Before going into exactly what impact that government debt can have on you as an individual, we first need to look at two other things: the impact on the government and the impact on the economy. Much of the impact in these two categories may have little to no impact on specific individuals, but examining the whole situation will give us all a better idea of what is happening.
The easier of the two impacts to examine is the impact on the government. It's actually quite straight forward.
As discussed earlier, there is no immediate drawback to the government being financed by debt rather than by taxes. The two are simply different methods of obtaining funding. The drawback is eventual financial instability.
When talking about corporations, the decision as to whether or not debt is a good way to finance business operations usually comes down to the sorts of cash flows you can expect in the future.
For instance, an ice cream shop has seasonal revenue. It only makes money during part of the year, and shuts down operations during the rest of the year. Debt is generally a poor way to finance business activities when your cash flows are periodic or uncertain, as the possibility of not being able to pay interest at some point is very important in your decision making process.
On the other hand, if you have steady revenue and are confident that this will continue to be the case, debt is a great method of financing activities, as the financial instability created by having the debt is greatly lessened when you know, without a doubt, that you can pay the interest and, eventually, repay the entire loan. Obviously guaranteed revenue is something that can never truly be obtained, so this is a best-case scenario. Right?
Not exactly. The government has the best possible example of constant, assured revenue that I can think of. Ever year, individuals WILL pay taxes, because the government has the ability to punish them if they do not. To draw an analogy, imagine if McDonald's could imprison you if you purchased a meal from, say, Burger King. You'd be much more likely to go to McDonald's, right?
The only risk associated with taking on debt for the government is the cyclical nature of the economy. During a recession, less taxes are paid, decreasing the overall revenue of the government significantly, greatly increasing the likelihood that they will be hard-pressed to meet requisite interest payments.
What this essentially means is that the United States federal government is incredibly secure when it comes to using debt as a method of financing their activities. The economy in the United States is generally quite strong, and even during recessions the possibility of failing to take in enough taxes to meet interest is remote. More importantly, even if such were the case, the government has the authority to simply print more money to meet obligations.
As such, direct negative impacts on the government as a result of being financed by debt are, essentially, zero. For them, the most they have to really worry about is the inconvenience of having to allocate money to pay off interest every year.
What I'm saying, then, is that the government has no incentive to not finance activities through the use of debt. We can then say that if the government having substantial debt causes negative impacts elsewhere we have a problem, as the government has no incentive to stop using debt as a method of finance until we give them one.
And that's all said and done. I'm sure things are a bit broad at the moment, but we'll be getting down to what debt means to the individual in the next few posts.
Also, for those who care, it looks like my regular update schedule will be Tuesday/Thursday and, if I can manage it, something on the weekend.
Tuesday, January 31, 2012
Friday, January 27, 2012
Individual Impact of Substantial Government Debt, Part Two: Aside Into Corporate Finance
This post largely consists of an important aside before moving on to things of actual relevance. It deals with the idea of treating the government and its finances as a corporation.
The idea is actually quite a useful one. People who pay taxes can be treated as shareholders, while those who buy bonds or otherwise lend money to the government would be considered holders of debt. Revenue is generated, but the government would usually be considered a non-profit, as it never pays direct dividends to its shareholders, only indirect through provision of services.
From the field of finance, then, comes the idea of whether or not there is a large difference between a corporation financed mostly by debt and one financed mostly by shareholder equity.
The short answer is, there isn't. Being financed by debt provides a tax shelter and being financed by shareholder equity provides financial stability, but the two models are equally appealing, albeit to different sorts of corporations. You can certainly find more about this particular aspect of finance somewhere on the Internet.
More importantly this means that, holding all else constant, the only consequence that impacts the government directly as a result of being financed by debt is the possibility of financial instability.
There are many other indirect results, but I will get to those in a later post.
Moving along slowly when it comes to this topic, but I want to make sure I cover as much as possible. Apologies to anyone who doesn't find it interesting.
The idea is actually quite a useful one. People who pay taxes can be treated as shareholders, while those who buy bonds or otherwise lend money to the government would be considered holders of debt. Revenue is generated, but the government would usually be considered a non-profit, as it never pays direct dividends to its shareholders, only indirect through provision of services.
From the field of finance, then, comes the idea of whether or not there is a large difference between a corporation financed mostly by debt and one financed mostly by shareholder equity.
The short answer is, there isn't. Being financed by debt provides a tax shelter and being financed by shareholder equity provides financial stability, but the two models are equally appealing, albeit to different sorts of corporations. You can certainly find more about this particular aspect of finance somewhere on the Internet.
More importantly this means that, holding all else constant, the only consequence that impacts the government directly as a result of being financed by debt is the possibility of financial instability.
There are many other indirect results, but I will get to those in a later post.
Moving along slowly when it comes to this topic, but I want to make sure I cover as much as possible. Apologies to anyone who doesn't find it interesting.
Wednesday, January 25, 2012
Individual Impact of Substantial Government Debt, Part One: Statistics
As stated at the end of my last post, I'm going to write a short series of posts about the impact of substantial government debt on the individual as the result of requests by a pair of my readers.
Every investigation of something first involves understanding exactly what you're investigating. As such, this post is all about statistics on the government debt of the United States Federal Government.
Our first question, then, is whether or not the debt of the U.S. Federal Government can be considered 'substantial.' I think by general consensus of U.S. citizens it can be considered such, but it would be a worthwhile exercise to determine exactly why.
As of this writing, the current national debt of the United States is at or around USD 15 trillion. You can check some more exact statistics here: http://www.usdebtclock.org/. This number can be corroborated at slightly higher or lower numbers all over the Internet, including at various sites run by government officials or government agencies.
The number seems pretty large, right? It's certainly more wealth than even the wealthiest people in the world possesses; for reference, the wealth of Microsoft CEO Bill Gates peaked at just over USD 100 billion.
However, to truly do any real comparison, we have to look at two things - ratio of debt to the GDP of the United States and similar ratios for other nations around the world. Some quick results...
The last known census data on the United States GDP put it at around USD 14.5 trillion in 2010. Some examination of Internet statistics for which there is no strictly empirical foundation show estimates of current GDP at about USD 15 trillion. This means that the ratio between the national debt and the GDP is about 1.0.
For some other developed nations, take a look at this rather revealing graph: http://en.wikipedia.org/wiki/File:Dept.svg.
From this, we can see that the United States has one of the highest debt to GDP ratios among the developed nations represented on this graph. It also has the largest total debt during the time of the last entirely reliable study in 2010, pulling ahead of Japan by USD .6 trillion.
I think we can then all agree that the debt of the United States Federal Government is substantial. It can also be seen that it is rising rapidly: the debt has increased by an estimated USD 6 trillion over the course of 2011 and early 2012. Considering that this is about two thirds of the total debt at the start of 2010, we can also consider the current upward trend in national debt to be substantial.
Now that we have a firm grasp on the problem, the next few posts will be about the possible impact of this on individuals. This analysis will attempt to be general enough so that it will hold in all developed nations with substantial government debt, but some portions of it will more than likely be specific to the United States and its citizens.
Anyways. I hope you have found this moderately enlightening. Until next time, folks!
Every investigation of something first involves understanding exactly what you're investigating. As such, this post is all about statistics on the government debt of the United States Federal Government.
Our first question, then, is whether or not the debt of the U.S. Federal Government can be considered 'substantial.' I think by general consensus of U.S. citizens it can be considered such, but it would be a worthwhile exercise to determine exactly why.
As of this writing, the current national debt of the United States is at or around USD 15 trillion. You can check some more exact statistics here: http://www.usdebtclock.org/. This number can be corroborated at slightly higher or lower numbers all over the Internet, including at various sites run by government officials or government agencies.
The number seems pretty large, right? It's certainly more wealth than even the wealthiest people in the world possesses; for reference, the wealth of Microsoft CEO Bill Gates peaked at just over USD 100 billion.
However, to truly do any real comparison, we have to look at two things - ratio of debt to the GDP of the United States and similar ratios for other nations around the world. Some quick results...
The last known census data on the United States GDP put it at around USD 14.5 trillion in 2010. Some examination of Internet statistics for which there is no strictly empirical foundation show estimates of current GDP at about USD 15 trillion. This means that the ratio between the national debt and the GDP is about 1.0.
For some other developed nations, take a look at this rather revealing graph: http://en.wikipedia.org/wiki/File:Dept.svg.
From this, we can see that the United States has one of the highest debt to GDP ratios among the developed nations represented on this graph. It also has the largest total debt during the time of the last entirely reliable study in 2010, pulling ahead of Japan by USD .6 trillion.
I think we can then all agree that the debt of the United States Federal Government is substantial. It can also be seen that it is rising rapidly: the debt has increased by an estimated USD 6 trillion over the course of 2011 and early 2012. Considering that this is about two thirds of the total debt at the start of 2010, we can also consider the current upward trend in national debt to be substantial.
Now that we have a firm grasp on the problem, the next few posts will be about the possible impact of this on individuals. This analysis will attempt to be general enough so that it will hold in all developed nations with substantial government debt, but some portions of it will more than likely be specific to the United States and its citizens.
Anyways. I hope you have found this moderately enlightening. Until next time, folks!
Monday, January 23, 2012
The Environment and Economics
It occurred to me recently that it might not be immediately obvious to all people why the environment is an important issue in economics and, more specifically, why environmental policy is an important issue from an economic perspective.
For the economy, the environment is a resource. It provides a steady stream of benefits, both in the form of natural resources and in the form of recreation and other benefits, such as natural beauty. These benefits can, at least theoretically, be treated the same as ordinary goods, like television; in fact, the branch of environmental economics deals entirely with placing a market value on the non-market goods provided by the environment.
The problem with environmental goods that makes them different from more normal goods is that they exist outside the market, hence the term non-market good. This means that any effect to the environment that occurs during the production or sale of a non-market good is not incorporated in the price of that good. This is referred to as a negative externality, as there are negative effects of market goods that exist outside the market.
These negative externalities are what make environmental policy important. Think of it this way - without regulation, corporations can create a fairly sizable amount of pollution without it having any effect on the price of the goods they produce. This means that they have no incentive to not create pollution. Since pollution obviously has a negative impact on society by removing the or lowering the benefits provided to us by the environment, this creates a serious problem.
The purpose of environmental policy is to ensure that businesses are required to pay for the negative externalities that they create in the form of pollution. The purpose of environmental economics is to find the optimal amount of regulation and remuneration to society to provide for the most efficient use of the possible benefits that the environment can grant.
This may seem a somewhat cynical view of the environment and why we protect it, but, ultimately, economics is a human science that deals solely with human benefits, human concerns, and human preferences. This means that understanding and maximizing the human benefit of any resource, such as the environment, is the sole concern of economics.
Now that that's out of the way and, hopefully, the last post makes a bit more sense, I'm moving on to another topic! By request of a few individuals, I'm going to take a while and a few posts to write about the impact of large national debt on individuals and the economy. Let us hope you all find it interesting.
For the economy, the environment is a resource. It provides a steady stream of benefits, both in the form of natural resources and in the form of recreation and other benefits, such as natural beauty. These benefits can, at least theoretically, be treated the same as ordinary goods, like television; in fact, the branch of environmental economics deals entirely with placing a market value on the non-market goods provided by the environment.
The problem with environmental goods that makes them different from more normal goods is that they exist outside the market, hence the term non-market good. This means that any effect to the environment that occurs during the production or sale of a non-market good is not incorporated in the price of that good. This is referred to as a negative externality, as there are negative effects of market goods that exist outside the market.
These negative externalities are what make environmental policy important. Think of it this way - without regulation, corporations can create a fairly sizable amount of pollution without it having any effect on the price of the goods they produce. This means that they have no incentive to not create pollution. Since pollution obviously has a negative impact on society by removing the or lowering the benefits provided to us by the environment, this creates a serious problem.
The purpose of environmental policy is to ensure that businesses are required to pay for the negative externalities that they create in the form of pollution. The purpose of environmental economics is to find the optimal amount of regulation and remuneration to society to provide for the most efficient use of the possible benefits that the environment can grant.
This may seem a somewhat cynical view of the environment and why we protect it, but, ultimately, economics is a human science that deals solely with human benefits, human concerns, and human preferences. This means that understanding and maximizing the human benefit of any resource, such as the environment, is the sole concern of economics.
Now that that's out of the way and, hopefully, the last post makes a bit more sense, I'm moving on to another topic! By request of a few individuals, I'm going to take a while and a few posts to write about the impact of large national debt on individuals and the economy. Let us hope you all find it interesting.
Friday, January 20, 2012
Environmental Policy: Why It Doesn't Work
Economics is involved with a lot more than just decisions involving money. In fact, it can be used to examine any decision in which one is considering utility and trade-offs, which, realistically, is nearly everything.
Here I'm going to discuss a bit about why environmental policy as instituted by a democratic or semi-democratic government will never yield optimal results from the viewpoint of society as a whole. A more in-depth discussion of this can be found in a paper by Kennedy called "Rethinking Sustainability."
I have been unable to find a link to an online copy, for which I apologize.
Regardless. The paper itself deals with the idea of present value of future benefits. This refers to the idea that, in the decision-making process of anyone, we always prefer to be given the same thing now than at some point in the future, with the preference being more and more weighted to the present the further in the future we look.
As an example, imaging I were to offer you $1,000 now, or $1,000 in ten years. You would take the present, guaranteed $1,000, possibly after thinking for a short while, and there are many reasons this is done, uncertainty and impatience being the main ones.
For any individual, the degree to which we prefer things now to things in the future can be thought of as the rate that we discount future values in the present, or the discount rate.
Now, consider the difference between the way an individual discounts the future, and the way an insurance company discounts the future. For the individual, his own death is a catastrophe, both to himself and to his family. This is why he buys life insurance. To the insurance company, the death of the individual
It is then the case that we say the insurance company discounts the future of the individual at a lower rate than the individual does. More generally, the individual always discounts the future more than any larger entity, with society as a whole being the largest possible entity with which economics concerns itself.
That is, the individual prefers things now to a degree that is not the most beneficial to society as a whole.
Now, let's apply this same logic to the environment. Obviously, the environment provides us with benefits. Benefits in the future are worth less to us than benefits now. We also know that the individual discounts the future more than society does. This means that any individual or collection of individuals will always take more from the environment than is optimal for society as a whole.
This is a fairly common idea, and the common solution is that the government should step in and prevent individuals and corporations from taking too much from the environment, be it in the form of adding pollution or removing natural resources.
However, in a democratic or semi-democratic government, the government is beholden, at least somewhat, to the preferences of the ordinary individual citizen. This means that, in any case where the government attempts to discount the future at the much lower rate that is optimal for society, the average individual will see such an action as contrary to their own needs and oppose it, therefore rendering the democratic government incapable of doing so over any appreciable length of time.
Kennedy suggests one solution in the form of education about the environment and why it is worth protecting. I present another in the form of changing expectations about government - that is, making people understand that the government is there to make appropriate decisions to benefit them, not to represent them.
I'm sure some of you have your own ideas about what, exactly, can be done about the situation.
Regardless of how you feel about the issue, the bit about discounting the future is very important and I am fairly sure will come up in a number of future issues I'm thinking about discussing.
Anyways. Hopefully this was interesting. If you have any ideas about things I should talk about, please let me know.
Here I'm going to discuss a bit about why environmental policy as instituted by a democratic or semi-democratic government will never yield optimal results from the viewpoint of society as a whole. A more in-depth discussion of this can be found in a paper by Kennedy called "Rethinking Sustainability."
I have been unable to find a link to an online copy, for which I apologize.
Regardless. The paper itself deals with the idea of present value of future benefits. This refers to the idea that, in the decision-making process of anyone, we always prefer to be given the same thing now than at some point in the future, with the preference being more and more weighted to the present the further in the future we look.
As an example, imaging I were to offer you $1,000 now, or $1,000 in ten years. You would take the present, guaranteed $1,000, possibly after thinking for a short while, and there are many reasons this is done, uncertainty and impatience being the main ones.
For any individual, the degree to which we prefer things now to things in the future can be thought of as the rate that we discount future values in the present, or the discount rate.
Now, consider the difference between the way an individual discounts the future, and the way an insurance company discounts the future. For the individual, his own death is a catastrophe, both to himself and to his family. This is why he buys life insurance. To the insurance company, the death of the individual
It is then the case that we say the insurance company discounts the future of the individual at a lower rate than the individual does. More generally, the individual always discounts the future more than any larger entity, with society as a whole being the largest possible entity with which economics concerns itself.
That is, the individual prefers things now to a degree that is not the most beneficial to society as a whole.
Now, let's apply this same logic to the environment. Obviously, the environment provides us with benefits. Benefits in the future are worth less to us than benefits now. We also know that the individual discounts the future more than society does. This means that any individual or collection of individuals will always take more from the environment than is optimal for society as a whole.
This is a fairly common idea, and the common solution is that the government should step in and prevent individuals and corporations from taking too much from the environment, be it in the form of adding pollution or removing natural resources.
However, in a democratic or semi-democratic government, the government is beholden, at least somewhat, to the preferences of the ordinary individual citizen. This means that, in any case where the government attempts to discount the future at the much lower rate that is optimal for society, the average individual will see such an action as contrary to their own needs and oppose it, therefore rendering the democratic government incapable of doing so over any appreciable length of time.
Kennedy suggests one solution in the form of education about the environment and why it is worth protecting. I present another in the form of changing expectations about government - that is, making people understand that the government is there to make appropriate decisions to benefit them, not to represent them.
I'm sure some of you have your own ideas about what, exactly, can be done about the situation.
Regardless of how you feel about the issue, the bit about discounting the future is very important and I am fairly sure will come up in a number of future issues I'm thinking about discussing.
Anyways. Hopefully this was interesting. If you have any ideas about things I should talk about, please let me know.
Thursday, January 19, 2012
Economics and Politics
Economics is often called the dismal science, a term coined by Thomas Malthus.
In general terms, this comment is interpreted to mean that economics often gives no real solutions to the problems it investigates. For instance, an in-depth understanding of welfare theory will bring you no closer to being able to solve the problem of maximizing the total utility of society as a whole.
This is where politics comes in. Politics deals with the government, a non-market force with the ability to affect the market. Hence, it is often from whence attempts to solve economic problems come, either directly or indirectly.
As such, while the main thrust of this blog is in the field of economics, a large portion of it will also be devoted to politics and how it relates to economics.
Just thought you should know, in case it matters.
Also, if any of you have ideas as to what I should write about or questions to ask, please feel free to put up a few comments. I shan't complain.
In general terms, this comment is interpreted to mean that economics often gives no real solutions to the problems it investigates. For instance, an in-depth understanding of welfare theory will bring you no closer to being able to solve the problem of maximizing the total utility of society as a whole.
This is where politics comes in. Politics deals with the government, a non-market force with the ability to affect the market. Hence, it is often from whence attempts to solve economic problems come, either directly or indirectly.
As such, while the main thrust of this blog is in the field of economics, a large portion of it will also be devoted to politics and how it relates to economics.
Just thought you should know, in case it matters.
Also, if any of you have ideas as to what I should write about or questions to ask, please feel free to put up a few comments. I shan't complain.
On Social Welfare
For those of you transitioning over from the short-lived previous location of my blog, welcome!
The following is a link to a short article from Tumblr that provides the basis for my first real post: http://communismkills.tumblr.com/post/16120904596/not-oddly-enough-all-arguments-in-favor-of-social
In this post, the writer expresses the opinion that social welfare programs have no real economic basis, and that all arguments for the creation of such programs are based on the idea of 'equity,' i.e. that people deserve certain things at the cost of other people, and it is cruel or unethical to deny them these things.
However, economics does provide a sound foundation for the creation of social welfare programs based on the redistribution of wealth from richer individuals to poorer individuals. This foundation is based on the idea of diminishing marginal utility.
Diminishing marginal utility is one of the key ideas in the economic field of utility theory, and it states that you get more satisfaction out of possessing the first unit of something than any later units. For example, the first slice of pizza you possess is much more useful to you than the hundredth, as, barring some odd occurrences, you will be incapable of consuming that hundredth slice of pizza before it goes bad.
The same idea applies to money. Say you have two people: one with $100,000,000 and one with only $1,000. The richer of the two cares less about losing or gaining $1,000 than the poorer one. Imagine the difference between doubling your wealth and lose 1/1000 of your wealth, and the concept is grasped.
It can then be said that a redistribution of wealth can raise the overall utility of society; thought it may lower the utility of richer individuals, it will raise the utility of poorer ones by more than the utility lost, at least in theory.
It may be that there exist no cases or individuals for which such a redistribution can occur, but the theoretical possibility of such a redistribution still exists.
In related news, this is my first real post! Hooray?
The following is a link to a short article from Tumblr that provides the basis for my first real post: http://communismkills.tumblr.com/post/16120904596/not-oddly-enough-all-arguments-in-favor-of-social
In this post, the writer expresses the opinion that social welfare programs have no real economic basis, and that all arguments for the creation of such programs are based on the idea of 'equity,' i.e. that people deserve certain things at the cost of other people, and it is cruel or unethical to deny them these things.
However, economics does provide a sound foundation for the creation of social welfare programs based on the redistribution of wealth from richer individuals to poorer individuals. This foundation is based on the idea of diminishing marginal utility.
Diminishing marginal utility is one of the key ideas in the economic field of utility theory, and it states that you get more satisfaction out of possessing the first unit of something than any later units. For example, the first slice of pizza you possess is much more useful to you than the hundredth, as, barring some odd occurrences, you will be incapable of consuming that hundredth slice of pizza before it goes bad.
The same idea applies to money. Say you have two people: one with $100,000,000 and one with only $1,000. The richer of the two cares less about losing or gaining $1,000 than the poorer one. Imagine the difference between doubling your wealth and lose 1/1000 of your wealth, and the concept is grasped.
It can then be said that a redistribution of wealth can raise the overall utility of society; thought it may lower the utility of richer individuals, it will raise the utility of poorer ones by more than the utility lost, at least in theory.
It may be that there exist no cases or individuals for which such a redistribution can occur, but the theoretical possibility of such a redistribution still exists.
In related news, this is my first real post! Hooray?
Hello Thar
Hello, random people.
My name is Bryan. Also, I like the color purple. That’s the only things you really need to know about me.
I’m creating this blog specifically as an outlet for writing and discussing impartial economic views of opinions and current events. Hopefully I can keep things simple, but I will probably fail, as I do at many things.
I’ll do my best to keep updating as I can, because if no one else cares, at least I do.
My name is Bryan. Also, I like the color purple. That’s the only things you really need to know about me.
I’m creating this blog specifically as an outlet for writing and discussing impartial economic views of opinions and current events. Hopefully I can keep things simple, but I will probably fail, as I do at many things.
I’ll do my best to keep updating as I can, because if no one else cares, at least I do.
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