The U.S. is NOT Bankrupt – It’s Impossible

I’ll try to make this point again: the U.S. government can NOT go bankrupt.  It’s impossible for it to default on U.S. government bonds.  Just like it’s impossible for Japan, Australia, Canada, the U.K., or any of the other nations that: have a non-convertible, floating exchange-rate currency and that borrow funds in their own currency.  I’m far from the only one saying this. I know Bill Mitchell at Billy Blog and the folks at New Economic Perspectives have to be nearing exhaustion from  explain it over-and-over-and-over again.  But this time, let’s try the high apostle and saint of monetary policy, none other than the former 17-year chair of the Federal Reserve, Alan Greenspan (the bold emphasis is mine):

Central banks can issue currency, a noninterest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank.

That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit. To be sure, if a central bank produces too many, inflation will inexorably rise as will interest rates, and economic activity will inevitably be constrained by the misallocation of resources induced by inflation. If it produces too few, the economy’s expansion also will presumably be constrained by a shortage of the necessary lubricant for transactions. Authorities must struggle continuously to find the proper balance.

It was not always thus. For most of the period prior to the early 1930s, obligations of governments in major countries were payable in gold. This meant the whole outstanding debt of government was subject to redemption in a medium, the quantity of which could not be altered at the will of government. Hence, debt issuance and budget deficits were delimited by the potential market response to an inflated economy. It was even possible in such a monetary regime for a government to become insolvent. Indeed, the United States skirted on the edges of bankruptcy in 1895 when our government gold stock shrank ominously and was bailed out by a last minute gold loan, underwritten by a Wall Street syndicate.

There. Any questions?   Lest you think I have played some sort of out-of-context trick with this quote, you can read the whole speech here. BTW, you’ll also find out that, yes, a gold standard is dumb and destructive.


5 Myths about Taxes

Bob Stoker (via TheMonkeyCage ) tries to shed light on the darkness by dispelling 5 myths about taxes.

Myth #1: Federal taxes are higher than they have ever been.

According to the Congressional Budget Office (CBO), the opposite is true. Budget analysts typically measure the federal tax burden as a proportion of GDP because this accounts for the amount of our economic output that is devoted to paying federal taxes as the economy grows or contracts. Federal taxes from all sources were 14.8% of GDP in 2009 and are projected to be 14.6% of GDP in 2010. See the CBO report, “The Budget and Economic Outlook: An Update,” August 2010, Table 1-2 (pdf).

By comparison, the lowest tax burden during Ronald Reagan’s Presidency was 17.3% of GDP. Under President Bush federal taxes reached their low point at 16.3% of GDP. See the CBO historic budget tables:

Myth #2: People at the top of the income distribution pay more than half of their incomes in federal taxes.

According to the Tax Policy Center, the average federal tax rate in 2009 (including income taxes, payroll taxes, estate taxes, and corporate taxes) among the top 20% of the income distribution was 22.9%. Among the top 1% of the income distribution, 26.1%; among the top 0.1 of the income distribution, 27.9. The top one tenth of one percent of the income distribution paid an average federal tax rate of less than 28%.

Myth #3: Poor people don’t pay taxes.

It would be more accurate to say working poor families with several children don’t pay federal taxes. According to the Tax Policy Center, the average federal tax burden on the bottom 20% of the income distribution is negative…that means, people in this income range typically get more money back from the federal government than they pay in federal taxes. However, this is a consequence of the Earned Income Tax Credit (EITC) and the Child Tax Credit. For most families the most generous benefits are provided by the EITC and you must work to receive this credit. The current value of the credit is $5,657 for families with three or more qualifying children. Although modest EITC benefits are available to childless taxpayers, the credit is much more generous for families with children. When the generous benefits that are provided for working poor families are aggregated with others in the bottom 20% of the income distribution, the overall federal tax rate for this group is negative.

Myth #4: Federal marginal tax rates always go up as income increases.

The marginal tax rate is the rate that is applied to the last dollar of taxable income. Although it is generally true that federal marginal tax rates increase with income (because the personal income tax is progressive), this is not always true. The FICA tax that supports Social Security and Medicare is a significant portion of the federal tax burden for many taxpayers. The part of the FICA tax that supports Social Security (a 6.2% tax on earned income that is paid by employees and employers) has an income cap (currently $106,800). Earned income above that cap is excluded from the tax. Beyond this, at present unearned income is entirely excluded from the FICA tax (though this is scheduled to change for the part of the FICA tax that supports Medicare under provisions of the federal health care reform). Because most calculations of the federal tax burden include both the employer’s and employee’s share, moving earned income just above the cap reduces the federal marginal tax rate by 12.6%. Here is a history of FICA tax rates from the Social Security Administration.

Myth #5: Only affluent people pay federal taxes.

It is true that people in the top 20% of the income distribution provided 67.2% of federal tax revenues in 2009. However, they receive 54.3% of cash income. Despite this however, most American households pay a share of the federal tax burden. Although 47% of households paid no federal income taxes, two-thirds of these households did pay social insurance taxes to support Social Security and Medicare. The “deadbeats” who paid neither tax were mostly elderly people and people with annual incomes below $20,000. See again the analysis of the Tax Policy Center:


Social Security presentation: Will It Be There?

An update:

I’m  giving gave an open lecture/presentation at the college today Oct 20 on the future viability of Social Security and the crisis rhetoric surrounding it. It’s available to view or download here: Powerpoint file Download (no sound).

I had plans to make a video out of it, but time has gotten the best of me.  So, I’ve posted the audio-only from the presentation.  Listen to it while you watch the slides.  Sorry, it’s not edited so it starts slow but it’s all there.  Download the MP3 audio file:

All materials are Creative Commons Copyright, Non-Commercial and Share-Alike license, so feel free to re-use.

Also another very useful (and re-usable) presentation on the same subject comes from National Academy for Social Insurance.  It’s available here:    Powerpoint of “Financing_Social_Security.ppt” or  here: Financing Social Security (in PowerPoint)

Ignorance, Voting, Pun, and Politics

The midterm elections this week went pretty much as early polls expected: Big Republican wins in the House, some Republican gains in the Senate, and lots of attention to the Tea Partiers.  The Pundits and Political People (Krugman calls them “the Very Serious People”), the Washington, D.C. people who deem to tell us what we think even though they have no clue what life is like outside Washington/NYC, in the lower 90% of the income distribution, or to not have a job, are telling us what “it all means”.  Unfortunately I think they’re missing a lot of stories.  One of the big stories is that while yes, the people who voted went strongly for Republicans and relatively anti-incumbent, but there really weren’t that many people voting.  Many stayed home which isn’t surprising given how Obama has largely given up on a progressive agenda – the healthcare reform bill looked exactly like what Republican Romney did in Massachusetts, the financial reform/regulation bill is toothless and largely written by bankers, the stimulus bill was too small by 1/2, reducing unemployment abandoned as a goal, and bankers given a free ride.

I interpret the results not as an endorsement of Tea Party/Republican platforms, but instead as pure rejection of Obama’s weak, let’s do Republican/Bush-lite policies.  Those independent voters that voted, voted against the present regime.  The Democrats stayed home and didn’t vote.  It’s definitely not an endorsement of the economic soundness of the one-liner economics policies proposed by Tea Partiers/Republicans.  The voters are going on emotion and what today’s condition is – not knowledge or analysis.  Unfortunately, there’s a lot of ignorance and prejudice involved too – things like perceptions that Germany has done better by pursuing austerity policies (it’s neither done better nor pursued pure austerity), or that the debt must be paid off.  I turn the podium to Brad Delong and Paul Krugman:

Democrats Favor New Stimulus; Republicans, Healthcare Repeal.png

A plurality of voters want to see a new economic stimulus bill–called a stimulus–to create jobs. Even 18% of Republicans and 32% of independents think a new job-creating stimulus bill should be Congress’s highest priority. Yet is Congress going to pass one? No. Is the Treasury leveraging up its TARP money and using it to stimulate the economy? No. The Federal Reserve–well, the forecasts are that the Federal Reserve’s quantitative easing programs may add between 0.2% and 0.5% to economic growth next year, although I do not see how the estimates can be so high unless the program has a large effect on inflation expectations.

This is an absolutely remarkable government that we have. And an absolutely remarkable political class.

Paul Krugman takes on the Very Serious People:

The Strange Death of Fiscal Policy – One clear result of the midterms is that we won’t have anything like a further round of stimulus. And this, in turn, means that the narrative all the Very Serious People will tell is that fiscal policy was tried, it failed, and that’s that.

But the real facts don’t at all support the conventional wisdom.

Actually, let me focus on an international comparison. You often hear the US experience contrasted with Germany: America, we’re told, went for Keynesian policies, while Germany chose austerity, and Germany did better.

The Strange Death of Fiscal Policy -

But as far as GDP is concerned, Germany did not, in fact, do better.

This is, I think, the most amazing thing I hear as I wander around talking to the necktie-wearing class: they genuinely do think that real GDP in Germany fell less than real GDP in America–and I cannot figure out where this belief cam from.

Paul goes on:

Yes, Germany did better on employment — but this reflects policies that American conservatives surely don’t support, including employment subsidies, strong unions, and rules making it difficult to fire workers.

And what may be even more surprising: if we look at actual government purchases of goods and services, as opposed to transfer payments (many of them just payments from the federal government to states), Germany was more Keynesian than the United States:

The Strange Death of Fiscal Policy -

So, it’s an amazing thing: Obama and company have managed to convince people that big government failed, without actually delivering big government.

Brad DeLong on November 03, 2010 at 05:50 PM in EconomicsEconomics: Fiscal PolicyObama A


Jobs & Unemployment, Oct 2010

The October 2010 jobs and unemployment report is out this morning.  Mark Thoma nails my thoughts pretty well:

The BLS reports that unemployment was unchanged in October at 9.6%, and Nonfarm payroll employment increased by 151,000.

I’ve seen some people calling this a strong report. It’s certainly better than lower job growth numbers, so it could have been worse, but in past recoveries we’ve had job growth of hundreds of thousands, far more that this. So let’s try to put it in perspective. Many people estimate that 7.5 million jobs have been lost since the start of the recession (and some people estimate it’s even more than this). Suppose it takes 100,000 jobs per month to keep up with population growth. I think it’s a bit more than this, but let’s take an estimate that is generous in terms of making up lost ground. With a net gain of 50,000 jobs (rounding from 51,000), how long would it take to reemploy the 7.5 million who need jobs? The answer is (7.5 million)/(50,000) = 150 months = 12.5 years. That gives an indication of the strength of the report. Some of the 7.5 million might drop out of the labor force reducing the time a bit, but having people drop out of the labor force is not good news either.

The Report is better than it could have been, but we need more job growth than this. Let’s hope it picks up in coming months.

Unfortunately, “hope” is about all we have left.  The new Congress does sound like it is going to do anything intelligent to improve employment prospects in the economy, although people with existing jobs paying  more than $500,000 ought are probably ecstatic.

Calculated Risk shows just how bad the employment picture is.  If you extrapolate this curve, you’ll figure we’re probably looking at another 4 years minimum till we recover the jobs we lost in this recession (assuming we ever get them back).

Percent Job Losses by Recession, from Calculated Risk