Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • No, the 90 Percent Debt Threshold Hasn't Been Proven

    Jan 28, 2013Mike Konczal

    The deficit hawks at the Washington Post editorial board are worried. They are worried that the deficit is falling and the debt-to-GDP ratio is leveling off as a result of the numerous cuts and tax increases implemented over the past two years. Liberals know this and are starting to push back, either claiming that the deficit is coming down too quickly or arguing that the main medium-term deficit issues are taken care of and we should focus more on unemployment and other non-budget issues while implementing Obamacare reforms well. The CBPP has been leading the charge on this, noting various levels at which debt as a percent of GDP would level off in the following graphic:

    The editorial focuses on the debt-to-GDP ratio leveling out too close to a 90 percent threshold. The writers also claim that there is a well-defined and well-established 90 percent threshold over which our economy will suffer. They write, "The CBPP analysis assumes steady economic growth and no war. If that’s even slightly off, debt-to-GDP could keep rising — and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth." This 90 percent threshold was proposed by Carmen Reinhart and Kenneth Rogoff in their 2010 article "Growth in a Time of Debt" (GITD). They found that economies with public debt over 90 percent of debt-to-GDP grew more slowly than other countries.

    It's always tough to figure out where consensus among economists lies. But economists don't "regard" the 90 percent mark as definitive; in fact, this study and its claim have never even been peer reviewed by an economics journal. [1]

    I don't bring this up because something that's peer reviewed should automatically be accepted as definitive, or that credentials are everything, or that only Very Serious Economics matter. (That's a bad rule in general, and as an economics blogger that would be a doubly insane claim.) I bring it up only because the public should understand that the 90 percent threshold couldn't survive peer review for a very important reason: It's impossible to seperate the cause and effect here given the evidence collected. Policymakers and deficit hawks should reconsider if they're running under the assumption that this is a well-established rule.

    Remember that growth that is suprisingly slow will increase the debt-to-GDP ratio relative to expectations by definition. And periods of slower growth will lead to higher debt levels. That doesn't mean that those debt loads caused the slower growth -- in these cases it would be just the opposite. Reinhart and Rogoff present no techniques, tools or theory to break this problem down and determine what is the cause and what is the effect in this debt versus GDP relationship.

    As John Irons and Josh Bivens of EPI noted in their review of the GITD paper (my bold):

    First, the theory that governs the relation between debt and growth suggests strongly that causality runs more firmly from slower growth to higher debt loads. Slow economic growth, and especially growth that is slower than policy makers’ expectations, will lead to higher levels of debt as revenues fall and as automatic-stabilizer spending increases... Importantly, the timing matters. Persistent slow growth will yield high debt levels, and will thus mechanically yield to contemporaneous combinations of high debt and slow growth...

    In short, the statistical evidence strongly suggests that the causality runs from growth to debt, and not the reverse. Given that theory and preliminary investigation agree in this case, it seems clear that the GITD analysis—which looks only at contemporaneous levels of debt and growth—is much more likely to capture causal relationships running from slow growth to high debt. This means there is very little reason for policy makers to think that there is a high-debt threshold that acts to slow growth.

    As one economist wrote me in an email, "it is likely unpublishable in a top journal due to the fact that they have not developed any techniques to tease out causality in what are suggestive but non-conclusive correlations. For this work to be the *one* thing that politicians decide to take from economics is horrible."

    You can think that lower debt is better than higher debt ratios. You can be worried about interest payments, even though those are at a 30-year low and projected to go back to historical averages. But there isn't a great reason to believe that that leveling out at 80 versus 90 percent of GDP matters that much when we have mass unemployment, low interest rates, and inflation in check. Growth matters just as much as GDP for this calculation, and it's a terrible deal if we sacrifice either immediate growth or long-term investments in an attempt to bring down this debt-to-GDP ratio. There isn't good evidence that the levels matter that much if the plan works, and it is likely the plan won't work. Weakening growth is likely to balloon that deficit as well.

    It's important to get a sense of where the deficit hawks will focus next because, if it is true that the deficit wars are coming to an end, all those giant deficit hawk groups are still funded through the apocalypse. Their mission will be that of Peter Venkman in Ghostbusters: "Type something, will you? We're paying for this stuff." How will they keep busy and justify their taxpayer-subsidized funding? We may have just gotten an important glimpse.

    [1] According to their C.V.s, it's been published in the May 2010 issue of the American Economic Review, which is a special non-reviewed "papers and proceedings" issue.

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    The deficit hawks at the Washington Post editorial board are worried. They are worried that the deficit is falling and the debt-to-GDP ratio is leveling off as a result of the numerous cuts and tax increases implemented over the past two years. Liberals know this and are starting to push back, either claiming that the deficit is coming down too quickly or arguing that the main medium-term deficit issues are taken care of and we should focus more on unemployment and other non-budget issues while implementing Obamacare reforms well. The CBPP has been leading the charge on this, noting various levels at which debt as a percent of GDP would level off in the following graphic:

    The editorial focuses on the debt-to-GDP ratio leveling out too close to a 90 percent threshold. The writers also claim that there is a well-defined and well-established 90 percent threshold over which our economy will suffer. They write, "The CBPP analysis assumes steady economic growth and no war. If that’s even slightly off, debt-to-GDP could keep rising — and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth." This 90 percent threshold was proposed by Carmen Reinhart and Kenneth Rogoff in their 2010 article "Growth in a Time of Debt" (GITD). They found that economies with public debt over 90 percent of debt-to-GDP grew more slowly than other countries.

    It's always tough to figure out where consensus among economists lies. But economists don't "regard" the 90 percent mark as definitive; in fact, this study and its claim have never even been peer reviewed by an economics journal. [1]

    I don't bring this up because something that's peer reviewed should automatically be accepted as definitive, or that credentials are everything, or that only Very Serious Economics matter. (That's a bad rule in general, and as an economics blogger that would be a doubly insane claim.) I bring it up only because the public should understand that the 90 percent threshold couldn't survive peer review for a very important reason: It's impossible to seperate the cause and effect here given the evidence collected. Policymakers and deficit hawks should reconsider if they're running under the assumption that this is a well-established rule.

    Remember that growth that is suprisingly slow will increase the debt-to-GDP ratio relative to expectations by definition. And periods of slower growth will lead to higher debt levels. That doesn't mean that those debt loads caused the slower growth -- in these cases it would be just the opposite. Reinhart and Rogoff present no techniques, tools or theory to break this problem down and determine what is the cause and what is the effect in this debt versus GDP relationship.

    As John Irons and Josh Bivens of EPI noted in their review of the GITD paper (my bold):

    First, the theory that governs the relation between debt and growth suggests strongly that causality runs more firmly from slower growth to higher debt loads. Slow economic growth, and especially growth that is slower than policy makers’ expectations, will lead to higher levels of debt as revenues fall and as automatic-stabilizer spending increases... Importantly, the timing matters. Persistent slow growth will yield high debt levels, and will thus mechanically yield to contemporaneous combinations of high debt and slow growth...

    In short, the statistical evidence strongly suggests that the causality runs from growth to debt, and not the reverse. Given that theory and preliminary investigation agree in this case, it seems clear that the GITD analysis—which looks only at contemporaneous levels of debt and growth—is much more likely to capture causal relationships running from slow growth to high debt. This means there is very little reason for policy makers to think that there is a high-debt threshold that acts to slow growth.

    As one economist wrote me in an email, "it is likely unpublishable in a top journal due to the fact that they have not developed any techniques to tease out causality in what are suggestive but non-conclusive correlations. For this work to be the *one* thing that politicians decide to take from economics is horrible."

    You can think that lower debt is better than higher debt ratios. You can be worried about interest payments, even though those are at a 30-year low and projected to go back to historical averages. But there isn't a great reason to believe that that leveling out at 80 versus 90 percent of GDP matters that much when we have mass unemployment, low interest rates, and inflation in check. Growth matters just as much as GDP for this calculation, and it's a terrible deal if we sacrifice either immediate growth or long-term investments in an attempt to bring down this debt-to-GDP ratio. There isn't good evidence that the levels matter that much if the plan works, and it is likely the plan won't work. Weakening growth is likely to balloon that deficit as well.

    It's important to get a sense of where the deficit hawks will focus next because, if it is true that the deficit wars are coming to an end, all those giant deficit hawk groups are still funded through the apocalypse. Their mission will be that of Peter Venkman in Ghostbusters: "Type something, will you? We're paying for this stuff." How will they keep busy and justify their taxpayer-subsidized funding? We may have just gotten an important glimpse.

    [1] According to their C.V.s, it's been published in the May 2010 issue of the American Economic Review, which is a special non-reviewed "papers and proceedings" issue.

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  • The Most Important Graph on the Deficit

    Jan 22, 2013Mike Konczal

    Another friendly reminder, especially as you are deluged by pundit commentary about the budget, debt, and deficit, that there's one graphic to keep in mind about the current budget situation. From CBO:

    As you can see, in 2009 our country goes into a deep recession. As a response, automatic stabilizers kick in, increasing spending through things like unemployment insurance and food stamps. Meanwhile receipts fall, as there is less economic activity and jobs that generate tax revenue, and taxes are cut further as a stimulus measure. This is not only natural, but to push back against it would have made the economy worse. That, in turn, would probably have blown out the deficit more.

    The deficit is just the difference between the two lines. As the economy slowly recovers, spending decreases and tax revenues increases. We already see this happening in the CBO graphic. From the Budget Control Act there will be less spending, and from the fiscal cliff there will be more revenue. If anything, we should be worried that gap is closing too quickly, suffocating the recovery as it starts to gain strength. But the gap is still decreasing. As many people noted, the gap is closing at record-high rates.
     
    There are long-term challenges driven by health care spending. Our course of action is to see if the cost control mechanisms in Obamacare work, and go from there if they don't, which I think is the right course. Certainly, after all the political pain of "cutting Medicare" and passing Obamacare, they'd be insane not to see how it works. And it is possible it is already working, with Medicare spending starting to drop.
     

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    Another friendly reminder, especially as you are deluged by pundit commentary about the budget, debt, and deficit, that there's one graphic to keep in mind about the current budget situation. From CBO:

    As you can see, in 2009 our country goes into a deep recession. As a response, automatic stabilizers kick in, increasing spending through things like unemployment insurance and food stamps. Meanwhile receipts fall, as there is less economic activity and jobs that generate tax revenue, and taxes are cut further as a stimulus measure. This is not only natural, but to push back against it would have made the economy worse. That, in turn, would probably have blown out the deficit more.

    The deficit is just the difference between the two lines. As the economy slowly recovers, spending decreases and tax revenues increases. We already see this happening in the CBO graphic. From the Budget Control Act there will be less spending, and from the fiscal cliff there will be more revenue. If anything, we should be worried that gap is closing too quickly, suffocating the recovery as it starts to gain strength. But the gap is still decreasing. As many people noted, the gap is closing at record-high rates.
     
    There are long-term challenges driven by health care spending. Our course of action is to see if the cost control mechanisms in Obamacare work, and go from there if they don't, which I think is the right course. Certainly, after all the political pain of "cutting Medicare" and passing Obamacare, they'd be insane not to see how it works. And it is possible it is already working, with Medicare spending starting to drop.
     

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  • How Has the Liberal Project Fared Under President Obama?

    Jan 22, 2013Mike Konczal

    After President Obama's inaugural address yesterday -- “one of the most expansively progressive Inaugural Addresses in decades," as President Clinton's former speechwriter told Greg Sargent -- many are looking at the liberal project from the point of view of what was accomplished in the first term as well as what is possible in the second. Paul Krugman makes one version of this argument in The Big Deal, arguing, "as the second term begins [liberals should] find grounds for a lot of (qualified) satisfaction." Elias Isquith, Ned Resnikoff, and Jamelle Bouie discussed the health of the liberal project, especially the fate of social insurance, last month.

    People will be engaging with these questions for the foreseeable future, starting in the next few weeks and continuing for a generation of scholars. I'm not sure if I have good answers, but I do have good questions. I've created a generalizable framework of what the component parts of the modern, domestic liberal project are so I can map how they've fared in the first term and what the challenges for each are going ahead. Liberalism is a project of freedom, of course. But by mapping it into component parts of managing the macroeconomy, a mixed economy, a strong regulatory state, and a system of social insurance, allows us to chart progress and retreat.

    I'm going to address where I think these issues stand in the current debate among liberals, so it'll have a "on the one hand and also the other hand" dynamic. (The framework might seem ad hoc, but it could be built from theoretical grounds [1].) 

    Managing the Macroeconomy

    Goals: Taming the business cycle, Keynesian demand management, full employment.

    The first term began with the worst downturn since the Great Depression, and normal monetary policy was immediately put in check. The mass unemployment of the past several years has thrown this Keynesian project into complete disarray. It hasn't helped that voters no longer think that the government is capable of doing much here, which is an unfortunate side effect of the weak response.

    There's already been an extensive debate about what could have been done to generate more stimulus early on in the administration instead of pivoting away to deficit reduction. After the GOP took the House in 2010, there were two initiatives to try and meet the GOP halfway on stimulus. There was the approach of trying to propose stimulus the GOP would potentially support, like the American Jobs Bill. Remember that Congressional address in which the president said "pass this jobs bill" over and over? There was also the approach of seeking Grand Bargains for additional stimulus. This involved exchanging, say, Social Security cuts for infrastructure spending and some tax revenue. For better or worse, but mostly better, this failed because Republicans refuse to raise taxes.

    But this all means that we are still stuck with high unemployment rates for the foreseeable future. It is unlikely that there will be stimulus in the second term; we should hope that some of the harsher cuts, like the sequestration, are postponed while the economy is weak.

    Investing in the Mixed Economy

    Goals: Creating the conditions for long-term growth, investing in public goods, protecting the public sector.

    In addition to managing the short-term economy, there's also the issue of setting the stage for longer-term growth. This is necessarily a grab-bag category, overlapping with the other categories, but it is useful to distinguish it from short-term unemployment. Michael Grunwald's excellent book The New New Deal revived the extensive investment in energy and other innovations that were part of the stimulus. Preventing the mass firesale and collapse of the auto industry were crucial as well.

    But there's been a decline in primary and secondary education investment driven by the states, as well as a large decrease in the number of government employees. That's largely the focus of states. At the federal level, investments in infrastructure, research and development, and education, all crucial to building longer-term prosperity, are at risk. Through the Budget Control Act and upcoming sequestration, President Obama and Congress have cut non-defense discretionary spending in order to balance the medium-term debt-to-GDP ratio. As EPI's Ethan Pollack notes, it is difficult to cut here without threatening long-term prosperity.

    The stimulus brought a large wave of investment, but that could be more than cancelled out by both collapsing state budgets and long-term austerity and cuts.

    Social Insurance

    Goals: Sharing risks from poverty, large declines in income, and health problems.

    The obvious win over the past four years is Obamacare. Universal health care was the missing piece in the safety net, and efforts to try and tackle this problem have failed every 20 years going back a century. It also survived the Supreme Court, making it the law of the land.

    Democratic Senator Tom Harkin called Obamacare a “starter home," which could be generous. The biggest fear I have is that when the government turns it on in 2013, it is viewed as a costly disaster. It isn't clear that Medicare costs would then be lowered and the whole idea of government health-care could be tossed overboard. The damage could be greater than just Obamacare itself. Greg Anrig worries that states can still sabotage the exchanges. Sarah Kliff has an overview on Obamacare implementation over the next four years.

    The defeat of Romney and Ryan means that the conservative plans to voucherize Medicare, privatize Social Security, and block-grant everything that's not bolted to the floor is off the table, perhaps for a while. What's possible in the next few years is means-testing the programs, raising their eligibility age, and otherwise reducing benefits. The administration's proposed willingness to raise the eligibility age for retirement programs in exchange for non-social insurance related goals, like stimulus, is bad news on this frontier.

    Much rides on Obamacare's success, both bending the cost curve of healthcare to fix the long-term deficit and the credibility of government more broadly.

    Regulatory State

    Goals: Creating rules for the marketplace that check market failures and power.

    The failure to tackle climate change will be remembered as the biggest problem of President Obama's first term. He was largely silent on the issue while a bill went through Senate, though has gotten louder on the topic recently, including in the Inaugural.

    Dodd-Frank consolidated regulators, added powers necessary to rationalize the derivatives market, and created a beefed-up consumer regulator. It didn't break up the banks and the Volcker Rule is very much uncertain. It's fair to say it gives regulators a lot of powers they should have had going into 2008 and checks some of the larger deregulations and market failures of the 2000s. There's a remaining sense, however, that Wall Street is outside of the normal accountability mechanisms of the state.

    It's probably too early to tell how much reform was jettisoned through Cass Sunstein, the "ambivalent regulator" in charge of OIRA. But my sense is that there were genuine liberals in regulatory agencies pushing strong reform at places like the EPA and the NLRB.

    Carbon is still a major threat, though it looks like the President will make a major push in his second term on the issue. There's a growing bipartisan argument for breaking up the Too Big To Fail banks, which, even if it doesn't turn into law, could put additional pressure on how financial elites have become detached from the normal modes of accountability and law.

    What's your take? This framework is obviously missing international and civil libertarian projects. There is the escalation of war in Afghanistan, as well as the larger deployment of drones to more theaters, both of which are major problems. The embrace of the legacy of torture is a betrayal of civil liberties. Congress will eventually need to step up and check the power of the executive branch, yet they seem just as bad as the administration.

    [1] If you want a more theoretical treatment on one way to get to this mapping, John Rawls proposed four "branches" of government in a Theory of Justice that loosely map onto these categories. The allocation branch works like the regulatory state, the stabilization branch as managing the macroeconomy, and the transfer branch for social insurance.

    Follow or contact the Rortybomb blog:

      

    After President Obama's inaugural address yesterday -- “one of the most expansively progressive Inaugural Addresses in decades," as President Clinton's former speechwriter told Greg Sargent -- many are looking at the liberal project from the point of view of what was accomplished in the first term as well as what is possible in the second. Paul Krugman makes one version of this argument in The Big Deal, arguing, "as the second term begins [liberals should] find grounds for a lot of (qualified) satisfaction." Elias Isquith, Ned Resnikoff, and Jamelle Bouie discussed the health of the liberal project, especially the fate of social insurance, last month.

    People will be engaging with these questions for the foreseeable future, starting in the next few weeks and continuing for a generation of scholars. I'm not sure if I have good answers, but I do have good questions. I've created a generalizable framework of what the component parts of the modern, domestic liberal project are so I can map how they've fared in the first term and what the challenges for each are going ahead. Liberalism is a project of freedom, of course. But by mapping it into component parts of managing the macroeconomy, a mixed economy, a strong regulatory state, and a system of social insurance, allows us to chart progress and retreat.

    I'm going to address where I think these issues stand in the current debate among liberals, so it'll have a "on the one hand and also the other hand" dynamic. (The framework might seem ad hoc, but it could be built from theoretical grounds [1].) 

    Managing the Macroeconomy

    Goals: Taming the business cycle, Keynesian demand management, full employment.

    The first term began with the worst downturn since the Great Depression, and normal monetary policy was immediately put in check. The mass unemployment of the past several years has thrown this Keynesian project into complete disarray. It hasn't helped that voters no longer think that the government is capable of doing much here, which is an unfortunate side effect of the weak response.

    There's already been an extensive debate about what could have been done to generate more stimulus early on in the administration instead of pivoting away to deficit reduction. After the GOP took the House in 2010, there were two initiatives to try and meet the GOP halfway on stimulus. There was the approach of trying to propose stimulus the GOP would potentially support, like the American Jobs Bill. Remember that Congressional address in which the president said "pass this jobs bill" over and over? There was also the approach of seeking Grand Bargains for additional stimulus. This involved exchanging, say, Social Security cuts for infrastructure spending and some tax revenue. For better or worse, but mostly better, this failed because Republicans refuse to raise taxes.

    But this all means that we are still stuck with high unemployment rates for the foreseeable future. It is unlikely that there will be stimulus in the second term; we should hope that some of the harsher cuts, like the sequestration, are postponed while the economy is weak.

    Investing in the Mixed Economy

    Goals: Creating the conditions for long-term growth, investing in public goods, protecting the public sector.

    In addition to managing the short-term economy, there's also the issue of setting the stage for longer-term growth. This is necessarily a grab-bag category, overlapping with the other categories, but it is useful to distinguish it from short-term unemployment. Michael Grunwald's excellent book The New New Deal revived the extensive investment in energy and other innovations that were part of the stimulus. Preventing the mass firesale and collapse of the auto industry were crucial as well.

    But there's been a decline in primary and secondary education investment driven by the states, as well as a large decrease in the number of government employees. That's largely the focus of states. At the federal level, investments in infrastructure, research and development, and education, all crucial to building longer-term prosperity, are at risk. Through the Budget Control Act and upcoming sequestration, President Obama and Congress have cut non-defense discretionary spending in order to balance the medium-term debt-to-GDP ratio. As EPI's Ethan Pollack notes, it is difficult to cut here without threatening long-term prosperity.

    The stimulus brought a large wave of investment, but that could be more than cancelled out by both collapsing state budgets and long-term austerity and cuts.

    Social Insurance

    Goals: Sharing risks from poverty, large declines in income, and health problems.

    The obvious win over the past four years is Obamacare. Universal health care was the missing piece in the safety net, and efforts to try and tackle this problem have failed every 20 years going back a century. It also survived the Supreme Court, making it the law of the land.

    Democratic Senator Tom Harkin called Obamacare a “starter home," which could be generous. The biggest fear I have is that when the government turns it on in 2013, it is viewed as a costly disaster. It isn't clear that Medicare costs would then be lowered and the whole idea of government health-care could be tossed overboard. The damage could be greater than just Obamacare itself. Greg Anrig worries that states can still sabotage the exchanges. Sarah Kliff has an overview on Obamacare implementation over the next four years.

    The defeat of Romney and Ryan means that the conservative plans to voucherize Medicare, privatize Social Security, and block-grant everything that's not bolted to the floor is off the table, perhaps for a while. What's possible in the next few years is means-testing the programs, raising their eligibility age, and otherwise reducing benefits. The administration's proposed willingness to raise the eligibility age for retirement programs in exchange for non-social insurance related goals, like stimulus, is bad news on this frontier.

    Much rides on Obamacare's success, both bending the cost curve of healthcare to fix the long-term deficit and the credibility of government more broadly.

    Regulatory State

    Goals: Creating rules for the marketplace that check market failures and power.

    The failure to tackle climate change will be remembered as the biggest problem of President Obama's first term. He was largely silent on the issue while a bill went through Senate, though has gotten louder on the topic recently, including in the Inaugural.

    Dodd-Frank consolidated regulators, added powers necessary to rationalize the derivatives market, and created a beefed-up consumer regulator. It didn't break up the banks and the Volcker Rule is very much uncertain. It's fair to say it gives regulators a lot of powers they should have had going into 2008 and checks some of the larger deregulations and market failures of the 2000s. There's a remaining sense, however, that Wall Street is outside of the normal accountability mechanisms of the state.

    It's probably too early to tell how much reform was jettisoned through Cass Sunstein, the "ambivalent regulator" in charge of OIRA. But my sense is that there were genuine liberals in regulatory agencies pushing strong reform at places like the EPA and the NLRB.

    Carbon is still a major threat, though it looks like the President will make a major push in his second term on the issue. There's a growing bipartisan argument for breaking up the Too Big To Fail banks, which, even if it doesn't turn into law, could put additional pressure on how financial elites have become detached from the normal modes of accountability and law.

    What's your take? This framework is obviously missing international and civil libertarian projects. There is the escalation of war in Afghanistan, as well as the larger deployment of drones to more theaters, both of which are major problems. The embrace of the legacy of torture is a betrayal of civil liberties. Congress will eventually need to step up and check the power of the executive branch, yet they seem just as bad as the administration.

    [1] If you want a more theoretical treatment on one way to get to this mapping, John Rawls proposed four "branches" of government in a Theory of Justice that loosely map onto these categories. The allocation branch works like the regulatory state, the stabilization branch as managing the macroeconomy, and the transfer branch for social insurance.

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    President Obama image via Shutterstock.com.

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  • Prioritization, Credit Risks and the Potential for Default

    Jan 15, 2013Mike Konczal

    Does going with "prioritization" if we going through the debt ceiling remove the risk of a debt default, defined in this post as a missed payment on the interest or principal of government debt? Suzy Khimm reports on the extensive talk on the right about how the government can't debt default if it decides to prioritize interest payments by paying them first. There's a lot of pushback on this line of reasoning (see Ezra Klein, Brian Beutler).

    The bigger danger is what happens when the government has to balance its budget in a single day. But it is worth shutting down this specific line of reasoning. Sorry conservatives: though it doesn't guarantee a default, going with this plan significantly increases the probability of default, which is what markets will be looking for.

    Fitch, the ratings agency, rightly calls BS on this logic:

    With no legal authorisation for net debt issuance, the Treasury would be forced to immediately eliminate the deficit - a fiscal contraction twice as great as the recently avoided 'fiscal cliff' - by delaying payments on commitments as they fall due. It is not assured that the Treasury would or legally could prioritise debt service over its myriad of other obligations, including social security payments, tax rebates and payments to contractors and employees. Arrears on such obligations would not constitute a default event from a sovereign rating perspective but very likely prompt a downgrade even as debt obligations continued to be met.

    Even if we successfully prioritize we'd be a higher risk for a default, prompting a downgrade. Trying this "prioritization" plan is not risk-free, but instead introduces substantial credit risk into government debt. I want to justify Fitch's assessment by looking at what would happen.
     
    As a former credit risk financial engineer who's been around a default probability transition matrix in his day, I see 5 major credit risks introduced by prioritization, which means it doesn't eliminate the risk of a debt default but in fact increases it. Let's get them in a chart:

    Let's go through them.
     
    1. Will It Work? The first, and most obvious, problem is that it isn't clear that they'll be able to do this successfully after the debt ceiling is breached. It hasn't been done before. As Brad Plumer notes, Fedwire, the program that handles interest payments, is seperate from the computers that handle other payments. Maybe this means it can work better; maybe it means that it won't be able to sync cash balances. As far as I can tell, nobody knows how this will work in an environment of extreme shutdown. If there are computer glitches, if the IT crowd can't get it all working in time, there's a chance of missing a payment and defaulting.
     
    2. Will There Be Enough Revenue? According to the BPC, February 15th has a $30 billion dollar interest payments with only $9 billion dollars coming in the door. Will we be able to make that payment? In general, we'll know the interest payments well in advance. However the revenues coming in will be uncertain, and, especially if we are making other payments, it may be difficult to match them up. Even a small mismatch could mean a default.
     
    3. Legal and Political Blowback. The civil unrest of paying foreign creditors while Social Security, military and domestic spending goes unpaid will be massive. One can easily see discontent in the streets over such a plan. If we are worried about future payments, this kind of rage generates future credit risks, and could cause the government to switch to a non-prioritization regime.
     
    Meanwhile, there will be extensive lawsuits, both over the lack of payments and President Obama's legal authority to prioritize payments. No matter what people are saying, the President's authority to legally do this is uncertain. Will the courts force him to pay claims in a different manner? All of this leads to huge uncertainty over the payments themselves, which amplify the chance of missing a payment.
     
    4. Rolling Over Debt. There's $500 billion dollars worth of debt that will need to be rolled over during the first month after we go through the debt ceiling. If, for some reason, any of it can't be rolled over, and there isn't a sufficient cash buffer built up, that would be a default. This is unlikely, though how unlikely it is is depends on numbers 1-3 and the level of economic chaos going through the debt ceiling generates. Especially if we are past the debt ceiling for a substantial period of time, rolling over our debt won't be a trivial operation. Though it is unlikely, if it happens it is an automatic default.
     
    5. Repeat Again Next Time. If Republicans are successful at pulling this off, they will do it again the next time the debt ceiling comes up. This will mean the risk of the first four factors identified are intensified.
     
    If anyone tells you that the credit risks from number 1-4 are zero, they are lying to you. Each of these has a very small chance of causing a debt default. Added together, they have a non-negliable chance of debt default such that the financial markets, and citizens themselves, should take note.
     
    Even if you think the chance of default in going through the debt ceiling is only about 2 percent, a 2 percent expected probability of default over the course of one year is what junk bonds have. This may be surprising for some of you, but even very small probabilities of default are big problems for firms. If there's a 0.87% chance, for instance, of default over the course of one year, that's non-investment grade debt.
     
    The government has no possibility of default except for this debt ceiling; hence our normal high rating. However the debt ceiling is where many on the right want to extract maximum concessions, even though it is the one place where you could see a chance of default. This, regardless of what they'll tell you, has consequences.
     

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    Does going with "prioritization" if we going through the debt ceiling remove the risk of a debt default, defined in this post as a missed payment on the interest or principal of government debt? Suzy Khimm reports on the extensive talk on the right about how the government can't debt default if it decides to prioritize interest payments by paying them first. There's a lot of pushback on this line of reasoning (see Ezra Klein, Brian Beutler).

    The bigger danger is what happens when the government has to balance its budget in a single day. But it is worth shutting down this specific line of reasoning. Sorry conservatives: though it doesn't guarantee a default, going with this plan significantly increases the probability of default, which is what markets will be looking for.

    Fitch, the ratings agency, rightly calls BS on this logic:

    With no legal authorisation for net debt issuance, the Treasury would be forced to immediately eliminate the deficit - a fiscal contraction twice as great as the recently avoided 'fiscal cliff' - by delaying payments on commitments as they fall due. It is not assured that the Treasury would or legally could prioritise debt service over its myriad of other obligations, including social security payments, tax rebates and payments to contractors and employees. Arrears on such obligations would not constitute a default event from a sovereign rating perspective but very likely prompt a downgrade even as debt obligations continued to be met.

    Even if we successfully prioritize we'd be a higher risk for a default, prompting a downgrade. Trying this "prioritization" plan is not risk-free, but instead introduces substantial credit risk into government debt. I want to justify Fitch's assessment by looking at what would happen.
     
    As a former credit risk financial engineer who's been around a default probability transition matrix in his day, I see 5 major credit risks introduced by prioritization, which means it doesn't eliminate the risk of a debt default but in fact increases it. Let's get them in a chart:

    Let's go through them.
     
    1. Will It Work? The first, and most obvious, problem is that it isn't clear that they'll be able to do this successfully after the debt ceiling is breached. It hasn't been done before. As Brad Plumer notes, Fedwire, the program that handles interest payments, is seperate from the computers that handle other payments. Maybe this means it can work better; maybe it means that it won't be able to sync cash balances. As far as I can tell, nobody knows how this will work in an environment of extreme shutdown. If there are computer glitches, if the IT crowd can't get it all working in time, there's a chance of missing a payment and defaulting.
     
    2. Will There Be Enough Revenue? According to the BPC, February 15th has a $30 billion dollar interest payments with only $9 billion dollars coming in the door. Will we be able to make that payment? In general, we'll know the interest payments well in advance. However the revenues coming in will be uncertain, and, especially if we are making other payments, it may be difficult to match them up. Even a small mismatch could mean a default.
     
    3. Legal and Political Blowback. The civil unrest of paying foreign creditors while Social Security, military and domestic spending goes unpaid will be massive. One can easily see discontent in the streets over such a plan. If we are worried about future payments, this kind of rage generates future credit risks, and could cause the government to switch to a non-prioritization regime.
     
    Meanwhile, there will be extensive lawsuits, both over the lack of payments and President Obama's legal authority to prioritize payments. No matter what people are saying, the President's authority to legally do this is uncertain. Will the courts force him to pay claims in a different manner? All of this leads to huge uncertainty over the payments themselves, which amplify the chance of missing a payment.
     
    4. Rolling Over Debt. There's $500 billion dollars worth of debt that will need to be rolled over during the first month after we go through the debt ceiling. If, for some reason, any of it can't be rolled over, and there isn't a sufficient cash buffer built up, that would be a default. This is unlikely, though how unlikely it is is depends on numbers 1-3 and the level of economic chaos going through the debt ceiling generates. Especially if we are past the debt ceiling for a substantial period of time, rolling over our debt won't be a trivial operation. Though it is unlikely, if it happens it is an automatic default.
     
    5. Repeat Again Next Time. If Republicans are successful at pulling this off, they will do it again the next time the debt ceiling comes up. This will mean the risk of the first four factors identified are intensified.
     
    If anyone tells you that the credit risks from number 1-4 are zero, they are lying to you. Each of these has a very small chance of causing a debt default. Added together, they have a non-negliable chance of debt default such that the financial markets, and citizens themselves, should take note.
     
    Even if you think the chance of default in going through the debt ceiling is only about 2 percent, a 2 percent expected probability of default over the course of one year is what junk bonds have. This may be surprising for some of you, but even very small probabilities of default are big problems for firms. If there's a 0.87% chance, for instance, of default over the course of one year, that's non-investment grade debt.
     
    The government has no possibility of default except for this debt ceiling; hence our normal high rating. However the debt ceiling is where many on the right want to extract maximum concessions, even though it is the one place where you could see a chance of default. This, regardless of what they'll tell you, has consequences.
     

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  • Are "Educational Services" Off-Setting the Reduced Number of Public Education Workers?

    Jan 15, 2013Mike Konczal

    One important reason the recovery has been so weak has been the collapse in the number of government employees, a decline that continues years after the recession has technically "ended." An important check on the economy, unemployment would be significant lower if there weren't 651,000 fewer government jobs since January 2009.

    Education jobs are a large part of this decline. State and local education job together declined 224,700 since January 2009. These losses are entirely at the local level, with state-level education workers going up slightly over the time period. This is consistent with declining spending on public primary and secondary education broadly in the states, and a large increase in the number of young people attending higher educaiton.

    But what if these public sector jobs are being replaced with private sector ones? Several people on twitter have noted that the number of "educational service" jobs have gone up quite significantly in the past several years, gaining 244,500 jobs since January 2009. What if they are replacing K-12 education workers? That would be a much different picture of how the public sector is evolving in the past several years.

    Luckily, the CES has the ability to break out primary and secondary education workers from education services. Let's graph this out:

    (The breakout is not seasonally adjusted, and education has large seasonal changes. As such, all these numbers are a 12-month moving average. The conclusions are robust to other specifications.)

    As you can see, there's been a minimal increase in the number of private elementary and secondary school workers, on the order of an increase of 39,600, all relatively recent. The vast majority of the increase in education sector workers are working in postsecondary education. This is consistent with the large increase in post-secondary education we are seeing in this recession. The private sector isn't offsetting either the state and local level austerity imposed through the school system, nor is it, as far as I can see, offsetting the major disinvestments we are making in the education and opportunities of our young people.

     

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    One important reason the recovery has been so weak has been the collapse in the number of government employees, a decline that continues years after the recession has technically "ended." An important check on the economy, unemployment would be significant lower if there weren't 651,000 fewer government jobs since January 2009.

    Education jobs are a large part of this decline. State and local education job together declined 224,700 since January 2009. These losses are entirely at the local level, with state-level education workers going up slightly over the time period. This is consistent with declining spending on public primary and secondary education broadly in the states, and a large increase in the number of young people attending higher educaiton.

    But what if these public sector jobs are being replaced with private sector ones? Several people on twitter have noted that the number of "educational service" jobs have gone up quite significantly in the past several years, gaining 244,500 jobs since January 2009. What if they are replacing K-12 education workers? That would be a much different picture of how the public sector is evolving in the past several years.

    Luckily, the CES has the ability to break out different groups of educational services workers, so we can focus on primary and secondary education workers as well more post-secondary workers. Let's graph this out:

    (The breakout is not seasonally adjusted, and education has large seasonal changes. As such, all these numbers are a 12-month moving average. The conclusions are robust to other specifications.)

    As you can see, there's been a minimal increase in the number of private elementary and secondary school workers, on the order of an increase of 39,600, all relatively recent. The vast majority of the increase in education sector workers are working in postsecondary education. This is consistent with the large increase in post-secondary education we are seeing in this recession. The private sector isn't offsetting either the state and local level austerity imposed through the school system, nor is it, as far as I can see, offsetting the major disinvestments we are making in the education and opportunities of our young people.

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