Tag Archives: debt

Roubini on debt and inequality

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Nouriel Roubini says the world is headed for a debt crisis. This kind of makes sense. Countries that have to repay their debts in U.S. dollars are in trouble as more of their currencies are required to buy a U.S. dollar. And everybody including the U.S. will be paying more in interest on their debts and this will cut into our budgets for other things.

Income and wealth inequality have been rising within countries for many reasons. Notable factors include trade and globalization, technological innovation (which is capital-intensive, skill-biased, and labor-saving), the self-reinforcing political power of economic and financial elites, the concentration of oligopolistic power in the corporate sector, and the declining power of labor and unions. Together, these factors have triggered a backlash against liberal democracy.

Project Syndicate

I’m with his logic up to that last sentence. Logically, the solution to these problems would seem to be more democracy rather than less. But we seem to be caught in a situation where the rich and powerful are able to influence the masses through propaganda to oppose policies that would help to address these very problems. Solutions would include (1) limits on the ability of wealthy people, institutions and corporations to pay for political campaigns that elect politicians who are then beholden to their interests, (2) value added taxes designed to raise revenue from the fruits of labor-saving technological innovation, which can then be spent on services to benefit the displaced laborers, and (3) anti-monopoly action, and (4) pro-union policies. I’m always a bit shaky on #4, because unions can serve as a break on innovation and efficiency, and they often benefit some workers at the expense of others, and they have a history of corruption. But they are undeniably a political counterweight to corporate power.

infrastructure decay like “hidden debt”?

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This article describes the U.S. lack of needed investment in infrastructure and (including maintenance) and renewable energy as a “hidden debt” that will come due. They liken it to not disclosing to a home buyer that your roof needs repairs, which if disclosed would reduce the expected selling price of the home. I don’t know about the accounting questions involved, but as a communication approach maybe this could work.

The federal government also has debt that has not been accounted for, and which one doesn’t often hear about. The debt that has been accounted for is the $15.6 trillionheld by the public in the form of US Treasury bonds. The debts that have not been accounted for include the deferred costs of maintenance on roads, water systems, and 54,560 structurally deficient bridges, as well as the yet-to-be-built low-carbon energy systems necessary to mitigate the catastrophic effects of climate change. And these are just two broad examples.

So, just how much hidden US debt is there? At this point, we must rely on rough estimates. For example, according to a 2016 report from the American Society of Civil Engineers (ASCE), upgrading the country’s crumbling infrastructure would cost $5.2 trillion. And, according to a 2014 International Energy Agency (IEA) report and our own calculations based on the US share of global CO2 emissions, transitioning to a clean-energy system will cost an additional $6.6 trillion. All told, that is $11.8 trillion in unaccounted-for non-inflation-adjusted liabilities.

money, debt, investment, and growth

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It’s interesting how economists talk about money, debt, investment, and growth. If you’re not an economist, you have to tie your brain lobes in a few knots to make sense of it. This is Michael Spence from NYU:

high unemployment, high and rising debt levels, and a global shortage of aggregate demand are constraining growth and generating deflationary pressures. And now, as then, the level and quality of investment have been consistently inadequate, with public spending on tangible and intangible capital – a critical factor in long-term growth – well below optimal levels for some time.

Of course, there are also new challenges. The dynamics of income distribution have shifted adversely in recent decades, impeding consensus on economic policy. And aging populations – a result of rising longevity and declining fertility – are putting pressure on public finances.

Nonetheless, the ingredients of an effective strategy to spur economic growth and employment are similar: available balance sheets (sovereign and private) should be used to generate additional demand and boost public investment, even if it results in greater leverage. Recent IMF research suggests that, given excess capacity, governments would probably benefit from substantial short-run multipliers. More important, the focus on investment would improve prospects for long-term sustainable growth, which would enable governments and households to pursue responsible deleveraging.

Here’s what I think it means. “Global shortage of adequate demand” means people aren’t spending enough money to support productive activity in the economy. Either they don’t have the money or they are saving it instead of spending it. Of course, we need a productive economy to generate the jobs and wages that get people money to spend. So it’s a chicken and egg problem that can spiral downwards once it gets started (“deflationary pressures”). Governments also aren’t investing in productive activity, either because they are afraid of debt or aren’t taking in enough taxes, or both. “Available balance sheets” means they should just wish new money into existence (governments can do that!) and spend it on investments like infrastructure, education, and research that tend to support long-term growth, which would get people more money, which they could spend to support more productive activity, and so on in a virtuous cycle. Money isn’t really real, as long as we think it is real. Debt doesn’t matter, as long as we believe it does matter. Belief in money and fear of debt usually stops us short of the absolute physical limits placed on us by our physical environment.