When Should Countries Pay Down Their Deficits?

Real Clear Markets ^ | June 17, 2015 | William Gale & Diane Lim

[expat_panama]

A recent study by three researchers at the IMF addresses an important question: Under what circumstances should a country pay down its public debt? When countries face fiscal crises, they have no choice but to cut debt. When they need a Keynesian stimulus, they end up raising debt. But what about a country that is not at risk of a fiscal crisis and is near full employment - a country that is in what the researchers call "the green zone?" Should it pay down its debt (reduce its deficit) or pursue other objectives like public investment?

The IMF researchers write down a model that says that such a country should not pay down its debt; it should increase public investment financed by debt, instead. Public reaction to the study in the U.S. has fiscal doves exulting, but this reaction is misguided and it would be a mistake for policymakers in the U.S. to conclude that they can safely put aside worries about the huge U.S. government debt burden.

Two key issues have been misunderstood in the public discussion about the IMF research. First, the question of whether public investment should rise is distinct from the question of whether medium-term fiscal consolidation should occur. Second, the researchers' results tell you about their own model, not necessarily about the real world, and their model makes two key assumptions that guarantee its results - that public infrastructure pays above the market rate of return, and that there are no benefits of debt reduction (if there is no prospect of fiscal crisis).

In fact, the right answer to the question about debt repayment - obvious to any careful observer - is "it depends."

[snip]

...the real-world debate about the appropriate timing and extent of debt reduction.

[Raycpa]

You pay down debt, not deficits.

[bert]

yes but......

Obama has reduced the deficit

[expat_panama]

Good Morning and a happy FOMC Day to all!  Yesterday's stock gains (in falling volume) with flat metals are now morphing into stock futures flat/up 0.02% and metals -0.19%. 

[PGalt]

6. But the grand nostrum will be a public debt…

http://www.constitution.org/cmt/freneau/republic2monarchy.htm

[driftdiver]

WHo doesn’t want you to pay off your debts? Your bankers

[Seruzawa]

First, get over the idea that any country ever needs a “Keynesian stimulus”.

[Lurkina.n.Learnin]

If 15% interest rates ever return we will know the proper time was before then.

[Buckeye McFrog]

*except in the current environment where virtually all countries are coming to the realization that they have more debt than can ever be paid...then all bets are off.

[Paladin2]

‘Xactly. Debt is a form of slavery. Some like it, many don’t.

[expat_panama]

You pay down debt, not deficits.

At first glance that sounds picky but thinking about it puts it spot on.  "Paying down a deficit" sounds like the democrat double-speak "paying for a tax-cut".  Real world says that spending cuts reduce a deficit but "pay" nothing, while tax hikes/cuts do nothing w/o spending cuts.. 

[mountainlion]

Obama has reduced the deficit

By reducing international trade and reducing crude oil imports by killing business?

[Gaffer]

Yes....they seem to think that as long as there is some nebulous cache of wealth that can be tapped, however drastically that may happen, there is no problem if a debt can be serviced.

The problem comes when you have an unaudited Federal Reserve able to issue bonds and certificates (effectively printing money) based on illusion the country is ‘solvent’.

Solvency means different things. It is one thing to be solvent in your own right; it is another when you obligate future wealth and uncommitted wealth to that guarantee. Further, to ignore trillions and trillions of unfunded liabilities (entitlements, Social Security, et al) and not consider them in the solvency equation is just plain fraud in my opinion.

[Raycpa]

The trade off is that at any point in time there is only x amount of cash to invest. When government borrows, there is less money available for business to invest. The model these guys created must make the assumption that government is better at allocating dollars than a free market. I believe that assumption is false.

[ProtectOurFreedom]

Government makes horrendous "investment" decisions with our money. Instead of "investing" in productive assets that would increase the wealth of the nation, it "invested" something like $22 TRILLION to create these monsters -- and because that "investment" has been so successful, the government keeps pouring most of its tax haul into this investment vehicle.

It is childish to think the government would learn from decades of mistakes and change investment course.

[bert]

I would suggest that since the budget is on auto pilot the deficit was reduced by the sequester. The sequester is a reduction in spending that is mandatory across the board.

Although the deficit is reduced, there is still a deficit and thus the debt continues to rise.

The political asshole in the White House claims the deficit is reduced knowing that 8 out of 10 Americans can’t differentiate between the debt and the deficit

You are referencing the balance of trade. That is a completely different kettle of fish and in the long term doesn’t really matter. Almost all of us maintain trade deficits, especially with our grocers.

[mountainlion]

The term deficits is wide open. There is a moral deficit in government. I was referring to the trade deficit being sarcastic to the government deficits. There is a budget deficit. When Should Countries Pay Down Their Deficits? Notice deficits is plural and not specific to finical deficits.