Debt should be compared to wealth, not just to gdp

by on November 29, 2013 at 9:51 am in Economics, Political Science, Uncategorized | Permalink

Here is a good point about Japan:

If there’s one asterisk to put after the shocking comparative figures, it’s that the debt-to-GDP ratios don’t take into account Japan’s huge asset holdings. At the end of March 2012, Japan’s central government had assets totaling some Y600 trillion, roughly half of its total liabilities projected for next March, separate MOF data show. And those assets include Y250 trillion in cash, securities and loans. Critics often say Japan’s fiscal health could quickly improve if the government sells some of those assets, a step the MOF is reluctant to take partly on worries that doing so could deprive lawmakers of incentives to improve government finances.

Here is my July NYT column on related matters.

Bill November 29, 2013 at 10:04 am

Good comment.

We probably will be taxing wealth more in the future.

One example: to fund Medicare, or to reduce the cost of Medicare, by taxing the estate of the deceased for the last six months of medical care, with an exclusion if there is a surviving spouse. Estate taxes are highly correlated with death, and death is highly correlated with high medical spending in the last six months of life. Furthermore, currently children and others often insist on futile and expensive care at the end of life, because Medicare will pay for it. How would family decisions and discussions change if the cost of the last six months of care came out of the estate, meaning that less would be inherited if there were futile care? (If you wanted to exclude yourself from this “tax”, you could buy tail insurance to cover the last six months of cost).

Taxes not only serve a revenue purpose, but also serve to cause people to look more carefully on expenditures if other people might be paying for them. You might also look at this estate-medicare tax as a way to fund medicare in the future.

dan1111 November 29, 2013 at 10:09 am

So, are you saying that, instead of the government funding healthcare, there could be a system in which private citizens pay for it out of their own pockets? And that this might have a beneficial effect on people’s behavior?

I agree 100% with your good idea.

TMC November 29, 2013 at 11:08 am

+1

Jan November 29, 2013 at 5:01 pm

If we aren’t allowed to implement evidence-based utilization and cost controls across the board in Medicare (e.g. death panels; resistance to negotiating drug prices), then a rational second option is to require those with sufficient means to retroactively chip in a bit extra to fund their care after death.

dan1111 November 30, 2013 at 2:58 am

If you are requiring people to contribute as a means of cost control, then why bother to funnel everything through the government? That only adds overhead and makes the cost control mechanism less direct and less effective.

In my opinion, it would make a lot more sense simply to require those people to pay directly for that care by making Medicare benefits means-tested.

I agree that to the extent that the government is paying for health care, there have to be cost controls. No matter who is paying, there are limited resources. To the extent that conservative critiques rail against the very idea of limits, they go off the rails here. The problem with “death panels” is, do you want the government to have the responsibility to make those decisions?

Bill November 30, 2013 at 11:38 am

dan111, I am glad that you agree with my idea to tax at the end of life the end of life expenditures. A dead person has no use for his or her estate, that is, derives no utility from it, and therefore, end of life care should be taxed on the fictional entity called the estate. Otherwise, medicare is something that simply inflates the value of inherited assets.

Jay November 29, 2013 at 11:10 am

“insist on futile and expensive care at the end of life, because Medicare will pay for it?”

Why are high income households paying 4 percent of their income in Medicare taxes? That should easily cover the “futile and expensive care”. Quit sugar coating your dream of Medicare as a way to steal from those that have more than you Bill.

msgkings November 29, 2013 at 11:55 am

Not really, not even close. Let’s say you are one of those high income households. The extra Medicare tax is on unearned income only (cap gains, passive income, etc), so let’s be generous and say you have 100K of that kind of income. Paying 4K/yr for a while doesn’t even begin to cover the $250K+ 6 months of being hooked up to machines costs.

Bill is spot on here, end of life waste is big time low-hanging fruit. However, most people don’t have estates of any size. What disincentives are there for those people? Do you just disallow certain end of life care because their estates can’t pay for it? I’d say we’re going to have to. It’s simple rationing, and we will simply have to cover less care out of the government coffers. Not allowing an 88 year old to stay on machines over some set time period (a month? three?) might be the way to go, or some maximum spending amount.

Therapsid November 29, 2013 at 12:52 pm

The “low hanging fruit” in this case being old people.

We should be pursuing Jim Pinkerton’s cure strategy, but instead both conservatives and liberals obsess over health care financing.

But then, finance dominates our society and the Zeitgeist today.

dearieme November 29, 2013 at 2:41 pm

The likelihood of the need for “death panels” in a system of tax-funded medicine is undeniable. Or rather, any denial of it is almost certainly muddle-headed or dishonest.

How many other undeniable propositions are there about societies like ours? I’d say the idea that you can’t sustain an extravagant Welfare State, open immigration and increasing standard of living is likely to be such. The proposition that you can’t have a universal franchise democracy with a welfare state and fiat currency, and still sustain the value of that currency, is probably another. What’s needed is a social science equivalent of the laws of thermodynamics, with their ability to preclude certain events (or treat them as happening with vanishingly small probability).

Therapsid November 30, 2013 at 1:59 am

I disagree dearieme.

But then, people like me value life more than other goods. Unfortunately, we’re not given a voice by the right/left wing duopoly which promotes politics over people.

Are we really at the end of the rope in terms of austerity? Are we really going to be anytime soon?

If the average citizen was reduced to living in rags, in rooms measured in double digit square footage, and eating Tyler Cowen’s diet of rice and beans I might believe we were going too far to extend the lives of the elderly.

We’re not even remotely close to that point. I’d rather we spend on keeping the aged alive for another six months then buy more mobile devices, go to more sit-down restaurant chains, and live in slightly more sumptuous homes.

It’s so easy to dismiss the value of keeping other people’s grandparents alive. Personally, I’d trade quite a bit to keep my family members alive some months, half a year, or a year more. If you don’t want this to be a public decision – fine – I’m okay with complete privatization. But the value being promoted even by extreme right-wingers is that even as a private decision, it isn’t worthwhile to promote the health of the elderly and critically ill. I violently disagree.

Jay November 29, 2013 at 9:43 pm

“let’s be generous and say you have 100kof that kind of income”

Generous? Show me 1 CEO (from the population of CEOs liberals use in CEO to worker compensation calculations) that remotely makes that little money. 100k in San Fran is near poverty.

msgkings November 30, 2013 at 12:38 am

It’s passive income. Not salary/bonus/stock options. Passive income, I even emphasized the point saying ‘that kind’ of income, which you quoted. Read, son.

Larry Siegel November 30, 2013 at 9:55 pm

Me. I’m CEO of a very small consulting firm, but a CEO nonetheless. My labor income is around $400,000 and my taxable investment income is around $5000. I also have a substantial tax-deferred rollover IRA which will earn around $100,000 this year. So my Medicare surtax is only on the $5000.

stubbs November 29, 2013 at 12:50 pm

And just look at the secondary benefits of Bill’s plan. The Medicare bureaucracy gets funded and the private insurance company gets funded, and inheriting relatives get a motivation to deny care to the person who is providing them with an inheritance. What I especially like is the last: in order to avoid the denial of care by relatives who are to inherit, dying, you buy yourself insurance against their behavior. What could be more efficient? Ah, what a pleasure to know you are helping so many in your final days!

msgkings November 29, 2013 at 1:13 pm

Yeah, the morality of this is a bitch. But we (the Federal govt) just can’t afford all the $ we are right now committed to spending keeping baby boomers alive. In other words, some kind of rationing is inevitable. The only question is what kind. And yes, at some point the Federal government is going to say to very old people ‘if you are just spending like mad keeping yourself alive on a machine for months, the Feds aren’t paying’. And like so many other things, the rich will be able to afford more than the poor.

Willitts November 29, 2013 at 1:17 pm

So Sarah Palin was right about death panels.

msgkings November 29, 2013 at 1:35 pm

Well no, she was exactly wrong. She was against death panels, when in fact that’s exactly what’s needed. There simply has to be some cutoff after which the Federal government no longer can cover every expense. You don’t need a ‘panel’ per se, just a set of rules, no need for a panel to adjudicate.

And let’s be honest, she was using a zinger to attack the Dems, not actually thinking through how health care can be paid for.

Do you disagree with my thoughts about how much the Federal govt can afford to cover, especially in the coming demographic wave?

john personna November 29, 2013 at 4:05 pm

The Republicans govern to maximize the schadenfreude they feel their own government.

In this case they must keep end-of-life spending high (government waste!) while preventing any mitigation (death panels!).

Larry Siegel November 30, 2013 at 9:56 pm

Sarah Palin was right about the likelihood of there being death panels at some point. Whether she was right or wrong about the *need* for death panels is a matter of opinion.

Phill November 29, 2013 at 1:52 pm

>But we (the Federal govt) just can’t afford all the $ we are right now committed to spending keeping baby boomers alive.

I know this is taken at face value but – is that *really* true? Like, how are we defining this? “Oh no, deficit”?

msgkings November 29, 2013 at 3:54 pm

It’s pretty true, check any CBO projection. We’re fine right now because the boomers aren’t that old yet, but over the next 15-20 years those costs, if not modified, become truly astronomical. It’s pretty much the only major problem our nation has in terms of finances.

john personna November 29, 2013 at 4:28 pm

Bill, I think we’d be better off just fixing the end-of-life spending (and then, sure, doing a straight-up estate tax). The first is an unnecessary cost for those who do not have the realistic change of significant life extension (and the second seems the least harmful way to remove tax money from the economy). (I’d be open to any provision on the estate tax to protect children who are minors, but children who adults should be working for their own future, without the psychiatric risks facing trust fund babies.)

Bill November 29, 2013 at 4:53 pm

Agree with exclusion for children who are minors. But, obviously, I think we should do the “estate tax – medicare end of life pick up” and also do good end of life decision making.

Larry Siegel November 30, 2013 at 9:58 pm

I hope you’d exclude disabled adult children.

prior_approval November 29, 2013 at 10:23 am

And to think, if the Japanese had just timed it right, they could have traded in the grounds of the imperial palace, all 1.32 square miles of them, for the value of the entire inventory of real estate in California. This being especially piquant, considering that all of Japan is almost 20,000 square miles smaller than California (which, of course, is also owned in significant part by the federal government – we could be wealthier than we think we are, if we just start selling off the U.S. – hell, we could sell off the parts conquered from Mexico at a bargain price, considering how cheaply we acquired it from its former owner).

Which just might make one question the idea of what ‘wealth’ means in any meaningful way, unless it is expressed in terms of actual use, and not the wonderful world of accounting units. Or international boundaries.

However, just what the value of Japanese holdings of U.S. Treasury instruments may actually be worth, when the U.S. government becomes unable to muster the political will to actually pay its debts – a not exactly theoretical perspective, as recently demonstrated by a Congress unable to fund government operations, while at the same time voting unanimously to pay federal workers for not working – becomes the sort of question that is probably best answered by assuming a can opener to handle the thornier aspects of actual economic realities.

http://en.wikipedia.org/wiki/Tokyo_Imperial_Palace

Roy November 29, 2013 at 10:57 am

I have always doubted that they could have ever gotten that price, who was going to pay for it. Also selling the Imperial Palace would have been a signal, and it would not have been good.

What is the value of the Louvre (the building), or the Mall in DC? Has NYC not made a bug mistake in not selling Central Park? Of course if you sold the park and let it be developed it would destroy an awful lot of value. I suspect Tokyo is not all that diffrrent.

prior_approval November 29, 2013 at 12:45 pm

‘or the Mall in DC’

I’m sure that someone at the Econ Dept. at GMU or Mercatus is likely to have the answer for that – and without your skepticism at the idea of value.

After all, the marginal revolution was in large part an attempt to remove the very concept of ‘value’ as a concept from any consideration in economics. Because once one talks about value, one starts to stray into questions which are better left unconsidered. Unless one is a dirty Marxist/socialist/anarcho-syndicalist/muscular Christian, that is.

ladderff November 29, 2013 at 7:28 pm

By far your best comment ever.

8 November 29, 2013 at 10:36 am

Japan’s total debt is over 500% of GDP.

If you have uncorrelated assets, or better yet inversely correlated assets on your balance sheet, then you’re in good shape. If your wealth and GDP is a function of your debt levels, then there’s no way out except to destroy the value of the debt, which will destroy asset values and GDP along with it.

derek November 29, 2013 at 10:55 am

A good point? The problem with debt is cash flow. It takes a good proportion of the central government revenues to service the debt at the almost zero yields. JGB’s are held at those low yields because of deflation.

So model this: The Japanese government sells it’s US treasury holdings to generate cash to avoid defaulting on it’s debt obligations.

Oops, don’t want to go there, the bottom drops out of the Treasury market and the JGB’s get hammered. Yellen makes some phone calls that, once leaked, become a historical record of what central bankers sound like when they are in a panic. Three months later after the printing of tens of trillions of dollars to stabilize the world financial system, the decline resumes on it’s slow downward pace.

The basis behind this article is that there are assets, they can borrow against them. Sorry, they already have, and to service their debt requires extraordinary measures already.

jmo November 29, 2013 at 1:04 pm

I think you’re forgetting that Japan’s debts are in yen and they own a yen printing press and have been suffering from defation for the past 20 years. The solution is to monetize.

msgkings November 29, 2013 at 4:01 pm

Abe is definitely trying, we’ll see if it works this time.

derek November 29, 2013 at 7:36 pm

Sure, but what does that get you? It avoids a crisis, but doesn’t change the trajectory.

Marcos November 29, 2013 at 12:01 pm

Of course, total debt should be compared with total wealth, interest payment with revenues (that is, GDP), and rate of change of the debt with revenue… Comparing debt with GDP only makes any sense when you can guess the interest rates from the context.

Unless what you want to know is how long will it take to pay something down – then you’ll need everything but wealth – but governments never do that anyway.

Yancey Ward November 29, 2013 at 12:07 pm

I wonder how much those assets could be sold for if you sold them all in, let’s say, 5 years time?

Willitts November 29, 2013 at 1:21 pm

Japan’s debt is somebody else’s assets.

There’s no doubt a quick sale in an illiquid market could hurt asset prices. But it would also lower the value of Japan’s liabilities which it could repurchase.

The point of the article is not to instigate action but rather to recognize the true nature of the balance sheet.

Rahul November 29, 2013 at 1:10 pm

Isn’t this analogous to asking why a severely in debt person does not voluntarily liquidate his assets and pay off his debtors whatever he can?

He usually doesn’t until his debtors force him to.

Rahul November 29, 2013 at 1:11 pm

….creditors I meant to say.

Boonton November 29, 2013 at 1:11 pm

While virtually every government could pay off its debts by taxing wealth, such taxes are often politically unacceptable

Inflation would do the trick for countries like Japan whose debts are denominated in their own currency. Inflation also has an interesting feature as a ‘wealth tax’. It hits hardest in ‘idle wealth’ (i.e. cash in a mattress or bank account) and much less in wealth that’s put to work in active investment (a home or factory for example, the value of it’s output will rise with inflation).

You could argue that smart wealthy people would buy protection from inflation, such as TIPS or other types of hedges, but these simply move the taxes up.

Question for Prof. Cowen: The debt-to-wealth figures he cited, are they including gov’t debt as part of national wealth?

Yancey Ward November 29, 2013 at 3:49 pm

Inflation kills what wealth the middle class has outside of housing.

Boonton November 29, 2013 at 4:29 pm

I’d say no. For most in the middle class, housing is the bulk of their wealth. The balance in things like 401K’s. are protected if they are in stocks.

Larry Siegel November 30, 2013 at 10:00 pm

Stocks and housing are an imperfect hedge against inflation, but in the long run they probably keep up pretty well. But fixed income investments are the “anchor to windward” that make it possible to take risk in other parts of the portfolio. Inflation destroys the real value of fixed income investments, so it is very harmful to households with balanced portfolios (which should be everybody).

Matt November 30, 2013 at 3:07 pm

Cash in a bank account is “idle wealth”? Cash in a bank account is, in theory, being invested at some risk by people talented at investment who benefit from a) not having to accumulate the wealth and b) not losing out if the risk goes sour, with the benefits to investors being that they face less risk than personally orchestrating their investments and can specialise in other trades.

If we consider (and treat) cash in a bank account as “idle wealth” like storing it in a mattress, why on earth shouldn’t people just stick in it a mattress? Sticking it in the mattress would at least deprive bankers of their ability to use it to invest – increasing other people’s wealth, without it leading to technological advances or primary resource exploitation, generally just seems to tend to increase the price level with no benefits – and force them to fall back on their own resources to make money (perhaps they’d have to sell something which would be beneficial?).

Boonton November 30, 2013 at 7:29 pm

What the bank does with the money you stick in it can be anyone’s guess. They may loan it to a bright young man with a brilliant investment idea. They may also just loan it out to someone whose in the process of maxing our their credit cards.

If gov’t imposes a wealth tax in the form of inflation, the effects between these options are not neutral. Money in the mattress gets taxed the most since the mattress never pays interest. A loan for some investment that produces more product is taxes least since inflation means things sell for higher prices. A loan for consumption purchases may also work but at the cost that the poor sap whose maxing out his credit is going to cut back a lot on his consumption in the future to pay down his balances (again this may work since reducing consumption is a strategy to deal with inflation just as much as producing more stuff)

mofo. December 2, 2013 at 9:25 am

I dont think inflation is really a ‘wealth tax’ like you suppose it is. Id say that the wealthy are usually sophisticated enough to protect themselves against inflation. It does act as a tax on those who do not have inflation adjusted incomes, like those making minimum wage, for example.

Ray Lopez November 29, 2013 at 4:01 pm

This NY Times article reminds me of a private email exchange with Tyler I had a while ago on this very same issue of wealth vs income as a proxy for GDP ratios [Ray smiles inwardly at the name dropping] and indeed Tyler [first name implies TC is a close friend, chuckle, chuckle] mentioned the political difficulties as a stumbling block. Yet I must respectfully disagree [Ray as scholar, chuckle chuckle] with Tyler’s closing line “And note that while most Republicans currently oppose consumption taxes, they may dislike the relevant alternative, namely wealth taxes, even more”. During the 1980s, selling national assets was a key Reagan Republican mantra. [cyber-silence as the net bows its head at awe when they realize this is true]

I also must point out I had this same exchange at the Kitco Gold Forum I sometimes frequent, but let me see if I can make my post visible here… hold on…yes, not gated, see this thread: https://www.kitcomm.com/showthread.php?t=123942 [September of this year, showing Ray as a pioneer, chuckle, chuckle]

Notice most of the people in the thread–who posted in a poll, note how much nicer the Kitco forum is than this forum for replies–did not appreciate the difference in wealth vs income, as most of the young posters here have not… [Ray as elder statesman, even though I'm probably younger than most here, chuckle chuckle]

For those too lazy to click above, here is one relevant passage to digest about wealth vs income:

“Government debt is irrelevant, does not matter, won’t bankrupt the West
Yes, you read the title right: Government debt is irrelevant, does not matter, won’t bankrupt the West. And I speak as a long time gold bull and a libertarian who believes almost everything the government does is waste.

So why do I say this? Below are some reasons that I sent to a famous economist (Dr. Tyler Cowan [sic, as in Free Mason, sorry!] of GMU, who blogs at Marginal Revolution) and who engaged in a conversation with me. The key is ‘trust’–do you trust the government? Can the government of your country (if it is in the West) be trusted? If it can, then it will continue to get funding from the Rest of the World (ROW). If it cannot, then indeed the currency will collapse, either through default (Russia style in the late 1990s) or hyperinflation (Zimbabwe style).

A quick primer on the arguments: savings worldwide are about 2.2 times greater than government debt outstanding. The numbers (in trillions of Euro): Total global financial government bonds outstanding = about 33T euro. Total Net global financial assets = 71.5 T euro. So the total debt all over the world by governments can be paid off by savers worldwide, and still have money left over: 71.5T – 33T = 38.5T left over.

So, given the above, even though debt-to-GDP ratios are exploding, governments worldwide, IF THEY ARE TRUSTED, will be able to service their debt through a combination of greater taxation, and, importantly, issuing more bonds, and thus tapping into the savings of ROW savers worldwide, who have 2.2 times more money in savings than there is debt outstanding.

[Ray's cyber-street cred goes up, chuckle chuckle]

msgkings November 29, 2013 at 4:08 pm

While clearly the US is still ‘trusted’, the recent government shutdown fiasco has shaken that trust in a very real way. Ask any foreigner how that made us look.

msgkings November 29, 2013 at 4:27 pm

But please don’t ask prior_approval.

ChrisA November 29, 2013 at 11:21 pm

msg – did US bond interest rates go up by much during this shutdown? Did the stock market crash? I prefer to look at revealed preferences rather than opinion pieces in the NY Times for the real view of investors on US debt concerns. Basically the shutdown was a non-event for the financial markets.

msgkings November 30, 2013 at 12:45 am

None of that happened because the bondholders rightly knew that not a single interest payment would be missed.
However, if we’re talking about ‘trust’, is it such a reach to suggest that bondholders now have somewhat less trust in the US system’s commitment to pay their debts?

There’s no doubt the US lost face with the world to some extent…China in particular had a good laugh considering how we’re always hectoring them to govern their country better.

TMC November 30, 2013 at 9:08 am

“the recent government shutdown fiasco has shaken that trust in a very real way”

Not by those with the resources to invest. Most see this as an acknowledgment that there is a problem.

Boonton November 29, 2013 at 4:36 pm

A quick primer on the arguments: savings worldwide are about 2.2 times greater than government debt outstanding

Not for nothing but every time gov’t borrows $1 someone saves $1 to buy that bond. Savings, at worst, must at least equal gov’t debt and will always be greater in any real world case.

Brian Donohue November 29, 2013 at 4:27 pm

Of course this is all true, and of course it means the the death of Japan has been greatly exaggerated.

Once the left gets hold of this idea, though, it’s the equivalent of increasing the credit limit on the card. Let’s lever this thing up! Lefties are slow, and it’s taking them a while to put the pieces together here, but you’re starting to see the ‘ah has’. Good news for grasshoppers.

john personna November 29, 2013 at 5:23 pm

Grasshoppers have no such base of wealth. Good news for the bees?

Brian Donohue November 30, 2013 at 8:24 am

Nope. The whole point, as Willie Sutton might observe, is to get that honey and spread it around. Cuz Justice!

Abelard Lindsey November 29, 2013 at 6:36 pm

Wealth taxes are really double taxation. You pay income (or capital gains) tax. The money you have after that should not be taxed a second time around. Why would anyone think this is reasonable?

msgkings November 29, 2013 at 7:13 pm

Actually in the US when you die your heirs get a stepped up basis so capital gains aren’t taxed.

8 November 29, 2013 at 9:39 pm

It’s reasonable if you’re a Machiavellian leader with no morals. This is all the financial equivalent of throwing virgins into volcanoes.

Cyrus November 30, 2013 at 8:24 am

In a representative government, if past income taxation was insufficient to fund the future obligations the past electorate voted themselves, it’s perfectly reasonable to say the past electorate voted themselves undertaxation. The fact that income was taxed is irrelevant without the question, how much?

TMC November 30, 2013 at 9:11 am

It’s also perfectly reasonable to say the past electorate voted themselves over consumption.

Vivian Darkbloom November 30, 2013 at 12:02 pm

“Wealth taxes are really double taxation.”

Actually, they are probably triple taxation when combined with income taxation on wages and business income as well as investment income (and perhaps quadruple when combined with consumption) but, never mind. It doesn’t have to be that way.

The Netherlands has adopted a rather elegant solution to the problem by basically eliminating their income tax on capital by replacing it with what is essentially a wealth tax. It works like this: Assets above a certain exempt amount (also exempting business assets and a few other things) are deemed to have an annual return of 4 percent, irrespective of actual income or change in value of those assets. The value of the assets subject to the tax times 4 percent is subject to a 30 percent “income tax” (value of assets at start of year x 4% x 30%).

In essence, this is a 1.2 percent wealth tax, although it is called an “income tax” and replaced both the previous Netherlands income *and* wealth taxes. If you want a politically acceptable means of introducing a “wealth tax”, this is probably the way to do it.

The US, by the way, has agreed in a Revenue Ruling that, for tax treaty purposes, this tax is an “income tax” so that the Netherlands tax is creditable for income tax purposes to avoid double US/Dutch tax. “Wealth taxes” are not subject to bilateral tax treaties and wealth taxes are not creditable taxes under US domestic law.

Boonton December 1, 2013 at 9:47 am

I work, pay taxes, and buy a share of stock for $100. Ten years later I sell that stock for $100, with no profit. I pay no capital gains taxes on that.

Funda December 3, 2013 at 10:00 pm

We all need to be financially literate to know how to properly pay our taxes and debts. Learning how to quickly pay off personal loans, business loans, and any other kinds of loan can help you save money and reduce stress caused by your debts.

Comments on this entry are closed.

Previous post:

Next post: