The Associated Press has an important story today about the fairly horrifying condition of many state budgets. On its site, Politico has a rewrite of the AP story. That’s a good thing: the fiscal retrenchment that’s going to result from steep state deficits seems likely to be a big, bad deal for the economy over the next couple years, and it should command the attention of a wide array of media outlets.
Less good, unfortunately, is the lede of the Politico piece: “It’s not just the federal government - the states are broke, too.” That simple statement is simply inaccurate—and inaccurate in a way that fosters misunderstanding of the federal budget in particular.
The problem is the use of the word “broke,” which seems to be used here to mean something like “in an unfavorable fiscal situation.”
But the actual definition of the word is closer to “unable to meet your financial obligations.” Those are very different things, and under the second definition, even today’s strapped state government’s have not reached the point of being “broke.” As a 2010 The New York Times article noted, an American state has not defaulted on its debt since Arkansas did so during the Great Depression.
Still, many states are in a pretty perilous situation. The AP reports that they have cumulative unfunded pension liabilities that near $700 billion, and there’s been talk in some quarters about creating a bankruptcy mechanism that would allow state governments to shed those and other obligations. So while it’s technically incorrect to say any states are “broke” now, it’s at least possible to envision a scenario in which that term applies.
Not so for the federal government, as Bloomberg’s David Lynch showed in an excellent, comprehensive article in March, at a time when House Speaker John Boehner was trotting out the “we’re broke” line frequently. Here’s Lynch:
“The U.S. government is not broke,” said Marc Chandler, global head of currency strategy for Brown Brothers Harriman & Co. in New York. “There’s no evidence that the market is treating the U.S. government like it’s broke.”
The U.S. today is able to borrow at historically low interest rates, paying 0.68 percent on a two-year note that it had to offer at 5.1 percent before the financial crisis began in 2007. Financial products that pay off if Uncle Sam defaults aren’t attracting unusual investor demand. And tax revenue as a percentage of the economy is at a 60-year low, meaning if the government needs to raise cash and can summon the political will, it could do so.
And:
Pacific Investment Management Co., which operates the largest bond fund, the $239 billion Total Return Fund, sees so little risk of a U.S. default it may sell other investors insurance against the prospect. Andrew Balls, Pimco managing director, told reporters Feb. 28 in London that the chances the U.S. would not meet its obligations were “vanishingly small.”
George Magnus, senior economic adviser for UBS Investment Bank in London, says the U.S. dollar’s status as the global economy’s unit of account means the U.S. can’t go broke.
“You have the reserve currency,” Magnus said. “You can print as much as you need. So there’s no question all debts will be repaid.”
And:
“You are never broke as long as there are those who will buy your debt and lend money to you,” said Edward Altman, a finance professor at New York University’s Stern School of Business who created the Z-score formula that calculates a company’s likelihood of bankruptcy.
And in case all those finance-world types aren’t persuasive:
Republican assertions that the U.S. is “broke” are shorthand for a complex fiscal situation, and some in the party acknowledge the claim isn’t accurate.
“To say your debts exceed your income is not ‘broke,’” said Tony Fratto, former White House and Treasury Department spokesman in the George W. Bush administration.
Got that? The U.S. government isn’t “broke,” and assuming Congress doesn’t do something foolish like refuse to raise the debt limit, it’s not going to be anytime soon.
I guess “technically” you are right, the US is not “broke” and we will always have the ability to pay our dollar denominated debt off so long as we have paper for the presses, but do you really think this is an acceptable alternative? Inflating our way out of our obligations would be have the same practical effect as defaulting on them. Prices of any good priced in dollars would skyrocket (hey, aren’t we already seeing that?), the real value of assets priced in dollars would plummet, and the credit of the US would evaporate. Pimco’s Bill Gross recently stated that our finances are in worse shape that Greece’s. To this effect, and something that would have been rather relevant to this article considering you quoted the good folks from Pimco, Pimco has dumped of its U.S. government-related debt holdings recently. China too has sharply decreasing its ownership of short-term securities from $210.4 billion in May 2009 to $5.69 billion in March 2011.
Lots of people thought buying Greek debt was an acceptable risk all the way to the point when they suddenly didn’t.
And you are certainly right that there is a “partisan” angle to this debate. The public is clamoring for deficit reduction and liberals known damn well that with a Republican house this won’t be done on the backs of tax payers it will be done primarily on the backs of tax recipients. So we have articles like this that go through great leaps to downplay the risks of continuing to run trillion dollar deficits because the sooner congress acts on the deficit the sooner the gravy trains end for their constituents.
#1 Posted by Mike H, CJR on Mon 13 Jun 2011 at 05:40 PM
The first definition from Google:
broke/brōk/
Adjective: Having completely run out of money
The use of the word "broke" to describe our national fiscal condition is entirely appropriate. The country is surely broke. We don't have anymore money - indeed the only reason that Congress needs to raise the debt limit is because we have (or will in a few days) completely run out of money.
All the liberal semantics games in the world won't change the reality -- We are broke. Cherry picking dictionary definitions won't alter the financial truth.
#2 Posted by padikiller, CJR on Wed 15 Jun 2011 at 09:47 AM
Funny how a broke country is able to afford all them tax cuts, oil subsidizes, and red state pork.
#3 Posted by Thimbles, CJR on Wed 15 Jun 2011 at 07:05 PM
@Mike H,
Without debating all the particulars, you raise a fair point with Greece -- the economic case for a debt freak-out is that markets sometimes do change their minds quickly. (And fwiw while Greece hasn't technically defaulted yet, I wouldn't object to anyone calling it "broke.") But that's an argument about what could happen, not a statement of what has happened.
And thanks for acknowledging the political salience of the terminology, and the way it shapes what are seen to be the political alternatives. The issue is not that there aren't any risks associated with debt -- it's that, as I wrote, the problem with casually employing this language is that it obscures the debate.
@padikiller,
Fine, let's work with that definition -- the federal government has not "completely run out of money," and it's not going to. As Mike H notes, the federal government prints money. And despite the events he flags, the government continues to be able to borrow money at favorable rates too.
As for the debt ceiling, that is a political limitation, not an economic one. Which, again, was the point.
#4 Posted by Greg Marx, CJR on Thu 16 Jun 2011 at 02:24 PM
Greg wrote: As Mike H notes, the federal government prints money. And despite the events he flags, the government continues to be able to borrow money at favorable rates too.
padikiller responds: Well, hell, Greg.. I've got a copier and some paper, so I could print some money too! And there's a payday loan store in town, so I guess I'll never run out of money, by your stilted, silly definition.
Neither will anyone else.
All this gnashing of teeth in some sort of commie protest over the purported "definition" of a commonly used colloquialism is nothing but juvenile whining.
We are out of money. The only reason... Again.. I repeat... The ONLY reason the debt ceiling needs to be raised is because we are out of money.
Having a bag of crack and having the ability to score a twenty rock on credit are NOT the same things. Having the ability to borrow money from others is NOT the same thing as having money yourself. PERIOD.
That's just the reality.
#5 Posted by padikiller, CJR on Thu 16 Jun 2011 at 02:43 PM
Greg, thanks for the response. To your point that the government is still able to borrow at low interest rates .. this is true, until the moment in time when its not, and every day we continue to run trillion dollar plus deficits that moment draws closer. Correct me if I am mistaken, You seem to believe that the rise in rates on Treasury securities will be long and slow, a point here and a point there. To my “moment when its not” point, I believe that since the worlds finances are in such shambles, investors have nowhere else to go, or they don’t see any viable alternatives, Treasury securities look safe, until the market has a Eureka moment spurred by a new under the radar monetary safe haven or by some massive shock. I believe its called a Black Swan, a seemingly innocuous event that begins a domino effect delivering a coup de gras to an already sick patient. When that moment comes, Treasury securities will become radioactive at their low rates and increasing the yield will not only make that debt more expensive to fiancé but it will make all previous debt that matures extraordinarily expensive to refinance, even if we can cajole investors into buying them at all.
This won’t happen gradually, it will happen all at once. Just like the collapse of Lehman Brothers or AIG or the European financial crisis no one will see it coming but in retrospect it will look obvious to all.
#6 Posted by Mike H, CJR on Thu 16 Jun 2011 at 04:01 PM
And just on a side note, since we are talking about debt here, although I see his name cited here with a regular degree of frequency, I hope the next time you mention Dean ‘lets default our way to prosperity’ Baker its to tear an argument of his to pieces.
#7 Posted by Mike H, CJR on Thu 16 Jun 2011 at 04:07 PM
First, the situation with Greece is that they have no monetary options to use in response to their economic conditions, and so they are getting killed because bank rates for the Euro are good for Germany and France, but not for Greece.
http://www.frbsf.org/publications/economics/letter/2011/el2011-18.html
The only option left Greece in the absence of monetary policy adjustment is a depressed economy until a new equilibrium is established. Banks aren't going to lend to a country undergoing depressed demand and being on the Euro means you gotta borrow from private banks.
This is different from America.
Now, on the subject of Dean Baker, he was one of the ones screaming about the Bush tax cuts and how stupid it was to renew them without guaranteeing a raise on the debt limit, but right now you have a-hole republicans taking hostages to achieve their policy goals. "If you don't renew the Bush Tax cuts, the unemployed get it! If you don't cut medicare and medicaid, the faith in the credit of the United States gets it, etc..."
http://my.firedoglake.com/deanbaker/2010/12/20/saving-social-security-stopping-obamas-next-bad-deal/
The line on hostage taking should have been drawn long ago, but if the republicans continue to attack entitlements while the economy is depressed, then you have to draw the line now. Failure to raise the debt isn't something ANYONE wants, but if the republicans want to attach ever increasing conditions to the release of their hostage, we have to call their bluff.
Iceland and Argentina called the bluff of creditors when they ran into trouble and they have recovered. It wasn't easy, but it was better to start fresh from a lower base than to start from a weighed down, debt saturated, medium one. Dean is not advocating a "default our way to prosperity" path, he's saying if the choice is letting the republicans control policy through hostage taking or standing by the pledges made to american entitlements, you should prioritize the pledges. If the republicans really want to push the country off a cliff, it won't be fun, but the drop will be shorter than you think.
But let's remember who is doing the pushing in this case. Democrats NEVER played this much politics over the debt limit while soldiers were being shot at in the battlefield during Bush.
#8 Posted by Thimbles, CJR on Thu 16 Jun 2011 at 08:12 PM
@Mike H,
Yes, the situation I’m envisioning involves a controlled rise in Treasury rates, when they do start to rise. I should probably leave detailed bond-market discussion to the Audit crew, but what I’ve read leads me to believe that’s the likely scenario.
Relatedly, the terrific econ blogger Karl Smith (who’s right-of-center, in a Will Wilkinson-y way) had a great post, riffing off of Felix Salmon, back in April when S&P downgraded its outlook for U.S. debt. The point was that credit risk can only be understood in relation to other credit. To extend that to your Black Swan scenario, a sudden, uncontrolled rise in rates would mean the bond market’s decided not just that U.S. debt is much riskier than it used to be, but that it’s suddenly much riskier than all the other things investors could do with their money. Because, as Thimbles points out, there are important differences between the U.S. and Greece, I don’t think that’s likely.
Now, maybe you disagree because you think investors will find this other under-the-radar safe haven. Or maybe you think the simple fact of escalating U.S. debt will bring about what Smith calls another “state of nature,” in which haggling over bond ratings is kind of beside the point. I wouldn’t criticize an article that compared the evidence for these arguments against the view I outlined above. In fact, I’d be interested to read it.
But that’s not what this Politico piece was. It was an article on state budgets that, in the course of setting the context in its lede, made a claim about the federal budget that, as I wrote, “can’t do much to improve the economic literacy of readers.” And based on some of the other comments in this thread, I’m sticking by that.
#9 Posted by Greg Marx, CJR on Fri 17 Jun 2011 at 06:36 AM
I just had to laugh at this:
Democrats NEVER played this much politics over the debt limit while soldiers were being shot at in the battlefield during Bush.
The Senate narrowly approved raising the limit along partisan lines in 2006, 52-48, with all Democrats voting no.
Greg, Thank you again for the reply. I would agree that there are fundamental differences between the US and Greece, mainly that Greece cannot print money to pay off its debts like we can, but I don’t think that particular difference is a real issue here. The difference between an outright default and printing money to pay off debt is in style not substance because at the end of the day the outcome is exactly the same: rampant devaluation and a complete erosion of confidence of the borrower. I think that the fundamental difference is US Treasury securities are still considered too big to fail. As bad as a Greek default would be, it would be two orders of magnitude less severe than a US default.
As for safe havens and alternatives to Treasury securities, Pimco and the Chinese are out shopping.
#10 Posted by Mike H, CJR on Fri 17 Jun 2011 at 10:27 AM
Once you catch Thimbles in one of his lies, the thread will soon degenerate into one of his trademark name-calling fests...
"Retard".. "Idiot".. "Moron"..
Still, it was a nice catch.
#11 Posted by padikiller, CJR on Fri 17 Jun 2011 at 10:51 AM
"Once you catch Thimbles in one of his lies, the thread will soon degenerate into one of his trademark name-calling fests...
"Retard".. "Idiot".. "Moron".."
Paddy, I save those labels for you. You're special.
And to Mike, funny I don't see any hostages. I don't see any rapidly escalating conditions that the democrats insist must be met before they pass the limit. I don't see any filibusters. I don't see an end to the war in Afghanistan or Iraq. When it was an empty political gesture, sure the democrats "stood strong" and voted furiously NO. But when their votes mattered in the very next year after the republicans lost some seats?
http://senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=110&session=1&vote=00354
Looks a little different, doesn't it.
I didn't say the democrats didn't play any politics. I clearly said they didn't play politics like the republicans are doing now. The republicans are demanding spending cuts in the middle of a depressed economy right after a bad jobs report came out and not long after the "bipartisan effort" to extend tax cuts for the rich. If the democrats really had the potential to cut off the debt limit and threatened to do so, the Bush administration would have demagogued the hell out of the poor soldiers; fighting without bullets in their guns because the democrats cut off their funding. You know it.
But now it's okay to threaten war funding for the sake of getting one, no two, no two point four, no three trillion dollars worth of spending cuts so that you can line up another tax cut.
IOKIYAR.
#12 Posted by Thimbles, CJR on Fri 17 Jun 2011 at 12:05 PM
It's OK to play politics with the debt limit...
As long as you're a Democrat and as long as you do in the way Thimbles likes..
#13 Posted by padikiller, CJR on Fri 17 Jun 2011 at 01:38 PM
Which label should I use? They're all so appropriate.
#14 Posted by Thimbles, CJR on Fri 17 Jun 2011 at 07:57 PM
You guys notice something interesting in the 2007 vote that Thimbles posted as a dodge to cover his nonsensical claim that the Democrats "never" played politics with the debt limit in wartime?
Take a look at the "Not Voting" section...
Clinton, Obama, and Biden all joined McCain in abstaining from the vote raising the debt ceiling in 2007.
Yeah, Thimbles... No Democrats would ever play politics with the debt limit, would they?
This statement is almost as kooky as Thimbles' suggestion that journalists be held to different standards based on their race.
#15 Posted by padikiller, CJR on Sat 18 Jun 2011 at 07:56 PM