This should be my last post on this topic, so hopefully it clears up the majority of questions related to it. You can probably get through it without having read the previous four posts, but the reasoning behind the assumptions made here can be found there.
Anyways. Here goes...
Government debt effects the individual negatively in one of two ways.
The more common affect is increased inflation. This occurs as the money supply expands and confidence in the financial stability of the government drops. While inflation is not necessarily a bad thing, and is even healthy for the economy at low levels, this can become a problem when it pushes inflation upwards well in excess of economic growth.
The second affect is that of financial instability. As the government has an incredibly stable cash flow in the form of taxes, this usually has zero impact on the individual beyond the ordinary impact it has on the value of the currency. However, in cases where paying off interest becomes prohibitive to the government's functioning, reduction of services and the potential of insolvency are both issues that affect the individual in a number of major ways, which I will not elaborate here.
(If you want to examine what happens when a government declares bankruptcy, take a look at Greece.)
The ideal positive impact of government debt is that the individual stands to gain from the additional services that the government provides as a result of deficit spending.
From here, we can then attempt to answer a rather important question: when is it a good idea for the government to run a deficit?
First and foremost, the problem is one that must be examined dynamically, rather than statically. Therefore, impacts of deficit spending will be examined in the future as well as in the present.
Now, let us say that there is a service the government must run a deficit to provide. Let us further assume that the service is a net benefit to society, as, at least in my opinion, the government should be offering no services that do not have a net positive benefit to society.
If the service is one that will be provided through a number of payments over a year or even a few years, deficit spending can be the proper thing to do. It obviously depends on the magnitude of the benefit of the service provided, but there is no theoretical reason as to why deficit spending could not be a good decision in this scenario.
On the other hand, if the service is one that necessitates a certain amount of funding every year over an arbitrarily long period of time, deficit spending leads, eventually, to a debt that the government cannot handle. Even small amounts of regular deficit spending will eventually cause the interest payments on the debt to eat into the budget, requiring additional deficit spending which, in turn, yields higher interest payments. This is obviously not sustainable over the long run.
We can then say that if the service requires capital every year to continue to be provided, either the service should not be provided at all, taxes should be raised to accommodate higher necessary spending, or other services should be cut to fit the necessary budget within current tax revenues.
These two scenarios are the extreme cases, so it can be said that they may never occur. However, from them we can come to a conclusion as to when the government should decide to run a deficit, and it can be stated in a single sentence...
Governments should run a deficit only when providing a beneficial service that requires only a few infusions of capital over a short period of time.
So, yeah. Hopefully the conclusion makes some amount of sense. A lot of the reasoning is in the other posts, so I advise you read those before asking any questions.
Also, I will not pretend that the conclusion holds in all cases, as there are very few economic laws that do, let alone little ideas like this one.
Anyways. I have a few ideas for my next few posts, but if any of you can think of something in particular you'd like to see me discuss, just leave a comment and I might get around to it. Eventually. Maybe.
Sunday, February 12, 2012
Tuesday, February 7, 2012
Individual Impact of Substantial Government Debt, Part Four: The Economy
To examine what government does to the economy, we must first examine what a large amount of debt does to a corporation.
In many cases, large amounts of debt do nothing significant, as individuals are still confident in the corporation's ability to maintain interest payments over long periods of time. On the other hand, large amounts of debt can also cause panic among investors, driving down stock prices and requiring higher interest rates to secure capital through the use of bonds.
For the government, we would ideally hope that the first case is the one that holds. Largely, it can also be shown that this is the case that holds. However, there is one major difference - deficit spending by the government causes inflation. Here's why.
Deficit spending by the government both reduces overall confidence in the government's finances and, generally, increases the supply of money available to the economy.
Considering that currency can be thought of as the government's version of 'stock,' and inflation is the devaluation of currency, a lack of confidence in government finances obviously increases inflation.
Additionally, increasing the money supply is both theoretically and empirically linked to greater inflation. The Quantity Theory of Money does a great job of explaining why this is the case, but I will leave it to you to Google it and find out more if you so wish.
As such, we can definitely say that government deficit spending will increase inflation when all other things are held constant (HAEC - holding all else constant, is an acronym I'll probably be using in the future). So, HAEC, government deficit spending will increase inflation, although the degree to which it will is not well understood.
To be clear, inflation is not necessarily a bad thing in moderation. To be even more clear, inflation equivalent to the growth rate of the economy can even be considered healthy. As such, this is a negative drawback only when inflation is increased to an unhealthy point as a result of government deficit spending.
Other effects of deficit spending on the economy are largely small and, in many cases, highly dependent on the manner of both the spending and the method of acquiring funds. For instance, the sale of additional government bonds and the general upward trend in the interest rates on those bonds over time as confidence in the government's finances decreases has an impact on the market for bonds.
However, these are all largely small impacts, and we shall ignore them as they have very little impact on the average individual.
Anyways. Apologies for not getting this up over the weekend, but I have been busier than expected. My next post will, hopefully, wrap this topic up quite nicely, but we shall see. If you have any ideas for other topics to discuss or questions or random comments, feel free to leave them.
In many cases, large amounts of debt do nothing significant, as individuals are still confident in the corporation's ability to maintain interest payments over long periods of time. On the other hand, large amounts of debt can also cause panic among investors, driving down stock prices and requiring higher interest rates to secure capital through the use of bonds.
For the government, we would ideally hope that the first case is the one that holds. Largely, it can also be shown that this is the case that holds. However, there is one major difference - deficit spending by the government causes inflation. Here's why.
Deficit spending by the government both reduces overall confidence in the government's finances and, generally, increases the supply of money available to the economy.
Considering that currency can be thought of as the government's version of 'stock,' and inflation is the devaluation of currency, a lack of confidence in government finances obviously increases inflation.
Additionally, increasing the money supply is both theoretically and empirically linked to greater inflation. The Quantity Theory of Money does a great job of explaining why this is the case, but I will leave it to you to Google it and find out more if you so wish.
As such, we can definitely say that government deficit spending will increase inflation when all other things are held constant (HAEC - holding all else constant, is an acronym I'll probably be using in the future). So, HAEC, government deficit spending will increase inflation, although the degree to which it will is not well understood.
To be clear, inflation is not necessarily a bad thing in moderation. To be even more clear, inflation equivalent to the growth rate of the economy can even be considered healthy. As such, this is a negative drawback only when inflation is increased to an unhealthy point as a result of government deficit spending.
Other effects of deficit spending on the economy are largely small and, in many cases, highly dependent on the manner of both the spending and the method of acquiring funds. For instance, the sale of additional government bonds and the general upward trend in the interest rates on those bonds over time as confidence in the government's finances decreases has an impact on the market for bonds.
However, these are all largely small impacts, and we shall ignore them as they have very little impact on the average individual.
Anyways. Apologies for not getting this up over the weekend, but I have been busier than expected. My next post will, hopefully, wrap this topic up quite nicely, but we shall see. If you have any ideas for other topics to discuss or questions or random comments, feel free to leave them.
Thursday, February 2, 2012
Short Post and Apologies
Considering that my last post ended with me stating that my regular update times would be Tuesday, Thursday, and some time on the weekend, it feels rather bad to fail on the very first day...
Regardless, I'm not going to be posting anything long today, as I am quite busy. However, I do have a picture that, I believe, will yield some interesting thoughts. It also relates to the topic I am currently on, which is always a plus.
So, here's a picture, I hope you enjoy it, I'll be posting again tomorrow or the next day to make it up to you.
Regardless, I'm not going to be posting anything long today, as I am quite busy. However, I do have a picture that, I believe, will yield some interesting thoughts. It also relates to the topic I am currently on, which is always a plus.
So, here's a picture, I hope you enjoy it, I'll be posting again tomorrow or the next day to make it up to you.
Tuesday, January 31, 2012
Individual Impact of Substantial Government Debt, Part Three: The Government
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.
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.
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.
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