On public debt

I have been busy at work as we approach the final-exam season.  But I enjoyed a little respite today and took part in a recent discussion on public debt held on the PEN-L listserv moderated by Michael Perelman.

Here are, in chronological order, my full posts (slightly edited to correct bad grammar and clarify a couple of thoughts stated too telegraphically in the original posts). Click on the link above to visit the list archives and follow the entire discussion.  (I’ll continue blogging on planning as soon as I can stick my head out the water.)

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Doug [Henwood] wrote:

Why is this so hard to understand? Social Security is an obligation of the U.S. Treasury. They write the checks, after all. In an attempt to meet a projected excess of outflow over inflow at some point in the future, the system has accumulated surpluses that it invested in non-tradeable T-bonds. Someday, the SS system is going to have to redeem those bonds to pay beneficiaries. How does the Treasury come up with the cash? It will either have to raise taxes, cut spending elsewhere, or borrow anew. It’s not like the Treasury is some external party to the deal. What savings are there? They’re purely internal bookkeeping entries.

It’s as if the status quo has caged an eagle. The ideologues of the status quo say, “You see, caged eagles cannot fly!” Max [Sawicky] seems to be saying, “Let that eagle out of the cage and you’ll see that it can fly up to the top of that mountain.” Doug [Henwood] seems to be saying, “If we make our argument as if eagles need no oxygen or as if they don’t have to abide by the law of gravity, we are going to look stupid and will never be taken seriously.”

It is true that an economy — even if it could continuously glide along its “full employment” path — has at each particular point in time a finite amount of wealth to distribute, and that applies to the resources society devotes to discharging its public functions. But the issue that Max (and others) seems to be getting at is that when the economy is far from full employment the funding of public expenditure programs (e.g. Social Security) does not have to be a zero-sum game. Certain fiscal policies (e.g. “deficit spending” and, therefore, borrowing) can help the economy expand the whole pie and, basically, fund at least a portion of the public sector’s obligations from what comes as a “free lunch.”

Frankly, as things stand right now, I don’t see much of a political downside to — as Doug puts it — just kicking the can down the road (i.e. using “creative” public-financial schemes to roll over the debt and fund the gap between Social Security outflows and inflows), as opposed to what appear as more definitive “resolutions,” e.g. giving workers back exactly what they contribute (minus administrative expenses?) as it may capitalize over time, or by maintaining “pay as you go” but reducing benefits, postponing retirement, or increasing taxes.

“Kicking the can” may be a tactical necessity, since there are such taboos fogging the minds of people. I guess if people had the things clear in their heads and we had sufficient political strength, we could just say, “Look, from this point on, working people are in command. So, if you hold public debt in your portfolio and have a net worth exceeding $X, then consider that debt officially repudiated. Society owes you nothing. From this point on, we will only honor explicit and tacit, grandfathered-in public obligations contracted with working people (and, among those, those that, after careful review, we may collectively regard as legit), plus all other obligations we may democratically contract subsequently.  All obligations held by — or for the benefit of — the propertied class are not legit and are hereby officially disavowed, abolished, gone.”

We want the needs of people to be met. How specifically that is to be done in a system in which private ownership is considered such a sacred cow should be left to the financial imagination of our public economists and the political imagination of our politicians, since ideological and political compromises may be required here and there. What we cannot afford is not to meet those popular needs. After all, what’s the point of an economy if not the welfare of its people?

*  *  *

Doug wrote:

You’re basically conceding that the idea of a SS surplus is a fiction, and making good on promised benefits will require new borrowing. There’s no reserve to be drawn down. Benefits will have to be funded by future incomes – the whole thing is pay as you go.

I would not call this a “concession.”

I view financial obligations as flowing from legal contracts and political configurations — e.g. the political and legal conditions that led to passing the 1935 Social Security Act and then reforming it as it stands today. So financial obligations that flow from legal contracts and political configurations are necessarily contingent, because legal and political conditions are in flux (with temporary stasis and all that, but overall in flux). In plain terms, these obligations (and all other obligations) are contingent upon the ability of the parties and ultimately of the state to make them bind, to enforce them.

Karl Marx used the term “legal fiction” to refer to private ownership contracts (i.e. to what we call financial assets) in contrast with the effective economic power of private individuals in a given social context to exclude others from snatching their wealth without their consent. But Marx wasn’t referring here to a mere illusion that can be dispelled by people merely changing the notions in their heads. Marx was referring to an alienated social fact with a certain degree of hardness or objectivity (with or without the quotation marks). Social objectivity is illusory and then it is not.

A point that Max Sawicky has made here before (or at least, that’s how I have construed his point) is that it is incumbent upon the left to promote the idea that financial obligations (tacit or explicitly legal) contracted by the federal government with regular people (the safety net) are as sacred and hardwired as the financial obligations between, say, the Treasury and the holders of regular Treasuries or between GE and its bondholders. Max has suggested that leftists tend to act as if these obligations between society (as represented by the federal government) and working people are second rate: for some reason much more contingent than the other ones out there. If that is the case (and it seems that it is), we are helping a self-fulfilling prophecy to be realized against our own interest. So, I agree with Max: Absolutely! In fact, if it is really up to us, then we should promote the notion that financial obligations between society and working people are the only ones that deserve to be honored. All other ones, well, we’ll see about that….

Now, I agree with you: the outcome will depend on the class struggle.  But, for some reason, you seem to suggest that if the government had a portfolio containing, instead of some rather peculiar type of Treasuries, private assets (e.g. “real” securities like real estate or commodities, or at least bonds and other obligations issued by private individuals, corporations, or foreign governments; oh, and currency, local or foreign exchange!) and dutifully labelled it “SS reserve portfolio,” then SS would be solvent. Since that is not the case, then SS is very iffy. Well, indeed. But those private financial assets are also contingent and, hence, they are also iffy, “fictional.” (And so is currency, which is just another obligation of the Treasury or central bank, even if it doesn’t look like one; but I should leave that for another post.) The outcome of those financial obligations will also depend on the class struggle! If society as it is doesn’t gather the productive force required to make these (or other) obligations effective, if they are left unenforced for whatever reason (reasons that are all contingent on political conditions), then they will all prove to be entirely fictional, and that’s that.

Why is my house ownership deed more binding than, say, the legal responsibility of the Fed to ensure the “full employment” of the labor force? Well, ultimately, because we all politically make it so. If we are going to go against the fetishism of U.S. capitalism, then let’s do it across the board. ¿No?

* * *

[In the following post, I make the point that every public spending program is necessarily, from a material point of view, “pay as you go” (PAYGO). Financially, they may or may not be. But economically or materially, they always are.  So called “fully-funded” public spending programs are necessarily — from a material viewpoint — PAYGO.  Believing otherwise is falling into the fetishistic myth of capitalist finance as detached from the production of actual wealth.]

Doug wrote:

In other words, the allocation of funds in the present. A society as a whole can’t save for the future the way individuals can. Yes, we’ve largely pissed away the proceeds of the borrowing, and probably reduced future incomes as a result. But that doesn’t change the fact that the benefits will have to be paid out of future incomes, not today’s savings.

Jim [Devine] wrote:



We need to see beneath the veil of money.

What people, as individuals, “save” today is not future wealth, but legal rights or (viewed from the other side) legal obligations contracted among one another over the disposition of future wealth. Future wealth does not exist today.  Future wealth is whatever wealth happens to be available in the future, and for the most part wealth has to be (re)produced: workers have to be  reproduced, maintained healthy and educated; the environment has to be preserved and enhanced; buildings, roads, machines, and inventories of all sorts of goods have to be repaired, maintained, renovated, or replaced with new ones.

Needs at time t can only be satisfied by wealth (goods) extant at time t, regardless of how the legal claims over that wealth may be allocated before, then, or after. Revolutions are precisely the reset button with which societies alter the allocation of those rights or obligations. The real issue then is who — which class or group of people — is going to appropriate the wealth existing at t, i.e. whether none/some/all needs of working people will be met at t — where t may be today (t=0) or some near or distant point in the future (t=k>0).

So, there are two issues here. Issue one: At t=0, we should not let the true sources of wealth (the natural environment and us, human beings) be destroyed or left to decay. We have to preserve the ultimate and true sources of wealth, and that can only be done to the extent the needs of working people are met today.

Issue two: Since t=k>0 will arrive, provided we humans are still around for that to matter, then we need to do today whatever possible to arrange things in such a way that when t=k>0 arrives, we are in a better position to make human life worth living, i.e. to have the true sources of wealth not only preserved but duly expanded and enriched.

We need to reject this notion that under capitalism, what individuals “save” privately, has some existence independent of the aggregate reality of our material reproduction as a society.

* * *

Doug wrote:

What contract? I don’t recall signing anything guaranteeing me certain SS benefits. They’ll take my money and maybe put me in jail if I don’t pay the tax, but the level of benefits is entirely up to Congress.

Well, you hadn’t been born. And not all contracts have to be spelled out.  There are what economists call “implicit contracts.”  By being a U.S. citizen, you are bound by the law of the land. Contracts are always socially constructed and socially enforced. By being a U.S. citizen, you are tacitly accepting the legal framework. If you don’t like the current legal framework, then you can renounce citizenship, do politics within the framework to alter it, or — that failing, as Antonin Scalia has reminded us — lead a revolution to change it. The laws that regulate contracts among private parties are also enacted, reformed, or repealed by Congress (and, ultimately, by the social and political forces that shape up the composition of Congress).

I asked why my deed of ownership is more binding that the Fed’s mandate to ensure “full employment” (or whatever formulation may be coined to that end). Doug answered:

Well for one there’s no definition of full employment in law or practice, while the rights and responsibilities of house ownership are well-defined.

That only begs the question of why some rights/obligations are better defined than others. Ultimately, this is a result of the underlying balance of political forces, embedded in turn in more fundamental economic and social conditions.

Complete contracts are impossible. We are talking relations among human beings, which lead to a peculiar kind of “uncertainty.” In general, defining rights/obligations — including those of house owners — is never costless. There is always a loophole, room for interpretation, both of the law (its letter and/or intent) and of the facts. Calls have to be made with lesser or greater arbitrariness. And all that is costly. That is why judicial systems exist.

I don’t know which share of the resources allocated to the judicial system over a given period of time is spent adjudicating disputes among private parties, in contrast to the share adjudicating conflicts between the state and private citizens, but I’d bet that the former is not negligible.

The issue is political power. And, IMO, in the context of the political struggle, it doesn’t help us much to view the obligations that private parties contract with one another as being 24-carat type of obligations while those between the state and working people as being debased. We shouldn’t fetishize either.

And regarding “full employment,” I say, sure, let it be 5.6% for the time being. Why isn’t the Fed taking more dramatic action to get the economy back to, at least, this sort of “full employment”? Again, it is the underlying balance of political forces. So, in the context of this fight, should we emphasize that the eagle is bound by gravity or that the eagle can fly high enough if only allowed out of the cage?

To Matt Cramer’s question:

doesn’t the formulation of SSA and how we talk about it help the political and legal configurations that ensure benefits are paid?

Absolutely. How we frame, phrase, word, even think of these matters makes what appears to be a very subtle difference at an individual level, but that tiny difference adds up collectively. I always go back to Marx on these matters: Pre-Marxist materialism viewed subjective activity as mere contemplation while the Idealists emphasized the active side of the subject.  In fact, the essential activity of the human subject is its practice, its engagement with the material world — the creation and recreation of that thing we call “society.”

Of course, to enforce SS obligations, it is not enough that we convince ourselves that they are sacred. We have to take sufficient political action to translate that belief into a material force. But, for sure, if we collectively believe that the SS Act is all fiction, that the public obligations that flow from it can be dissolved without much happening, then its repeal (or its watering down) becomes much easier for the powers that be.

* * *

Doug wrote:

Julio, I’m really confused. I’m describing the world we all live in; you’re describing some very desirable fantasy world.


I believe I’m also talking about the world we live in. I am sure you’ve read the phrase “The Illusion of the Epoch.” (See Marx, German Ideology, 1845.) Illusions about what is permanent in society — and what is not — are, indeed, part of the social order. They are part of the reason why the social order sticks.

As Marx wrote to Kugelmann (July 11, 1868), and I’m quoting him by heart:

When the inner connections have been identified, all theoretical belief in the perpetual necessity of the existing conditions collapses, even before the conditions collapse in practice. It is in the interest of the ruling classes to perpetuate the confusion. The role of the vulgar economist is to make us believe that we don’t need to think beyond the appearance of things.

[The correct quotation is here.]

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I will end this post by conceding to Doug that, his belief that — for whatever reason (because they are “well defined” or whatever) — private contracts are more binding than public programs enacted and “funded” by Congress to provide a social safety net is a belief that seems to be shared by a lot of people (aside from the fact that legal casuistry matters, for as long as people abide or forced to abide by the law).

To that extent, Doug is indeed talking of the world we live in, because the fact that people massively believe the story turns it ipso facto into a harder-wired social reality, whereas the notion that all financial assets are contingent and represent merely ways in which societies reshuffle the wealth that they reproduce  may be a theoretical notion incomprehensible to most Americans right now and, hence, not real.

But if now — when a triple-whammy combo is shaking U.S. capitalism (the crises of the economy, the environment, and U.S. global hegemony) — is not the time for the critics of capitalism to emphasize the fluidity of social forms –the real possibility of building a different and better society — then when is?


1 Comment

  1. this is a very important post. the idea that the amount of real resources that can be readily sold and distributed relative to current demand for goods and services is the guage for the limitations to government fiscal policy is crucial to understanding budget issues. that no matter how much “public debt” that is incurred by the government, these legal fictions do not magically destroy real goods and services in the present or the future is something very poorly understood.

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