Wednesday, November 14, 2012

Secession, Debt, and Responsibility

As tempting as it is to scoff, there is a valid point to be made behind these petitions to secede from the union.

As a response to the 2012 elections and Obama’s victory, people in several states have created petitions asking the government to allow their state to secede from the union. Several have quickly gotten the 25000 signatures in 30 days required for an actual review of their request.

The first response – my first response – was to see this as a childishly immature “cry-baby” response to losing an election. However, when I read some of the comments behind these petitions, I found a valid moral point – a legitimate reason for anger and frustration where “leaving” is a perfectly legitimate response.

Let us imagine a situation with two people.

Person A, we may assume, has put some effort into remaining fiscally responsible. His debt (as a percentage of income) is relatively low, and he works to keep it that way. To do this, he gives up a lot of things – things that it would be nice to have.

However, in this example, Person A has been made responsible for the debts of Person B. If Person B spends more than he can pay back, creditors are being told they can collect from Person A.

Of course, the very reason Person A has money that the creditors can collect is precisely because he has been financially responsible – giving up some of the things he would like to have in order to live within his means.

In this type of situation, it follows that Person B has a moral obligation not to become a financial burden to Person A. If he runs up a huge debt on his own, than his actions are imprudent but not immoral. (Well, breaking a promise to pay back the money would still be immoral.) However, when he runs up a debt under conditions that bring real harm to Person A, in this example, his actions harm another person. In this case, what was imprudent becomes immoral. It is something that a virtuous person would seek to avoid.

However, we have created a situation where immorality is heavily rewarded, while virtue is punished. Person B, in this case, can run up huge bills buying everything in sight – obtaining personal benefit from all of the things that he acquires on credit. Of course, people are great rationalizers, so we can expect Person B to convince himself that he absolutely needs these things and cannot possibly get by without them. Still, he cannot afford them.

As Person A observes Person B’s financial recklessness, he sees his own financial well-being under threat. What good does it do to give up the things that one wants in order to remain financially responsible if somebody else’s reckless behavior ruins one’s efforts anyway?

Person A has two options.

He could decide to become just as financially irresponsible himself. If he runs up his own debt, at least he gets the value of the things the buys on credit – rather than having Person B have all the fun.

The other option – the only option for Person A if he actually values living a finically responsible lifestyle and not ruin his own life with excessive debt – would be to sever his ties with Person B. “Let Person B cover their own debts – or suffer the consequences.”

The most financially irresponsible state governments are blue states. They include California, New York, Connecticut, Oregon, Washington, New Jersey, and Massachusetts. Whereas the financially most responsible states are red states. They include Montana, Wyoming, Nebraska, Oklahoma, Alabama, Tennessee, and Indiana.

Yet, no matter how well these financially responsible state governments do at maintaining their own budgets, they are tied to states who do not seem to be able to act responsibly – blue states. Currently, this blue-state mentality is also in control of the federal government, which already has a severe debt problem.

It is perfectly rational to respond to this by saying, “You may drown in debt, but we will not allow you to drag us down with you.”

Unfortunately, this story has a twist.

As a point of fact, the “red states” are substantially responsible for much of the federal debt. They are the ones who put into office the incompetent George Bush and crew. Through a system of tax cuts for the rich, two unfunded wars, a unfunded prescription drug program, and engineering a financial collapse requiring trillions of dollars to recapitalize the banks, they created a substantial part of the federal debt.

It may be tempting to blame this on Obama. However, they threw the country down this financial well. Obama has only had the opportunity to try to climb out again after the nation hit bottom.

So, in effect, this is still a case in which the “red states” created a huge financial mess and, instead of accepting responsibility for their mistakes and offering to help clean it up, they seek to blame somebody else and run away, leaving others suffer through the financial disaster they voted for.

Consequently, there is still a legitimate objection to be raised against these cry-baby conservatives who (seek to) go running away in a tantrum because they did not get their way. It is still legitimate to say to them, “You created this mess by putting that incompetent in office for 8 years, you will stay around and help clean it up.”

However, this does not change the fact that “blue states” also have a moral obligation – an obligation grounded on a principle not to cause harm to others – to get their own financial houses in order.

23 comments:

noahluck said...

Assuming it were politically possible, would be a good idea to pass a constitutional amendment requiring government at all levels to balance their budgets?

Alonzo Fyfe said...

Requiring a balanced budget is actually a poor idea.

On a national level, an invasion or a financial crisis requiring a recapitalization of the banks to avoid a depression, is a terrible time to be burdened by a requirement to balance the budget.

Borrowing is also a preferred form of funding for anything that produces a future benefit. Let the people who get the benefit finance the project.

For example, a state wants to improve its infrastructure. Nobody today will benefit from the improvements. The benefits will come - let us say - 3 years from now. So, let the people 3 years from now pay for the improvements. The state borrows the money today and promises to pay it back in 3 to 5 years.

Research investments fall into the same category.

If we do not allow for the possibility of borrowing to cover these types of improvements, then they might not get done. People today have no incentive to invest in those improvements, and even if they wanted to they might not be able to afford it. They might need the investment to pay for itself by allowing the return on investment to cover the debt.

Jesse Reeve said...

On a hunch, I checked here:
http://taxfoundation.org/article/federal-spending-received-dollar-taxes-paid-state-2005
http://taxfoundation.org/article/federal-taxes-paid-vs-federal-spending-received-state-1981-2005
Every one of the "financially responsible" states you listed, received more federal funds than they paid in federal taxes. Every one of the "financially irresponsible" states paid more than they received. My home state of California paid a net 47 billion dollars in 2005 (the most recent data in that study). For comparison, the state's deficit peaked in 2009 at 42 billion.

If cry-baby conservatives want to call it "financial responsibility" to live on other people's money, then I have a suggestion: take a trial run at secession by returning all federal funds granted to the state in excess of federal taxes paid by the state.

Let's see how many signatures that petition gets.

Alonzo Fyfe said...

Jesse Reeve

It is no argument against the thesis that a state knows how to handle its budget to note that it is good at drawing money into the state while reducing the flow of money out of the state.

In fact, I would consider it highly irrational to say, "Because I think this program should not exist, I will choose to suffer and let others rob me while I get nothing back."

There is no hypocrisy in saying, for example, that the state should not fund college education - but, as long as it is doing so, I am going to get as much college education as I can at the state's expense. I have no obligation to simply stand here and impoverish myself by geting robbed by others.

mojo.rhythm said...

Currently, this blue-state mentality is also in control of the federal government, which already has a severe debt problem.

The federal government does not have a "debt problem." That is what the conventional wisdom would have us believe. The debt has been caused by running deficits for many years. But, what is a deficit? It simply means that the government is creating more money than it is destroying (taxes destroy money; government spending creates money). It all boils down to this false equivalency between a government and a household. Households can and do have debt problems because they do not have their own printing presses. But governments are the sole issuer of their own currency. The whole thing is a manufactured attempt to scare the shit out of the citizenry.

Bottom line: it is impossible for the United States to default on debts it owes in money that it has the authority to print out of thin air.

The most financially irresponsible state governments are blue states.
You've omitted one critical fact: red states receive more revenue from the federal government than the blue states, which helps them balance their budgets.

Jesse Reeve said...

It is no argument against the thesis that a state knows how to handle its budget to note that it is good at drawing money into the state while reducing the flow of money out of the state.

One reason California receives less federal money per capita is that California has a younger population, so it benefits less from Social Security, Medicaid, etc. Should good Californians oppose government benefits to the elderly on these grounds?

I accept the viewpoint of the liberal who says, "This money could do more good in other hands than ours," and the conservative who says, "Let's get our own house in order before we start giving to others." Both play a role in political discourse. The fool who says, "Blue states are fiscally irresponsible!" without acknowledging or, in all probability, realizing that his own state's budget is balanced on money siphoned from blue states, is contributing less than nothing of value.

There is no hypocrisy in saying, for example, that the state should not fund college education - but, as long as it is doing so, I am going to get as much college education as I can at the state's expense.

Consider the case of a man who, taking a stand on principle, refuses to be a guard at Auschwitz. Someone else will get that job if he doesn't, after all. His family will go hungry, he may end up in that very concentration camp for defying the Nazis, and an evil man might get the job instead. Yet, we celebrate such actions, and call such men moral heroes. For an Ayn Rand libertarian to accept a college scholarship is a much lesser wrong than working at Auschwitz, of course, but it absolutely is an act of hypocrisy.

Michael E said...

"The most financially irresponsible state governments are blue states. They include California, New York, Connecticut, Oregon, Washington, New Jersey, and Massachusetts. Whereas the financially most responsible states are red states. They include Montana, Wyoming, Nebraska, Oklahoma, Alabama, Tennessee, and Indiana."

Well this is simply untrue.

I live in Virginia, a red state until recently, and don't feel that raiding the state employee pension fund in order to create the appearance of a budget surplus is very fiscally responsible. Similar things have happened in other red states.

Also remember that those red states that you call fiscally responsible are also the states that request and receive the most federal money while paying the least in federal taxes. That federal money is added into their budgets. The red states are no more fiscally responsible then the blue states.

http://www.slate.com/blogs/the_reckoning/2012/10/25/blue_state_red_face_guess_who_benefits_more_from_your_taxes.html

Alonzo Fyfe said...

mojo.rhythm

Defaulting on a debt (by paying 50 cents for every lar borrowed) and inflating the currency (making it so that every dollar is only worth 50 cents) is functionally the same thing.

Read my comment above concerning the claim that red states take in more federal money. T is not an argument against fiscal responsibility to say, "You balanced your budget by bringing in more money than you sent out."

Alonzo Fyfe said...

Jesse Reeves

your point about the Nazi Guard is a non-starter. We are not talking about rounding up people and killing them.

These states are not demanding that the government take from others to give to them - a position that would be hypocritical. They are saying that there is a better way to do things. However, because they are not n charge thy follow the rules of those who are.

Cosider a squad of soldiers on a battlefield. Each may think that there is a better way to fight this battle. However, it is absurd to say, "every soldier must never yield to somebody else's plans when that somebody else is in charge."

Certainly it is true that there are lines not to be crossed. Slaughtering the innocent people in a community is one of them. At the same time, it is just as absurd to argue for 100% extrenism in the other direction - saying that everything is like the Nazi Guard case. There is no moral crime in agreeing to live by the rules adopted by the community in which you live until you can peacefully change them.

Jesse Reeve said...

Cosider a squad of soldiers on a battlefield. Each may think that there is a better way to fight this battle. However, it is absurd to say, "every soldier must never yield to somebody else's plans when that somebody else is in charge."

The premise of the original blog post was that governments and party organizations at the state level have some say in determining the federal budget-- that they are active participants, not soldiers following orders. This analogy isn't just a "non-starter," it amounts to abandoning your entire original argument.

We are not talking about rounding up people and killing them... There is no moral crime in agreeing to live by the rules adopted by the community in which you live until you can peacefully change them.

No, we are talking about a person who believes that state college scholarships are "robbery" -- your word, not mine. Again, participating in robbery is a lesser moral crime than participating in murder, or genocide, but it absolutely is a moral crime.

Neither of us has such a belief. Neither of us believes that accepting a state scholarship is a moral crime. But our hypothetical person who does so believe-- an Ayn Rand libertarian, perhaps-- and accepts a state scholarship anyway, has a great deal of explaining to do to escape the charge of hypocrisy.

mojo.rhythm said...

Defaulting on a debt (by paying 50 cents for every lar borrowed) and inflating the currency (making it so that every dollar is only worth 50 cents) is functionally the same thing.

You assume that running massive budget deficits causes inflation. Definitely not in this environment, where there is weak demand and extremely under-utilized capacity.

A deficit is when the government is crediting the accounts of people in the private sector more than debiting accounts of people in the private sector. That is it. If the government continues to credit people's accounts when the economy is at full capacity and there are possible cost spirals or supply shocks, then you will see inflation. But not in this environment.

To assume that crediting the accounts of the public with 1 trillion of funds will automatically lead to inflation of a commensurate amount is a naive form of Milton Friedman monetarism.

I don't say all this just to be pedantic. Distorted visions of how an economy works have concrete, moral implications for people in the real world. In fact, it is twisted neoclassical dogma about austerity that is causing Greece to rapidly transition into a Third-World hellhole unfit for human habitation. As Steve Keen has said, "A naive faith in economic theory has led to outcomes which, had they been inflicted by weapons rather than by policy, would have led their perpetrators to the International Court of Justice."

Joshua Bennett said...

I want to chime in and agree with mojo here. Sounds like he's been paying attention to Modern Money Theory rather than talking heads on TV.

For a basic rundown of MMT's perspective on the deficit see this article. That whole website offers very clear thinking on economics and, though most of their writers probably lean left, the theory is politically neutral.

mojo.rhythm said...

Josh,

I'm a little more inclined towards Modern Circuit Theory, but MMT definitely gets 99% of it right as far as modern fiat money is concerned.

Alonzo Fyfe said...

mojo.rhythm

It is not the case that I believe, or that anything I said requires the assumption, that deficits cause inflation. (I actually have no idea where that comment came from - which suggests we may be talking about two different things.)

A US Government bond represents a promise to pay a certain amount of money at a future date. At that future date, the economy may or may not be in recession. The fact that there are benefits to be had and costs to be avoided by simply printing money during a recession does not imply that the same is true when those bonds are to be paid.

Furthermore, it is not impossible for inflation and high unemployment to strike at the same time. It has happened before - in the 1970s.

An option is to throw out some additional taxes - but that simply adds a third option to the set. (1) Pay you 50 cents for every dollar you borrowed, (2) pay you with inflated currency where every dollar is worth 50 cents, or (3) Pay you your dollar and, at the same time, raise your taxes by 50 cents,

Steven said...

What Mojo Rhythm said is somewhat correct. However, if it is so easy to elimate debt, then why have we not done it already?

Because inflation. To print that much money (or in today's age, transfer it electronically) would tank the USD.


We could eliminate our deficit today, but that would kill our (and the world) economy through inflation.

However, Mojo has a point. We've been running a debt since WW2, and never paid it back.

Inflation isn't all bad. As the real value of money goes down, so does the real value of debt.

If everyone has $10, and I owe you $1, and then everyone is given $20, that one dollar that I owed you just went from 1/10th of my wealth to 1/30th of my wealth. Costs would also triple though, and so you would really be getting the equivalent of 33 cents.

Interest is the real problem. If a country stops lending to us, they still get intrest until we pay them back. If we can't even cover the interest, they are getting free money until we can start chipping away at the debt.

The only reason to attack the debt is because of interest (from a selfish point of view at least; paying a person/country back is a moral obligation).

mojo.rhythm said...

"We could eliminate our deficit today, but that would kill our (and the world) economy through inflation."

You misunderstand what I said. I didn't insinuate that the deficit needs to be eliminated; quite the opposite. The crux of my argument was that there is not any so-called government "debt problem," because the U.S. government has the power to, by definition, always make good on its promises to pay money denominated in its own currency. The occurrence of a debt default would be entirely voluntary, self-inflicted, and preventable (re: the artificial debt-ceiling constraint).

The only logical way to eliminate a deficit is to tax more than you spend (remember: a deficit is a flow, not a stock). Such an action would actually be highly deflationary right now and completely unnecessary.

"Interest is the real problem. If a country stops lending to us, they still get interest until we pay them back. If we can't even cover the interest, they are getting free money until we can start chipping away at the debt. "

Since there are no inherent (nominal) restraints on a sovereign nation's ability to spend its own currency, I consider government issuance of public debt to be a blatant form of corporate welfare. It is an outmoded vestige from the Gold Standard era. All the government has to do is remove the self-imposed restraint that requires the US Treasury Account to be positive in order to be debited. You do that, and government bonds will be a relic of a bygone era. There is no logical reason that the United States has to send money to China in order to spend currency that it creates itself.

mojo.rhythm said...

if it is so easy to elimate debt, then why have we not done it already?

Actually there is a certain type of debt that must be purged from the economy as quickly as possible. The beast is not the debt owed by Washington. It is private debt. The Great Recession was entirely the result of an unsustainable acceleration in the growth of levels of private debt, eventually hitting a ceiling and embarking on a catastrophic descent, hence the reason for the current crappy economy. Debts that can't be paid, won't be paid. It is only a question of how they will not be paid. Does the U.S. government write them off via a Debt Jubilee, or does it allow the economy to go through a slow and excruciating period of bankruptcy after bankruptcy? The latter would be protracted economic torture, resulting in a completely unwarranted amount of suffering, decline in living standards, and social unrest over roughly 15 years or so. A jubilee must be implemented. However, the main obstacles to it are political, and I definitely don't see it getting passed by Congress.

bmr1970 said...

Something about this claim that red states receive more money doesn't pass the smell test. Does this include farm subsidies that eventually ends up in the pockets of corporate giants like Archer Daniels Midland (based in Decatur, IL)? Does it include the salaries and upkeep of military personnel and bases? Energy production and manufacturing tax breaks?
And, I'm sorry, you may have a point concerning Bush's deficits on the wars and Medicare part D, but engineering the banking collapse in 2008? Bull. Fucking. Shit. The root cause was the Community Re-Investment Act, the investment bundling and insurance 'scandals' that followed them were results of a predictable attempt to finance an arbitrary, court-mandated liability.
By the way Jason Reeves, interesting choice of stats from 2005, the year Katrina hit red states LA and MS -- and a continuing source of Leftist whining.

mojo.rhythm said...

The root cause was the Community Re-Investment Act, the investment bundling and insurance 'scandals' that followed them were results of a predictable attempt to finance an arbitrary, court-mandated liability.

What the fuck are you talking about? That typical conservative lie has been debunked, time and time again.

The cause of the GFC was private debt. Pure and simple. Far too much private debt was created, and it reached an unsustainable peak in late 2007. It was a process that has been in work for a long, long time. I am flabbergasted that there are still people who think the greatest financial crisis since the GD is all attributable to one fairly inconsequential law passed over thirty years ago. Jesus man, think.

mojo.rhythm said...

It is not the case that I believe, or that anything I said requires the assumption, that deficits cause inflation.

It's obvious that running a deficit can have inflationary effects in some cases. Imagine an economy that is at full capacity and full employment. Everybody that is willing and able to work has a full time job. All available resources are being exploited. In this situation, what do you think would happen if the government continued to credit more accounts than it debited? Well, then it would be increasing the purchasing power of the public, without the public being able to direct that purchasing power into harnessing unused resources. Assuming the propensity to spend did not dramatically alter, the public would then inadvertently bid up the price of goods, thereby raising the CPI.

My point is that the United States is not in this situation at all. The U.S. is experiencing a massive private debt overhang and extremely under-utilized capacity. The deficits, in this case, are nowhere big enough. Either the debt needs to be directly written off (a debt jubilee), or the state needs to run deficits far larger to indirectly get people's debt levels down. Private debt is killing economies all over the world.

Alonzo Fyfe said...

mojo.rhythm

It's obvious that running a deficit can have inflationary effects in some cases. Imagine an economy that is at full capacity and full employment. . . . My point is that the United States is not in this situation at all.

This is the part that I always get stuck on.

A debt is a promise of FUTURE payments.

The United States is not in this situation today. However, this argument seems to suggest that one expects the economy to be permanently in a state of near depression - sufficiently depressed to handle our current level of debt.

Granted, when the economy improves, then revenue will improve - and some expenses (e.g., unemployment insurance) will drop.

However, is there some guarantee that it will improve enough to cover the deficit and generate a surplus?

Furthermore, as the economy improves, interest rates will rise. We can't pay back the whole debt all at once - so old bonds will need to be replaced with new bonds at a higher rate.

If we are not planning for a permanent recession, then we need to keep the deficit at a level that can be managed when the economy is not in recession.

mojo.rhythm said...

However, is there some guarantee that it will improve enough to cover the deficit and generate a surplus?

That is not something that needs to be "pre-empted"; you start to move in the direction of budget balancing if and when inflation happens; worrying about it now honestly makes no sense whatsoever.

I doubt you would have to achieve a literal surplus (such times in history are exceedingly rare). If the economy fully recovered and inflation reared its head, reduce deficit spending by just enough so that inflation gets back down to a standard level (2-3% a year or something like that), but no more. Any more deficit reduction would be totally unnecessary, and a vicious economic blow in the solar plexus to the private sector (government deficit equals non-government surplus by definition).

mojo.rhythm said...

Alonzo,
As the economy improves, interest rates will rise.

Mojo,
"The interest rate paid on treasury securities is not subject to normal “market forces” unless the government voluntary chooses to do so."

Bill Mitchell, Modern Monetary Theory economist

Alonzo,
If we are not planning for a permanent recession, then we need to keep the deficit at a level that can be managed when the economy is not in recession.

Mojo,
Any deficit, however large, can be "managed" by the U.S. government. Remember that it is the sole issuer of its currency. Even if the deficit was 5000% of GDP (which would be the worst hyperinflation in human history), it would not be insolvent. It could make good on every single promise just with strokes on a keyboard.

It gets to my point: the US government is not financially constrained. It has many concrete limits in what it can do, but spending US dollars is not one of them. From this little factoid follows a whole bunch of counter-intuitive relevations: the public debt is not a burden on the next generation, taxpayer revenue does not finance government spending, T-bonds are a totally unnecessary form of corporate welfare, deficits and surpluses are a means of controlling unemployment and inflation, surpluses drain savings from the private sector while deficits add savings, and so on and so forth.