simply makes a swap. Dollars for more dollars in the future. Literally at the Fed dollars are moved from a non-interest bearing fiscal assets account (dollars) to an interest bearing asset account (bonds).

Sell a $1000 bond and the government "receives" $1000 and at some point in the future might pay $1200 in return.

So while the bond is a liability, the money it receives at the time of the sale is the asset.

The $200 extra will be money the government will magically create out of thin air and then use fiscal accounting (bonds) to account for the extra money we call debt.

 

[Shaul]

In what sense?

In the sense that some things could be classified as one or the other or both or neither capriciously by a government.

All money in a fiat system is created.

Which is what I wrote. Unless the minting of currency is linked to a reference it allows for quantitative easing or tightening which can completely circumvent any balance budget requirement.

Sure, but all transactions have two components, you're ignoring 1/2 of the transaction.

When the government sells a bond it simply makes a swap. Dollars for more dollars in the future. Literally at the Fed dollars are moved from a non-interest bearing fiscal assets account (dollars) to an interest bearing asset account (bonds).

Sell a $1000 bond and the government "receives" $1000 and at some point in the future might pay $1200 in return.

So while the bond is a liability, the money it receives at the time of the sale is the asset.

The $200 extra will be money the government will magically create out of thin air and then use fiscal accounting (bonds) to account for the extra money we call debt.

I'm not ignoring it, quite the opposite. A government that is required to have a balanced budget but can print money at will can simply print whatever quantity of money is needed to "balance" the budget. But that isn't true balancing. It is merely the passing of the deficit onto the economy and populace via a hidden "tax" of currency devaluation and, probably, inflation.

 

[EconGuy]

By real I mean is there an actual cost to average Americans caused by the national debt

Well, that's sort of the point of this thread. It's not the debt, per-se that has a cost on you and I. It's how the debt is managed.

For example, you've probably heard politicians say that not dealing with the debt will just "kick the can down the road" to our grandchildren to pay.

But, step back, think about what they are really saying. We should cut spending and/ or raise taxes to reduce the debt.

Wouldn't that do exactly the same thing? I mean, most proposals to reduce or maintain debt levels requires reducing spending. on the kinds of things that children today rely on and children in the past have benefitted from. So the solution is to punish this generation of children to avoid what? How does increasing debt affect anyone?

Some people might argue increased taxation....

But taxes have decreased sharply in the last 60 years.n

Other people might say that it increases the amount the government has to pay in the debt, and in nominal terms that's true, but when you measure that against the size of the economy, it's not true.

Here are interest payments as a percentage of the size of the economy:

Look at the year 2000:

Now look at 2020

So the debt increased by $20 trillion, but the interest paid on the debt relative to the size of the economy is just over 1.5% or about what it was in 1945.

The bottom line is the the cost are in NOT creating enough money to ennsure that people who want to work can earn enough to care for themselves including medical care. And people who want to learn can be paid to learn a trade or go to college.

Making people feel like debt is a moral failing that has costs and then using that to justify reducing spending in the end will cause the very costs they claim to try to be avoiding.

That said, let me be clear, too much spending is as bad as too little, but there is a window that fall into the "just right" area and the only way to know that area is to understand the prevailing economic conditions and it ramifications.

 

[EconGuy]

In the sense that some things could be classified as one or the other or both or neither capriciously by a government.

That's an assertion, but what sort of examples can you share with us?

Which is what I wrote. Unless the minting of currency is linked to a reference it allows for quantitative easing or tightening which can completely circumvent any balance budget requirement.

Quantitative policies don't affect a balanced budget policy as it neither creates nor destroys money. Every dollar created or removed by QE policies is offset by an asset acquired or a debt sold in the real economy. In other words, the FED has a ledger that must remain balanced.

I'm not ignoring it, quite the opposite. A government that is required to have a balanced budget but can print money at will can simply print whatever quantity of money is needed to "balance" the budget.

You clearly don't understand how "debt" arises in our system.

Every $1 the government creates, creates $1 in debt. There is no such thing in our economy as a dollar created debt free.

It's like withdrawing $1 on your credit card to repay $1 on your debt.

 

[It Aint Necessarily So]

Well, that's sort of the point of this thread. It's not the debt, per-se that has a cost on you and I. It's how the debt is managed.

For example, you've probably heard politicians say that not dealing with the debt will just "kick the can down the road" to our grandchildren to pay.

But, step back, think about what they are really saying. We should cut spending and/ or raise taxes to reduce the debt.

Wouldn't that do exactly the same thing? I mean, most proposals to reduce or maintain debt levels requires reducing spending. on the kinds of things that children today rely on and children in the past have benefitted from. So the solution is to punish this generation of children to avoid what? How does increasing debt affect anyone?

Some people might argue increased taxation....

But taxes have decreased sharply in the last 60 years.n

Other people might say that it increases the amount the government has to pay in the debt, and in nominal terms that's true, but when you measure that against the size of the economy, it's not true.

Here are interest payments as a percentage of the size of the economy:

View attachment 81380

Look at the year 2000:

View attachment 81381

Now look at 2020

View attachment 81382

So the debt increased by $20 trillion, but the interest paid on the debt relative to the size of the economy is just over 1.5% or about what it was in 1945.

The bottom line is the the cost are in NOT creating enough money to ennsure that people who want to work can earn enough to care for themselves including medical care. And people who want to learn can be paid to learn a trade or go to college.

Making people feel like debt is a moral failing that has costs and then using that to justify reducing spending in the end will cause the very costs they claim to try to be avoiding.

That said, let me be clear, too much spending is as bad as too little, but there is a window that fall into the "just right" area and the only way to know that area is to understand the prevailing economic conditions and it ramifications.

Thanks for your answer and time, but this still doesn't answer the question I'm asking, which was another way of asking why any citizen should care about the national debt and how high it grows. After all, if there is no cost to him, shouldn't he encourage his government to borrow and spend as much as it can? I can't believe that the answer is that he is unaffected, that is, I believe that the cost of this debt to him is real. Specifically, the cost per citizen is the number of tax dollars collected from Americans but not spent on them, which I estimated at about $3700 each:

• $32,700,000,000,000 debt / $253,700 debt per taxpayer = 129,000,000 taxpayers

"In 2022, the federal government spent $476 billion on net interest costs on the national debt."

• $476,000,000,000 interest per year / 129,000,000 taxpayers = $3700 per taxpayer per year in government expenditures that cannot pay police or build roads, meaning that the taxpayers either need to pay the extra or accept fewer government services for their current taxes.

Would you please address that argument. Is the above calculation meaningful? Does it tell us anything about actual costs to citizens? It says to me that if America had no debt and paid no interest on debt, the government could collect about $3700/taxpayer less and provide the same service to its citizens. I consider that an actual cost to people, whether to taxpayers for money collected from them but not used to make their communities safer and more prosperous, or to people living in the US were those funds available to spend to improve their lives.

My larger point is that taxpayers often think the debt costs them nothing because they never get a bill for a payment on it, and I think that that is incorrect thinking.

 

[EconGuy]

Thanks for your answer and time

NP, I enjoy sharing this stuff as it's really important that people understand as what they believe about economics affects what people do, how they vote and ideas they support (or don't). For what it's worth I appreciate you being patient and asking questions and working to understand.

Good on you man.

After all, if there is no cost to him, shouldn't he encourage his government to borrow and spend as much as it can?

Great question.

I'm trying to answer your questions so that the answer presents itself. If I just tell you, "no, the government shouldn't spend as much as it can", you still won't know why I think that.

So here goes.


Now, your asking a few questions:

1. Does the government's debt have real costs on citizens?
2. Should the government spend as much as it can?

#1 Yes, the government's spending has real costs on citizens, but the costs aren't simply in dollars.

Let's say the government doesn't spend enough to pay for people or equipment to run an ambulance service. If you can't get to the hospital as fast as you might if there were sufficent services, then the cost is paid in your health.

On the other hand, let's say that the government is spending too much on infrastructure and the nation is running short of steel to build things with. This causes shortages and the ambulance company cannot acquire the ambulances it needs to service the area you live in.

Same result. The cost to you, in this case is your health.

The real costs to you and I aren't in dollars as the government can create all the dollars it wants, dollars are not the limitation. If the government doesn't spend enough so that the economy has the money it needs in order to do the business that it needs and wants to do then costs are paid in real terms. In other words, if there are people that need work and there is work that needs to be done, not spending enough money (or taxing too much) then the cost is unnecessarily high levels of unemployment.

If on the other hand, the government spends too much money (or taxes too little) then there is extra money in our hands, that can lead to shortages as demand for goods and services exceeds supply. But again, the cost isn't in dollars, it's in the grocery store that doesn't have any toilet paper!

#2 Should the government to spend as much as it can?

First, the government should spend as much as it needs (where spending as much as it needs is not the same as as much as it can) to ensure full employment IF the economy (this can include the global economy because as a nation we import a lot) has the necessary labor and raw materials that will be need by the private sector when full employment is reached, because if the government overspends it puts pressure on real resources and labor that can run out. When labor and resources run out, prices go up.

I believe that the cost of this debt to him is real.

It is absolute real, but not in the way you are thinking.

There is no cost to create dollars (unless we're talking about paper money, but that only makes up about ~3% of all money). There is no cost to the government beyond what it imposes on itself to carry debt, and remember the graph I already showed shows that over the last 80 years the cost of debt as a percentage of the size of the US economy has never gone above 3.5% of GDP.

Specifically, the cost per citizen

First, If we're simply taking the total costs and dividing it evenly among all citizens to get a "cost per citizen", then yes, but should a person who is in $100,000 in medical debt and owns almost nothing pay the same as a billionaire?

The answer to that question often is up to each person to decide for themselves. Is debt a matter of personal moral responsibility, or should we consider the health of the nation as a whole? We can tackle this later if you are interested.

It says to me that if America had no debt and paid no interest on debt, the government could collect about $3700/taxpayer less and provide the same service to its citizens.

That's just it....

If the government had no debt, the citizens wouldn't have any money.

I explained this, but I get that it's hard to understand because it's not very intuitive.

The government starts, in the very beginning with no money. Zero, nothing. To create a dollar, the government splits zero into 1 and -1 dollar.

The government holds the -1 (that's the debt) and it spends the 1 into the economy. If you give the dollar back, the government doesn't have 1 dollar, it goes back to zero.

So today the government has $32 trillion dollars in debt and $32 trillion dollars the government created is now circulating in the economy (there's a LOT more dollars than that, but that has to do with the way banks work, but we can't even discuss that until we understand this part).

And I also explained that "debt" is an asset to people in the private and foreign sectors. Many people think of the government's debt as their debt, no, the government's debt is an asset to anyone that buys it.

How long can we have trillions of dollars in debt?

As long as the private sector continues to create trillions of dollars in goods that we can buy with those same dollars.

My larger point is that taxpayers often think the debt costs them nothing because they never get a bill for a payment on it, and I think that that is incorrect thinking.

As I've said, you are right, there is a cost, but the costs are real. If the government spends too much or to little.

Think of it like this:

The window moves right or left based mostly on external economic conditions, wars, pandemics, energy crisis etc.

I hope this helps.