Federal Debt Research Articles

Elections and the Economy: What to do about Recessions?

Abstract There is no doubt that the US is embedded in a weak economy. Bond markets are now saying that neither inflation rates approaching 2 percent targets or real interest rates substantially above zero are on the horizon anytime in the foreseeable future. Growth forecasts are being revised downwards in most places, and there is growing evidence in the US that inflation expectations are becoming unanchored to the downside. That, along with widening credit spreads and a stronger dollar as Europe and Japan plunge more deeply into the world of negative rates is alarming and suggests that we are at risk of another recession. Presidential candidates on both sides of the aisle have laid out their positions on major issues ranging from taxes, minimum wage, the federal debt, to issues such as immigration, military strategy, and climate change. While candidates’ policy positions differ generally, it is not clear what their priorities are when it comes to most of these issues. In this paper, we apply text analytics to analyze hundreds of thousands of words that appeared in policy releases, interviews, or debate transcripts related to all of the 2016 presidential candidates. Among other things, we find that macroeconomic policy or “what to do about recessions” has been largely ignored by presidential candidates in this year’s election. Perhaps not surprisingly, Donald Trump’s positions are focused on Mexico and China while Hillary Clinton’s positions are heavily focused on gender and social factors. This appears to present a contrast from Bill Clinton’s campaign in the early 1990s, which was focused on America’s declining economy, emphasizing a basic but effective slogan, “It’s the Economy, Stupid!”

Extraordinary responsibility: politics beyond the moral calculus

Careful attention to contemporary political debates, including those around global warming, the federal debt, and the use of drone strikes on suspected terrorists, reveals that we often view our responsibility as something that can be quantified and discharged. Shalini Satkunanandan shows how Plato, Kant, Nietzsche, Weber, and Heidegger each suggest that this calculative or bookkeeping mindset both belongs to 'morality', understood as part of our ordinary approach to responsibility, and effaces the incalculable, undischargeable, and more onerous dimensions of our responsibility. These thinkers also reveal how the view of responsibility as calculable is at the heart of 'moralism' - the pettifogging, mindless, legalistic, excessively judgmental, or punitive policing of our own or others' compliance with moral duties. By elaborating their narratives of a difficult 'conversion' to the open-ended and relentless character of responsibility, Satkunanandan explores how we might be less moralistic and more responsible in politics. She ultimately argues for a political ethos attentive to how calculative thinking can limit our responsibility, but that still accepts a circumscribed place for calculation (and morality) in responsible politics.

Federal Debt in the Financial Accounts of the United States

This note explains the concept of federal debt in the Financial Accounts of the United States, how it has recently changed, and how it differs from other commonly cited measures of federal debt. As described below, a key factor is the treatment of intragovernmental holdings of U.S. debt securities.

Designing Federal Budget Policy to Spur Economic Growth

Federal budget policy should focus on raising incomes for lower- and middle-income people, because they have benefited little from economic growth in the past few decades. That goal would be advanced by maintaining federal investment as a share of total output, reforming the tax code, encouraging innovation, reducing federal debt slowly, and reducing uncertainty about future policy. However, the likely effects of budget policy on income growth should not be exaggerated.

Household Response to Government Debt: Evidence from Life Insurance Holdings

We use state‐level panel data on life insurance in force in the United States and find that a $1 increase in government debt, at either the state or federal level is associated with a $0.96 increase in the face value of the average life insurance holdings per capita for a household in the average state. This increase represents an intention to save that would almost completely offset the government debt in specific states of the world (i.e., if the insured dies). Because this state of the world is rare, the immediate increase in actual savings is only about $0.03, the cost of the additional insurance. We find, in addition, that this response occurs mainly on the intensive margin, meaning that the size of the average life insurance policy increases when government debt increases. Along the extensive margin, we find the number of policies in force falls slightly with federal debt, and rises slightly with state debt increases. The results show altruistic planning in response to changes in government debt that are consistent with Ricardian Equivalence and the long‐run neutrality of government debt.

Free cash, corporate taxes, and the federal deficit

:Over seventy years ago, Michal Kalecki noted that budget deficits would “permit profits to increase above the level determined by private investment and capitalists’ consumption.” Kalecki’s insight into the generation of “free cash” (cash in excess of new investment) was formulated at a time when consumer deficit spending and other private deficit spending was minuscule. But it can be shown that his insight can be extended not just to an expansion of public deficits but to private deficits as well. Over the past forty years, the rise of “free cash” and expanded deficits have allowed corporations to cut back on investment growth, funneling the excess cash into mergers, stock buybacks, and expanded dividends to the wealthy. In recent years, this outpouring of cash has accounted for well over fifty percent of corporate fixed investment. I run a simple “what if” exercise on U.S. corporate tax flows utilizing past U.S. tax rates to calculate the possible absorption of free cash and reduction of federal debt that would have been associated with such an exercise.

The Changing Nature of the Long-Run Federal Budget Problem

Although recent performance and the short-term outlook for the U.S. federal budget deficit have been favorable, the good news is not expected to continue. Low interest rates and slowly growing health costs have helped ease the burden of debt, but they are not expected to continue for very long. A likely combination of growing spending on Social Security, Medicare, and Medicaid and higher interest rates would increase the drag on the American economy. This paper analyzes which expenditures do and do not cause a significant increase in the federal debt and describes how a remedy implies difficult choices that require leaders of both political parties “to join hands and jump off the cliff together.”

Federal government debt and economic growth: Evidence from Malaysia

This article conducts an investigation into the effect of federal government debt on Malaysia’s economic growth with the application of threshold regression. The result reveals that, beyond the government debt threshold level, the country is experiencing a positive effect on economic growth.

The 2011 Debt-Ceiling Controversy and the 2012 US House Elections

ABSTRACTThis article considers how a key legislative vote—that is, the August 2011 vote to raise the federal debt ceiling—influenced the 2012 elections for the US House of Representatives. Two outcomes are analyzed: (1) the incumbents’ ability to retain their seats through the 2012 general election, and (2) their share of the two-party vote for members who faced a general-election competitor. In developing this study, the research design was registered and released publicly before the votes were counted in 2012. Therefore, this article also illustrates how study preregistration can work in practice for political science. The findings show that seat retention did not vary with the treatment; however, incumbents who voted against raising the debt ceiling earned an additional 2.4 percentage points of the two-party vote.

The Political Geography of the Federal Public Debt in Belgium

We calculate that over the 1970-2002 period the combination of persistent primary surpluses of the Flemish region and persistent primary deficits of the Walloon region – and to a lesser extent of the Brussels region – increased the net fiscal transfer due to the federal debt provided by Flanders to Francophone Belgium to almost 100% of the total interest bill on the Belgian federal debt. This amount is considerably larger than the transfer amount resulting from previous “traditional” interregional transfer calculations that assume a balanced federal budget. The geographically very unevenly spread benefits from Belgian federal budget deficits – and hence the geographically strongly diverging incentives for federal budget deficits – may well explain to a considerable extent the large overall size of deficits and debt in Belgium since the 1970s. In other words, interregional fiscal transfers resulting from the federal debt may be important not just because of their distributional consequences, but even more because they may provide an explanation for the large overall size of deficits and debt that have particularly characterised Belgium since the 1970s. We also test empirically if Francophone Belgian politicians have more of an incentive to run a federal deficit than Flemish politicians. To this effect, we regress the popularity of federal government parties on net fiscal transfers received by Flanders, resp. by Francophone Belgium. We find that transfers to Flanders affect the popularity of Flemish parties governing at the federal level less positively than that transfers to Francophone Belgium affect the popularity of Francophone Belgian parties governing at the federal level. The difference in effect is however insignificant in our major regression specifications.

The Financialisation of Sovereign Debt: An Institutional Analysis of the Reforms in German Public Debt Management

This study explores the financialisation of sovereign debt through an in-depth study of institutional change in German debt management. Between 1998 and 2006, the Ministry of Finance fundamentally altered the management of federal public debt by not only disempowering the Bundesbank and Federal Debt Administration as debt managers and outsourcing this task to a new agency, the Federal Finance Agency; moreover, the conservative debt strategy was replaced by strict market orientation. Conceptualising this change as institutional innovation, the paper argues that the Ministry of Finance played a leading role in the reform process. It shows that the arrival of the Euro brought with it a power struggle between the Ministry and the Bundesbank. The evidence fits better the concept of institutional innovation as a result of entrepreneurship than approaches which conceptualise institutional innovations as consequences of profit maximisation or layering and displacement.

A New Structure for U.S. Federal Debt

This paper proposes a new structure for U.S. Federal debt. It argues that all debt should be perpetual, paying coupons forever with no principal payment. The paper introduces six financing options and argues for their creation in order to protect against future fiscal or monetary shocks.

ENVIRONMENTAL POLICY FOR FISCAL REFORM: CAN A CARBON TAX PLAY A ROLE?

This paper compares the effects of using revenues from a carbon tax to either reduce the national debt or reduce federal personal or corporate income tax rates. It differs from other analyses by looking at a carbon tax as a purely revenue raising measure, not as an optimal Pigouvian tax or as an instrument to achieve a predetermined reduction in emissions. Thus it addresses the question of whether a carbon tax would be part of an optimal tax policy even if there were no damages to the United States from CO2 emissions. We use a computable general equilibrium model (NERA's NewERA model) that consists of a top-down macro model of the U.S. economy and a detailed bottom-up model of the North American electricity sector. The NewERA model is an integrated energy and economic model that includes a detailed plant-level representation of the electricity sector with an aggregate level representation of the rest of the economy. The analysis shows that using revenues for either debt or tax rate reduction can reduce the welfare losses from a carbon tax; however, the savings from reducing either federal debt or the marginal rates of other distorting taxes are still less than the economic costs imposed by the narrowly based tax on CO2 emissions. The higher the carbon tax, the greater the disparity becomes.

Comment on “How Biased are US Government Forecasts of the Federal Debt?”

In this comment on “How Biased are US Government Forecasts of the Federal Debt?” by Neil R. Ericsson, we investigate the sensitivity of the “bare-bones” application of the impulse indicator saturation technique. We offer an alternative but complementary interpretation of Ericsson’s findings of bias in government debt forecasts. Our findings reinforce his interpretation of the role of the IIS technique as a general diagnostic tool for detecting model misspecification.

How good are US government forecasts of the federal debt?

This paper compares annual one-year-ahead and five-year-ahead forecasts from government agencies for the US gross federal debt and deficit from 1984 to 2013. Other studies have compared two of these agencies’ forecasts, but not for debt. The current paper finds that the forecast from the Analysis of the President’s Budget performs best across both horizons but does not encompass the other forecasts. Instead, each of the forecasts lacks information included by the other agencies and therefore a combination of all three outperforms all individual forecasts.

The Geography of Incentives to Run a Federal Budget Deficit in Belgium

Political parties in Belgium are split along Flemish-Francophone lines, and Flanders enjoys relatively less federal expenditures and pays relatively more federal taxes than Francophone Belgium. As the federal debt is serviced out of federal tax revenues, Flanders bears most of the cost of debt servicing, while on average having benefited the least from the deficit-funded expenditures. Those uneven net benefits from Belgian federal budget deficits – and the diverging incentives for federal budget deficits this disparity seems to create – may be an explanation of the large overall size of deficits and debt in Belgium since the 1970s. Hence, interregional fiscal transfers resulting from the federal debt may be important not just because of their distributional consequences, but even more because they may provide an explanation for the large Belgian federal deficits and debt burdens. We test for these differing deficit incentives by investigating the difference between the effect of an increase in net formula-based transfers on Flemish resp. Francophone Belgian federal government parties’ vote share. We find at first sight that an increase in net transfers causes Flemish governing parties to lose votes during the next federal election, while the effect is insignificant in Francophone Belgium as well as in Belgium taken as a whole. The negative Flemish effect may be suggestive of Flemish voters being aware that increases in formula-based net transfers to Flanders may go hand in hand with similar increases to Francophone Belgium, that these increases may increase the public debt, and that the latter is serviced mainly with federal taxes raised in Flanders. However, when taking into account legislature-specific shocks that differ between Flanders and Francophone Belgium, the Flemish negative effect of transfers on votes mostly turns insignificant. Neither is there a consistently significantly positive effect of transfers on votes in Francophone Belgium, and also when investigated for Belgium as a whole the effect is insignificant. In conclusion, Francophone Belgian (Flemish) voters do not seem to particularly reward (punish) extra net transfers with more (less) votes. Francophone Belgian voters seem to overestimate the future cost of extra transfers they will bear, while the opposite seems to hold for Flemish voters. Alternatively, Francophone Belgian parties may overestimate the rewards – in terms of voters’ gratitude – of steering extra transfers to Francophone Belgium, while Flemish parties may correctly estimate the – lack of- punishment – in terms of voters’ anger of steering extra transfers to Flanders.

Debt Control: An Alternative Route to a Balanced Budget

This paper discusses an alternative route to a balanced budget, namely through debt control. Two models are compared: the debt brake which has been used in Switzerland since 2003 and the debt limitation model proposed by Compact for America. The paper concludes that the former, while apparently successful in Switzerland, is technically more sophisticated than necessary to control federal debt in the United States. As a debt control instrument, the Compact for America model is therefore preferable.

Tragedy of Commonly-Shared Debts

The debates about how to deal with government budget deficits are raging all over the world. In the US, the federal government was forced to shut down for 16 days in October, 2013 because of the failure to pass a budget through congresses, and barely averted a default of federal government obligations due to failure to raise the federal debt ceiling limit. The city of Detroit filed the largest municipal bankruptcy in the US history on July 18, 2013, despite Michigan State constitution’s balanced budget requirement. In Europe, the sovereign debt crisis has dragged down the entire EU economy since late 2009 with no end in sight. In Japan, the government debt to GDP ratio is well over 200%, which is one of the highest in the world. In the world of academics, the debates of government budget deficits have become the key battlegrounds of different schools of thoughts of economics and political ideologies. Economists and political scientists could not even agree to a framework to solve budget deficit problems, and let alone settle these debates. This paper provides a permanent and equilibrium solution to government budget deficits. Surprisingly the solution comes from the first principles of quantum politics. The political equilibrium structure has the time translational symmetry in treating different generations equally. One result of applying physics laws of social science to study the most stable political structure is that the most stable political structure is not only to require the majority voters must deal with minority voters fairly to avoid the tyranny of the majority, but also to require the voting generation must exercise their fiduciary duty to their children and unborn future generations. In terms of government budget deficits, the fiduciary duty means that the current voting citizens must take the full responsible of the current government budget deficits or surplus. The permanent equilibrium solution of government budget deficits is legally and personally held all the voting citizens accountable for the current fiscal surplus and deficit at all levels of governments. In contrast to the balanced budget approaches, the permanent equilibrium solution in this paper allows deficit spending and the accumulation of government debts as long as the government debts must be paid off by the responsible borrowers and voters. This method to solve the government budget deficit problem is an excellent example of applications of law of equilibrium, which can be used to solve economic, political, and other social problems in a value-free way. The permanent solution to government budget deficits presented in this paper is consistent with a different line of reasoning in economics, which is known as the tragedy of the commons. In cases of government budget deficits, the tragedy of fiscal abuse happens because the US Constitution fails to protect interests of the future generations. Through the commonly-shared responsibility for government debts, current voters and their political representatives have financially taken unfair advantage of their children and the future generations, who virtually have no political power.

Evaluation of the Effects of Reduced Personal and Corporate Tax Rates on the Growth Rates of the U.S. Economy

Using several variants of a Marshallian Macroeconomic Model (MMM), see Zellner and Israilevich (2005) and Ngoie and Zellner (2010), this paper investigates how various tax rate reductions may help stimulate the U.S. economy while not adversely affecting aggregate U.S. debt. Variants of our MMM that are shown to fit past data and to perform well in forecasting experiments are employed to evaluate the effects of alternative tax policies. Using quarterly data, our one-sector MMM has been able to predict the 2008 downturn and the 2009Q3 upturn of the U.S. economy. Among other results, this study, using transfer and impulse response functions associated with our MMM, finds that permanent 5 percentage points cut in the personal income and corporate profits tax rates will cause the U.S. real gross domestic product (GDP) growth rate to rise by 3.0 percentage points with a standard error of 0.6 percentage points. Also, while this policy change leads to positive growth of the government sector, its share of total real GDP is slightly reduced. This is understandable since short run effects of tax cuts include the transfer of tax revenue from the government to the private sector. The private sector is allowed to manage a larger portion of its revenue, while government is forced to cut public spending on social programs with little growth enhancing effects. This broadens private economic activities overall. Further, these tax rate policy changes stimulate the growth of the federal tax base considerably, which helps to reduce annual budget deficits and the federal debt.

Have the US Macro-Financial Linkages Changed? The Balance Sheet Dimension

We establish a set of US stylized facts on prices, quantities and balance sheets, assess the consistency of the current generation of financial DSGE models to these, and provide guidance on the challenges ahead. We mainly find four aspects which future financial friction models should take into account. The first is the profound shift in household financing structure, both on the asset and liability side, which has meant that they have been left vulnerable. Second, the balance sheet of firms has become increasingly leveraged and coupled with more volatile and procyclical equity prices has meant that the balance sheet of firms has become increasingly procyclical and volatile since the 1990's. The current generation of FA models do capture some aspects of this but produce excessively smooth results. Third, it would be of interest for policy makers to find the optimal level/percentage of foreign ownership of the Federal debt at which the debt portfolio is diversified, but the future government budget constraint and its stabilisation capacity is not put in danger by over-exposure to international shocks. Lastly, models might be extended to include a regime-switching mechanism and explore the effects on model dynamics and model stability when the economy goes from a low volatility-low correlation state to a high volatility-high correlation state. A wider implication of our findings is that accumulation of stocks might alter agents risk preferences, production technologies, or beliefs to such a degree that the optimization problem that those agents face has transformed over time. The economy is effectively in a different state of nature, and agents may face different constraints. Future macroeconomic models need to take a different strategy to modeling the long-run ratios, since these have increased over the long-run, and this has had an effect on both the frequency and the amplitude of the business cycles.