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Home Publications Blogs Beat the Press $1 Million Dollar Prize! Can You Find Someone Who Holds the View That Steve Rattner Rants Against In the NYT?

$1 Million Dollar Prize! Can You Find Someone Who Holds the View That Steve Rattner Rants Against In the NYT?

Friday, 20 January 2012 17:48

Steve Rattner is very upset. He tells NYT readers

"Debt doesn’t matter? Really? That’s the most irresponsible fiscal notion since the tax-cutting mania brought on by the advent of supply-side economics. And it’s particularly problematic right now, as Congress resumes debating whether to extend the payroll-tax reduction or enact other stimulative measures.

Here’s the theory, in its most extreme configuration: To the extent that the government sells its debt to Americans (as opposed to foreigners), those obligations will disappear as aging folks who buy those Treasuries die off."

Wow, I really would like to find the person who believes that government bonds will disappear when the people who own them die off. I sure hope Rattner can convince readers that this is not true.

However the true statement here, that Rattner either does not understand or is trying to obscure, is that the debt itself is not an inter-generational burden. Since ownership of the debt will ultimately be passed on to future generations (ignoring the portion that is held by foreigners -- which a function of the trade deficit), the debt itself is not a generational burden.

It can raise important issues of distribution within generations and the taxes needed to pay for the debt can create economic distortions, but many other things also lead to economic distortions (like patents and copyrights).

To carry this point a step further, since deficits that stimulate the economy today are likely to increase investment (especially if they are used to finance public investment and education), they are likely to make out children richer. Furthermore, the Fed could simply hold this debt and use higher reserve requirements in future years to stem an inflationary impact from a greater volume of reserves in the banking system. In that case, interest on the debt would be paid directly back to the Treasury. Where is the burden on our kids?

[Note: the million dollar prize is a joke.]

Comments (24)Add Comment
written by bdbd, January 20, 2012 6:43
You can owe me the prize monies.
written by foosion, January 20, 2012 6:43
Real (inflation adjusted) yields on 10 year treasury debt are less than zero. Investors are paying the government to take their money. Not borrowing more at these rates seems silly
Hank Morris already collected the $1,000,000 + prize from Rattner.
written by AndrewDover, January 20, 2012 7:52

Except that all he had to do was ensure that Rattner's firm was awarded the NY State pension fund contract:

From the AG's statement of November 18th, 2010:


The series of kickbacks paid or arranged by Rattner include the following:
Rattner paid over $1 million in sham placement fees to Henry “Hank” Morris, then-Comptroller Alan Hevesi’s paid political adviser and campaign manager.
Though Morris provided no legitimate placement services, Rattner paid these fees in order to influence Hevesi’s and then-Chief Investment Officer David Loglisci’s decision to make investments totaling $150 million in Quadrangle Capital Partners II (“QCPII”), a private equity fund.
At Morris’s request and in order to influence Hevesi, Rattner arranged for third-party contributions totaling $50,000 to Hevesi’s re-election campaign. Shortly thereafter, the CRF increased its total investment in QCPII from $100 million to $150 million. Rattner ensured that the contributions were made through third-parties in order to conceal his role and to ensure his name did not appear on public donor records."

written by ltr, January 20, 2012 8:20
How impossibly stupid.
The Debt Does Disappear
written by PAUL , January 20, 2012 9:14
Because inflation eats it. For example, over 90% of our debt at the end of WWII was consumed by inflation.
A $1,000 government bond in 1945 now buys $92 worth of stuff. So going into debt to fight WWII was definitely worth it and our standard of living is massively higher than it was in 1939.

But the question remains: how do people like Steve Rattner get jobs when they are so blatantly ignorant?
Out of context
written by Rodyn, January 20, 2012 9:25
You're taking his position out of context. His column was looking at debt held through US citizens via bonds v. other forms, like debt issued to foreign institutions.
You'd serve your readers better by being more honest about the position you're taking a stand against. Or, perhaps, you didn't bother to read to the end of the article? It was 800 words or so.
[jokes that need footnotes]
written by JHM, January 20, 2012 11:57
Happy days.
What does this generation owe the next? Anything?
written by Luke Lea, January 21, 2012 12:05

A nation can consume its capital, which is little more than the accumulated crime and sacrifice of centuries, plus interest. A terrible human price has been paid to build the modern world, and we owe it to future generations not to deliver them back into servitude, into the hell-hole of history from which our ancestors climbed. We need to pay more attention to the possible mechanisms, whether public or private, by which such a sin could be committed. It would be the greatest of all possible evils.
Inter-Generational Scarcity is a Myth, Low-rated comment [Show]
Debt does matter...
written by LSTB, January 21, 2012 8:19
...For different reasons. Rattner's is a straw man argument, hence his statement, "Here's the theory, in it's most extreme configuration." Right. Too bad he's unwilling to argue against the mainstream configuration.
Rattner writes:
The more realistic alternative of continuing to service that debt offers the unattractive eventual prospect of either higher taxes or sharp cutbacks in government programs, or both.

Higher taxes isn't a problem depending on the tax. Eliminating the home mortgage interest deduction and the exclusion of gain from sale of principal residence would be good taxes, as would taxing the Romney rentiers. As for spending, we don't need private health insurance, Homeland Security, tens of thousands of nuclear weapons, and aircraft carriers.

But what really bugs me is when Rattner closes:
I agree that short-term help for the economy combined with long-term deficit reduction is the right direction for budgetary policy.

Pushing this to the penultimate paragraph isn't good faith. I doubt he really believes it.
written by tom m, January 21, 2012 8:36
I nominate Jamie Galbraith who makes a similar argument in his New Republic article, elaborated in a working paper at the Levy Institute. We will pay off the debt---by issuing new debt.

Well, I can't help but think this is just a bit too Happy Talkie for me.

Can I have the mil. in small bills?
written by Robert Waldmann, January 21, 2012 9:42
Will you please cut the Ricardian equivalence crap. Yes if there were Ricarida equivalence, then the main problem with debt would be distortions due to taxes needed to satisfy the intertempral public sector budget constraint. But you don't believe in Ricardian equivalance any more than I do. given actual ignorance, public debt creates the illusion of wealth causing irrationally high consumption and crowding out investment (except when the economy is in through the looking glass and down the rabbit hole, that is, in a liquidity trap).

Points conceded for the sake of argument should not stay conceded. So pointing out that Ricardian equivalence impalies a public spending multiplier of 0.95 not zero if monetary policy is accomodating should not cause you to assume Ricardian equivalence when writing about what is bad about public debt when the economy is not in a liquidity trap.
Think OLG models
written by Nick Rowe, January 21, 2012 11:09
Dean: "Since ownership of the debt will utlimately be passed on to future generations (ignoring the portion that is held by foreigners -- which a function of the trade deficit), the debt itself is not a generational burden."

Unless you believe in Ricardian Equivalence, the ownership of the debt is not "passed on" to future generations as a gift. The bonds are sold to future generations.

In an Overlapping Generations Model, even for a closed economy with lump-sum taxes and no capital goods, the debt is a burden on future generations.

Put it another way
written by Nick Rowe, January 21, 2012 11:17
Future generations pay for the bonds, but inherit the liability as a "free gift".

And Robert Waldmann is right. Either you believe in Ricardian Equivalence or you don't. You can't have it both ways, and only believe in it when you want to say the debt is not a (first order) burden on future generations.
Ricardian Equivalence
written by Dean, January 21, 2012 11:44
I'm failing to see the point how a lack of Ricardian equivalence means that the debt is a generational burden. How does the argument that people consume based on ownership of the debt make it a generational burden? Right now, since we are way below potential GDP, the additional consumption spurred by the debt would simply boost growth.

Even in more normal times, where it can lead to additional consumption that can crowd out investment/net exports the impact on future generations is measured by its impact on GDP growth, not the debt. (I cannot even think of a story where it would be one to one.)

As far as current generations selling the debt to future generations -- sorry folks, in this country we have something called inheritance. look it up.
written by skeptonomist, January 21, 2012 11:58
The belief that debt doesn't matter is certainly one that is held by some economists, such as James Galbraith, and by politicians when they are in office, although not necessarily for the reason that debt is not passed on between generations. The whole question is evidently one that is too complicated for economists (as are many questions in economics) since there is such wide disagreement about it. What is remarkable to me is that economists think they can answer these question on a purely theoretical basis (or claim to) without reference to pertinent history. Although several prosperous nations, such as Britain, the US and Japan, have run up debts well over 100% of GDP and have been none the worse for it, some economists (not just politicians) claim that these levels of debt are disastrous. Of course no successful nation has actually taken the view that debt doesn't matter - tax rates have always been high during and after wars so that debts as a fraction of GDP were eventually reduced. And again many economists go along with totally anti-historical claims that such tax rates are disastrous. During wars it is very rare for economists or economic conservatives of any kind to claim that expenditures must be severely limited because of future consequences. Actual printing of money in war, such as greenbacks during the Civil War, did not in the real world lead to the disasters that continue to be predicted - on the whole the US economy was very prosperous after the Civil War.

Rattner's piece is certainly slapdash, and he makes no concrete recommendations; what exactly does he think provides long-term benefit and what is it that is currently giving the economy "a short-term burst of caffeinated energy"? Where is the evidence of any caffeination?
written by Eclectic Obsvr, January 21, 2012 1:47
Goes back to the error of the Clinton Administration in getting all these Wall Street types to think they should be running Economic Policy.

Where were these folks when we reversed the surpluses with Tax cuts and unpaid for spending in the years before the recession?

Sure, I'd bet you can find some Economist with an argument that Debt doesn't matter but it's hardly a new view. The progressive voices have only said that debt is not a short term issue and it shouldn't be used to frustrate us from stimulating the economy or avoiding a demantling of the social safety net.
who will take these good thoughts?
written by analist, January 21, 2012 5:05
What amazes me as a non-economist is that anyone would argue anything that Steve Rattner pronounces in his missives or on the telly. He is only capturing public attention in order to stay alive, since he cannot contribute legitimately to the decision making. Obama would be ill advised to take him in, and the only way he can legitimize himself is by having people talking about him. It seems that the well intentioned will argue any half-baked submission by Rattner-- in good faith--but who will take your wisdom and put it to use?
I would like to know what will affect the decisions made on debt and jobs and the future, if it isn't political positioning, votemongering and power grabbing, not the best and most accurate course.
As for Rattner, ignore him and he will, hopefully, fly away in one of his planes. He craves power and adulation, he has everything else.
written by Calgacus, January 21, 2012 7:49
Wow. The stupid. It burns. A contender for the all time idiocy prize, along with Ricardian equivalence & the idea that "the debt" could be a burden for future generations. People whose minds have been fuddled by nonsense - called modern economics, with its models and their sham pseudomathematics (which presents a real mathematician with the quandary of whether to laugh or vomit) - should ask themselves - what could "matter" or "burden" here possibly mean? When you have an argument that concludes with 2+2 = - 58, do you conclude that you have discovered a new arithmetic fact, or that you made a mistake? If the first, you deserve a Harvard professorship in economics. :-)

Dean, your psychotherapy for the fuddled is praiseworthy.

Rodyn, there's nothing out of context. Rattner came up with the weirdest straw many imaginable to defend the preposterous idea that "the debt" could "matter" or be a generational burden, with the nonsenses that "entitlements" should be cut & that taxes pay for spending in the background.

Paul, inflation is overestimated as a cause for debt "disappearance". The $1000 1945 bond, if rolled over, would still buy about $1000 worth of stuff. Treasury bonds are a decent store of value. Economic growth makes growing nominal debt non-inflationary. There's more financial assets out there, but also more real wealth for them to buy. Equally, skeptnomist, it's growth that "matters", not taxation. For the whole of the 19th century, Britain had a Japan-sized debt & low interest rates, and low laissez-faireish taxation. No problem, even under the gold standard.
Ricardian Equivalence and inheritance
written by Nick Rowe, January 22, 2012 1:42
Under Ricardian Equivalence, people will save all of a bond-financed transfer, and pass on all of the bonds as an inheritance to their children, so there is no burden on the next generation.

If they don't pass on all of the bonds as an inheritance to their children, then there is a burden on future generations, and Ricardian Equivalence is false.

You can't have it both ways. If they plan to bequeath all the bonds to their children, they must plan to save all of the bond-financed transfer.

Sorry, but you and Paul Krugman are just plain wrong on this. What I am saying here is nothing new. Most macroeconomists have understood this point for the last 30 years. If you believe there is no burden on future generations, then, like Barro, you believe that bonds are not net wealth.
Are you unaware of the recent debate on this point?
written by Nick Rowe, January 22, 2012 1:58
written by Shayre, January 22, 2012 1:39
Eventually, wealth will be so concentrated that the majority will have no problem supporting estate taxes that clawback all the IOU’s the government has issued. This will be under the guise of returning America back to a meritocracy!
These people didn't believe....
written by M. Senft, January 23, 2012 7:38
Rattner was in fact a little right. The Bush/Cheney administration poo-pooed the growth of debt from irresponsible tax cuts.

Money, please!
Ricardian Equivalence
written by anon, January 24, 2012 10:10
You only have to assume ricardian equivalence when the interest rate is held permanently above the growth rate.

There is also no necessary burden if the interest rate is held (roughly) equal to the rate of growth over time.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.