Is Paying Down Government Debt Bad for the Economy?
Summary
MMT Critique: Challenges the MMT sectoral balances claim that government deficits are required for private net saving, arguing the framing is misleading and conflates financial with real assets.
Empirical Claims: Disputes the idea that debt paydowns cause depressions, emphasizing that correlation is weak and timing lags are too long to imply causality.
Canada Case Study: Details Canada’s mid-1990s fiscal consolidation with spending cuts dominating tax hikes, 11 consecutive surpluses, and debt/GDP falling from 78% to 39%, alongside strong subsequent growth.
ECB Evidence: Cites ECB research showing about half of EU consolidations improved growth, with success linked to spending cuts rather than tax increases.
Counterexamples: Notes the Great Recession followed a period of rising U.S. debt, showing debt paydowns are neither necessary nor sufficient for economic crashes.
Monetary Mechanism: Suggests central-bank-fueled booms can drive surpluses, with busts later attributed to the monetary cycle rather than prior fiscal paydowns.
No Company Pitches: No public companies, tickers, or specific GICS sectors were substantively pitched; discussion remained macro-policy focused.
Investment Perspective: Concludes that paying down government debt via spending cuts supports long-run stability and private-sector prosperity, while tax hikes pose growth risks.
Transcript
[music] This is the Human Action podcast where we debunk the economic, political, and even cultural myths of the days. Here's [music] your host, Dr. Bob Murphy. Hey everybody, welcome back to Human Action Podcast. [music] This episode, I want to go through a sort of one-two punch that the MMT and some other related schools of thought will throw at the fiscal hawks. And so what they try to do is show both on theoretical and empirical grounds, referring specifically to US history, that paying down the federal debt would be a disaster. And so they're going to try to argue that um this will lead to economic calamity and that hey, this isn't even up for grabs. This isn't like a an ideological theory. This is just basic accounting on the one hand and then empirically they're going to say look at the record. Every time the US government has significantly paid down the debt there's been a depression. And so what are you guys doing? What are you thinking? It's not just look at the poor belleaguered people who depend on federal funding, you know, for their subsistence, but you're going to throw the economy into a huge crash. What are you thinking? All right. So, let me first to uh steal man the case. Let me go ahead and just run through this standard MMT type presentation on both of these points. Okay. So, as far as the theory is concerned, they often will appeal to what you might call sectoral balance equations. Um, Michael KI, I don't know if I'm pronouncing his name right, I think he was the one that really drove home this point. I believe he's the one that Stephanie Kelton cites as the authority in her book, The Deficit Myth, for example. And he will go through it pretty straightforwardly, you know, just take standard macro income accounting equations, just do simple algebra on them, rearrange terms and so forth, and end up with statements showing that if we set aside international trade, right? So we assume that the nation under consideration just has balanced trade with the rest of the world. Then in order for the domestic private sector to engage in what you might call net saving or to accumulate net financial assets or sometimes they'll say to increase its net financial worth, the government necessarily needs to run a budget deficit for that period. And then going the other way, they'll say if for some reason the government decides to run a budget surplus, right? So the government's paying down the outstanding government debt that period. Well then necessarily just again in terms of pure accounting. They can show that that means there's going to be a reduction in the net financial assets held by the private sector. And Stephanie Kelton famously summarized this on Twitter. She showed a chart of the federal government's net surplus or deficit and then overlaid that with the corresponding image for the private sector and they were virtually mirror images with you know anytime that the federal government was running a deficit the private financial sector was running a surplus and vice versa. And then she summarized that by saying their red ink is our black ink or or I think I think no more specifically she said something like their red ink makes our black ink possible. I think that's what the exact quote was. Okay. So that's like the theory and again they're saying this we're not relying on Keynesian economics here. We're not talking about aggregate demand having a shortfall. We're not appealing to sticky prices or sticky wages or uh you know the collapse in union bargaining power. They're not talking about any of that. They're not making specific uh assumptions about how the economy works. They're saying just writing out the simple equations summarizing income to the flowing to the various sectors over a period of time out pops that result. Okay. And now so that's again like the the theory saying so do you think it's a good idea to have the net financial assets held by the financials or the private sector going down? Do you think that might cause strain or stress to the to the private corporations and households financially to see their net assets shrinking? Okay. And then to say [snorts] let's let's see let's look at the history books instead of just relying on pure theory. And I've seen different versions of this floating around, but here's one that I saw. I just did the screen capture from a YouTube. Unfortunately, I'm not trying to throw the guy under the bus. I I can't remember where I grabbed this from, but I was watching various YouTube rabbit holes, as you know, as we all want to do at times and moments of personal weakness when you really should go to bed. And I saw this and I thought, "Wow, that's a great thing." And I grabbed it. And so here you can see he's citing this guy Frederick theer who compiled these statistics in 1996 and then apparently uh Kelton you know recycled them and featured them in the deficit myth. Okay which came out in 2020. All right. So you can see here that yep it'll show six major periods in US history where there were prolonged and significant debt payowns. Right. Right? So in other words, the US federal government read ran budget surpluses during these time periods in each of the years. And then it's showing from start to finish over this stretch, how much did the outstanding total debt go down? And then it says, oh, and by the way, can we say anything about what the economy was like during these periods of significant and prolonged debt reduction? Oh, look at that. for every single time you see there was a major financial, you know, they might have called it a panic back in the day, but what we would call depression with a small D, including of course the Great Depression was preceded by the roaring 20s when um the Koolage administration in particular ran a string of budget surpluses. They were trying to pay down the debt that had been accumulated during World War I. Okay. And look at that. So again, the MMTers would conclude, what more do you need to see that especially aggressive payown of federal debt on both theoretical and empirical grounds is going to cause a huge economic crash. So why would anybody want to do that? And let me mention, it's not just the MMTers who say that. I've even seen uh Austrian adjacent fellow travelers who are saying, "Yeah, I'm I understand we can't just keep running up the government debt forever, but let's not fool ourselves and let's be honest with the public when we're commentating on these things or commenting on these things that yeah, at this point, if we were to reverse course and start paying down uh the government debt, we would cause a huge depression." All right. and they think again they agree with that analysis. Okay. So how do I as an Austrian respond to that? Okay. On the theoretical side, I'll just very briefly give my response here because I've done it extensively via you know Mises Institute channels including um my book understanding money mechanics. So I'll link to that. there's a, you know, a chapter in there. And then also perhaps more specifically, um, I [clears throat] had a mises.org daily article that ran years ago and then they reran it once MMT got, you know, had a resurgence in popularity. It was called the upside down world of MMT. So, I'll link to it here, but if you want to try to find it yourself, you just can't wait. Can't be bothered to go through the the links. It's uh, again, Robert Murphy, the upside down world of MMT, and you should be able to find it that way. It it ran at mises.org if that helps you find it. And I just go through this. So, let me just very briefly explain my points and those longer critiques. In so far as it goes, like once you understand what they mean by the terms they're using, yes, the MMT accounting is correct. Right? In other words, I'm not accusing them of an arithmetical or algebraic error. However, their presentation is extremely misleading. Right? When Kelton says, referring to the government's budget deficit, their red ink makes our black ink possible, it leads you to believe that the private sector can't save or can't get ahead unless or or households can't pay down their debts unless there's an accounting mirror image and the federal government is running up its debt at the same during the same accounting period. And that is not true. Okay. what it means when they say for example the private sector can't accumulate net financial assets that word net is doing a lot of work there. So for example it could be the case that all the households in the private sector pay down their credit card debt in a given period. And you might say oh okay so they're they're you know climbing out of debt. The households are paying down their debt. They're uh getting more financially secure and so forth. Okay, that's a good thing, right? And you could see statistics about like aggregate credit card debt in the US going down or stuff like that, household net worth going up. And the trick is they would say, "Oh, no, no, because if you as a household owe Visa $10,000 on your credit card bill and you pay it down to $8,000, well, yeah, your debt went down 2,000, but now Visa's assets went down 2,000, right? because your debt to Visa on their books is a asset to them and so taken as a whole the total indebtedness of the private sector hasn't changed because you paid down your debt to Visa and they would say in fact if we're looking at financial assets right and that's the thing sometimes the MMT people are sloppy and they don't put the word financial in there but to make the claim correct they have to use that modifier financial to say financial net assets in the private sector again if we exclude foreign trade because you know foreigners could owe your your private sector money but if we just look at you know do the domestic situation or if we look at planet earth as a whole where there's no foreign sector visav all of the earthlings um which is a private sector as a whole the net financial assets sum to zero the way the standard accounting is done okay so if uh households have bonds issued by GE E those are net financial assets to the households right they have corporate bonds but obviously those are liabilities to GE and so it cancels out and so the idea is a financial asset by its very nature is something that one party owes money to the other party. Now, maybe it's like a fixed income one, like it's a bond that pays out a different thing. Or maybe it's an equity claim, like you own shares of corporate stock where you don't know how many dollars does is that going to translate to down the road, like if the company pays a dividend. But still, the idea is the way they tend to do the accounting on these things, the standard approach, the orthodox approach is to say the way you compute it that net financial assets in a closed system sum to zero. Okay? And and they do that because they want to avoid double counting. But I want to be clear, even on its own terms, that doesn't mean net assets always sum to zero. No, you can look at an economy that people can live below their means. They can save. They can accumulate. They can instead of cranking out more cheeseburgers and uh sports cars and stuff like that. They can make [snorts] factories and they can build more tractors and 18-wheelers and things that you know are not consumption goods or services but are capital goods and thereby increase the productivity of their labor over time. So their standard of living or their real GDP if you want to use that term terminology goes up over time. Right? So there's nothing about these accounting identities that prevents a population of people, even if they don't have a government running budget deficits, from saving and investing and accumulating and increasing their capital stock over time and the productivity of their raw labor power and having their standard of living increase and having their assets increase, right? that you start out a little mud hut and then over the generations you end up living in huge mansions and, you know, huge fields with, you know, automatic irrigation and tractors that do all the heavy work and so forth. Huge silos full of grain that you've accumulated over the years. That's all possible. You don't need government budget deficits to make that a possibility. Of course not. Okay. But again, the trick is you could have a bunch of genuine real assets like huge factories, rooms full of supercomputers, mining bitcoins, uh you know, satellites up in space doing telecommunications, do all sorts of stuff. And the corporations that owned those things as corporate assets would have those as real wealth, real assets. But then the idea is if the households own shares of stock in those corporations that receive their market valuation implicitly via the net real assets held by the corporation, right? Like if the corporate corporation issued some bonds, then the total market value of the corporation would have to take that into account that it had those outstanding liabilities, right? But the idea would be like to a first approximation the value of all the outstanding corporate shares of stock in that company would refer to its real assets perhaps minus you know the outstanding bonds. Okay. And so the point is you wouldn't want to when you add it up and said where are the total assets held by the private sector in this type of example. You wouldn't want to count up all the oh here's the factories and here's the forklifts inside the factories and here's all of the warehouses full of inventory that we're getting ready for this the Christmas rush. So we're looking at all these coats and uh snowsuits and everything and Christmas presents. All these, you know, toy train sets that we've been building up over the last few months and storing in these big warehouses. We're going to count all that up and we got, you know, hundreds of billions of dollars of inventory and that, you know, those are real assets that that counts as part of the total wealth of this group of people in this particular private sector that we're analyzing. And if they happen to be held by corporations, yep, that's all part of the corporate assets. But then, let's say, you know, that number is whatever $5 trillion. and now the households own the shares of stock that ultimately, you know, point to those corporations. You wouldn't then say, "Oh, the households own $5 trillion of corporate stock also, and so now there's 10 trillion in assets." That's the script. No, no, you don't want to double count. The corporate shares held by the households have a mirror image in liabilities in a sense. They're not liabilities the same way a bond is to the corporations. So that those things net to zero and then you're just left with the underlying real assets that we originally counted as being owned by the corporations. Okay. So that's how that stuff works. All right. I know I kind of had to go through a little detour there to explain that. But once you see that context, now what Kelton is saying again relying on KKI and so forth is that the only way the private sector can hold financial assets, right? Claims that some other entity owes them a flow of dollars in the future in the US context. The only way that can be true on net is if there's some entity that's outside the private sector that owes them that flow of dollars. Oh, the government. That's the only entity that could do it. Right? If we're excluding foreigners, right? Foreigners could own could owe your people a flow of dollars or the federal government could. But if if sort of by definition you're drawing a shell around your domestic private sector and saying any dollars owed internally just sum to zero and then you say yeah the only way some entity outside the private sector could owe the private sector money is if it's the government and I say okay so what because what's odd or ironic is the one entity owing the private sector money that should not be considered as wealth health or financial assets in the same way that a household owning a corporate bond is a financial asset to that household would be the government, right? Because it's not that the government has to generate a profit through voluntary means and that it's buying inputs with its originally justly held property, converting them into goods and services that it sells to its customers voluntarily and then you and earns a profit and then uses that to pay down the debt or to pay interest on the treasuries it's it'ssued over the years. No, that's not how it works at all. The way the federal government services the debt held by the private sector is it either taxes them and says, "Oh yeah, we owe you some money here. We'll tax it from you at gunpoint." And then give it right back to you. There you go. Aren't you so glad you're holding safe treasuries. Or they roll them over. They borrow from somebody else in the private sector to pay off the original lenders. or they run the printing press, which yes, that's a way to get a flow of dollars into the private sector. But is that really wealth in the same way that we're thinking of it when we say, "Oh, the household, you know, has a checking account balance and it's got some bonds and it's got some corporate shares of stock that might pay dividends over time or they could sell it if they needed to at the market price down the road." to say that those are all sources of dollars. Is that wealth in the same way as if the federal government turning to the Fed says just run the printing press and certainly you know for any individual household it might be but in the aggregate is the private sector made wealthier if the Federal Reserve just creates another trillion dollars and hands it over? No, of course not. the the real wealth effects of that you could either say are a wash or I would actually say in general in the long run are negative. It's not just that oh yeah every all prices adjust accordingly and everything's a wash that no I would say that causes the boom bus cycle and actually makes the private sector poor in real terms in the long run. Okay. But for sure to run around saying the only way the private sector can accumulate net financial assets is if the government runs up its debt I think is incredibly misleading and doesn't those terms don't mean in that context what they mean in the normal connotation when you think of a of a single household and it accumulating financial assets that are claims on other private sector entities. Okay. So that like I say is my response when it comes to the the theoretical claims. But now let me tackle those empirical arguments to say, okay, sure, Murphy, you've got your perspective coming from an Austarian ideological view. We've got ours. Let's look at history. Right? If it's really so good and wise for the federal government to pay down its debt and be responsible just like a household is, then how come we see this correlation? Why is it that in US history whenever they do aggressive payown of the debt, it leads to calamity? Right? Okay. So, let me pause for a moment and say before I dive into the specifics here, let's step back and ask ourselves in general, if you've got two people arguing and someone says this thing causes this other thing that we observe in history, what sorts of And then they present and show an apparent correlation where it looks like, yeah, the thing that they're saying is the cause is followed by the thing they're saying is the result or the effect and then the other person disagrees. What types of arguments or evidence could the critic bring up just in general? Right? So, let's say the first person says, "Yeah, I think that rain dances cause severe rainstorms." And here, look at I've got a list of six major examples from this tribe's history where the sheamans did some serious rain dancing. Like the most intense rain dancing we've ever really recorded. And in each of those instances, it was accompanied by massive downpours. Some of the biggest downpours we've ever seen in this tribe's history. So there you go. Clearly intense rain dancing causes intense rain showers. So now you're the critic of that. What do you what would you say? Again, you can't just say, "Well, that's crazy." Because the other person says, "No, I don't think it is. Here's my theory." Da d d d d d d d d d d d d d d d d d d d d d and they go through whatever the theory would be and then here's my historical evidence. Okay, so I think the first thing you would do if you were like genuinely trying to argue with the person or appeal to the the public is you'd say, "All right, your theoretical mechanism doesn't make sense." and you would walk through. I'm not going to go through here and pretend I believe in rain dances, but whatever it is that they said, whether you know they're appealing to the gods or mother nature, whatever, you could go through and try to explain theoretically why no, that doesn't work. I have a different theory as to what causes rain and it does not involve rain dances, right? So, that's one way in which you could try to attack that argument or that proposal or hypothesis. But then when you turn to the historical record, a great way to proceed if the data allowed or allowed, yeah, is you would try to show, hey, are there any instances when the sheamans really did intense rain dances and then there wasn't a big downpour, right? To show, hey, sometimes the rain dances don't work, right? So that would be one feather in your cap. And then could you do the flip side? Could you also point to examples where there were very intense rain showers that had not been preceded by intense rain dances? Right? And so then what you'd be able to show like the fancy way they would say this in philosophy is you would have just if if the historical record allowed you to do that honestly then you could say yep we can see that rain dances are neither necessary nor sufficient for intense rain downpours. Right? because there's times where they do the rain dance, it doesn't rain heavily and then there's also times when it's raining heavily and there's no preceding rain dance. Now notice too, just even I'm going through this silly example just to kind of warm us up and to figure how are we going to tackle the more serious question. You'd have to get a precise, right? Like in principle once somebody does a rain dance are you going to say for the rest of time anytime it rains it's fair to say oh yep see the pattern holds because I can go back far enough in time and see what see that there was a rain dance and so therefore from that point forward every single rain downpour that ever happens we can attribute to that one time back in 1587 when they did rain you see what I'm saying that know there has to be some time interval like to say you do a rain dance and then and likewise too, suppose they do a rain dance and then nothing happens for a while. At what point do you get to say it didn't work, right? Do you just keep waiting around waiting around and as long as you know at some point it rains? Then you can say, "Oh, yep. See, it works." Just like we said that no, at some point for this to be operational, to be falsifiable, to use that term, you'd have to have a time limit on it. So again, since I'm making this up and I don't believe in rain dances, and presumably [snorts] most of you listening don't either, it's not worth getting into the specifics, but the the person who's advancing this theory and gave their theoretical mechanism, you would have to ask them once you did showed your thing. You could say, "Now come back, get a little more specific with your theoretical mechanism, what time frame should we expect?" And should it always be the same, right? Is it that if you do a rain dance then boom 16 hours later the downpour should start or is it like it could be anywhere you know do rain dances have a long and variable lag for precipitation which is I'm making a joke because that's what mantists say right that they there's no tight connection between changes in the money stock and then what happens with price inflation okay and so monists famously say yes there's a long and variable lag, which I've joked in other contexts is like saying this actually isn't true. There's other causal factors at work. Okay, so there you go. All right. And so that's what I'm going to do here. Now, let me say even even having done what I'm going to do and I you folks can probably guess rhetorically in the fact that I'm so proud of myself in this rain dance analogy. I'm going to go ahead and do that with paying down debt. I'm going to show that paying down the government's debt is neither necessary nor sufficient for an economic crash. Right? Namely, I'm going to show there are times when the government's debt was paid down that was not followed anytime soon by an economic crash. And I'm also going to show there were economic crashes that were not preceded anytime in the recent past by significant government debt paydowns. So, since I've tried to show you and and also I could challenge the theoretical mechanisms, that's pretty easy. I don't think I need to do that here in the human action podcast to say why I think the government paying down its debt, right, holds hold taxation constant. Just have the government cut spending so it's running a surplus. that there's no intrinsic reason given the way I think the world works that the government cutting its spending such that it's paying down the debt year after year should all of a sudden cause the economy to crash. At the end of this episode I will bring up a sophisticated uh element where given the way our system works there could be this third factor that kind of causes both. So I'll talk about that near the end, but I'm just saying primmaaccia in terms of economic laws and how do I think the world works and how does the economy work and interact with government fiscal policy. No, in general the government paying down debt should not cause an economic crash. Okay? And so and I'm again I'm going to show you the historical records like that too. Let me say that admittedly and in fairness to the MMTers is not a mic drop, right? Because you could also imagine a more nuanced scenario like something like smoking, right? The opponent of cigarette smoking could say, "Hey, smoking causes cancer, lung cancer, right?" And then the defender of big tobacco could say truthfully, "No, what are you talking about? Look it, I can show you all kinds of case studies of people who got lung cancer even though they never smoke smoked a single cigarette. And I can show you examples of people who smoked a pack a day and never got lung cancer. And in some cases, it's not just cuz they died in a car crash when they were 38, but no, they lived into their 70s, never got lung cancer. So smoking is neither necessary nor sufficient for lung cancer. QED smoking has nothing you see and that last step would be the wrong one presumably based on my knowledge of the evidence and so forth right that but even there you would have to amend the claim it's not that smoking causes lung cancer period the way mass causes gravitational attraction it would be more like smoking is a strong contributor to lung cancer or smoking makes it much more likely that you will develop lung cancer or in the long run or some you know you see what I'm saying okay so again maybe after I go through this demonstration the honest MMTers out there would come back and say okay yes some of the people on our side on social media might make hyperbolic claims really what it should be is that aggressive paying down of government debt enhances the instability in the private sector you know Allah Minsky and so it's not that guarantees there's going to be a crash. It just means year by year the probability of a crash is higher than other. You know, they could say something like that. All right? And then, you know, I would come through and we could go back and forth. Okay? Because with again with smoking, yes, you can find counter examples, but presumably with a big enough pool, you would find that the the probability that somebody gets lung cancer. If you're doing regression analysis or something, it looks like there's statistical significance on their smoking habits in terms of predicting whether that person's going to have lung cancer down the road. Okay. So having gone through all that and giving you the framework, let me now just run through the empirical bit. So for one thing, I would point you to I'll put a link in the show notes page of course. I wrote an article for Econ lib econ library a while ago talking about the economic literature and the case for so-called fiscal austerity. And what I pointed out is if and I and I give examples. I document all this stuff just showing how like Paul Krugman and Christina Romer at the time, this was back during the Obama years during the rounds of QE and then when geez that didn't work, right? the economies of the world in the wake of the financial crisis of 2008, so-called great recession, they were still mired in the doldrums even though they had run massive government budget deficits and that their central banks had slashed interest rates to basically zero and done massive accumulations of uh fixed income assets like government bonds and in the US case mortgage back securities. Gez, didn't it was working. And so then some of them said, "All right, we got to get our fiscal house in order. We just can't keep running these huge deficits. We got to start tightening our belts." And so Krugman and Christina Romer among others came in telling everybody, "What are you doing? This is Herbert Hoover 2.0 if you do that." And they're acting like it was just an insane theory, this notion that somehow paying down government debt might help your economy. And they were saying, "No, it doesn't. That's crazy. There's no evidence of that. There's no theoretical me." Right. Okay. So I was just going through and showing they were completely full of it. And ironically, one of the key pieces in the literature showing the strong effect that government tax policy has on economic growth came from Christina Ror along with her male ROR co-author. So it was really weird in her case. Okay. But in any event, Krugman as well in a different context had also argued that deficit Keynesian deficit spending arguably has one example in history where it worked, right? Krumman from the late 90s that is said that. Okay. So my point was don't listen to them. They're bluffing that there's plenty of stuff in the economic literature backing up this idea that when governments get into fiscal trouble, they need to cut spending and that that will not crash the economy. Okay, so here I'm quoting from the believe it or not the European Central Bank and this might have been motivated by political reasons. It might have been that some major Euro countries like Germany, you know, wanted to encourage austerity and so the people at the ECB knew like, yep, this is what the big boys want and so we're going to go ahead and do this. But in any event, this was what they published. The ECB had a bulletin that came out in June 2010 explaining or assessing the record of fiscal consolidation, okay, in Euro era countries. And this is what they said. The empirical literature offers diverse results as to whether fiscal consolidations in the Euro area have had expansionary effects on economic activity in the short run with reference to the periods of sizable government debt reductions mentioned above. Expansionary fiscal consolidations are suggested in Ireland, the Netherlands, and Finland. Looking at a broader range of experiences, it is found that around half of the fiscal consolidations in the EU in the last 30 years have been followed by an improved output growth performance in the short term relative to the initial starting position. Okay. So what they're saying is they're they specifically highlighted Ireland, the Netherlands, and Finland as as case studies of look at here's examples where they did aggressive debt reduction in their economies were fine. Right? So showing it could be done. And then they're also saying we broadened our our results and looked at over the last 30 years in around half the cases it worked and the other half it didn't. And you might say, "Oh, so it's just a coin flip." Well, no. I don't have it quoted here. But they got more specific and said to try to understand how come sometimes it works and sometimes so-called fiscal consolidation does lead to a bad economy. You know, seeming to justify the Keynesians worry. And they said, "Oh, it's because in those cases where there was a the economy crashed, it's because these governments tried to pay down their debt by raising taxes. In contrast, if we look at the cases where the countries largely dealt with their, you know, debt problem by cutting spending and not increasing taxes significantly. Then they got their debt under control and didn't crash the economy. Right? So that's what they said just looking empirically to try to understand how come sometimes it seems to work and sometimes it doesn't. And so now I'm saying as an Austro libertarian, is that surprising to anybody that if the government's been running up a big debt and people are like, geez, this can't continue. We need to start running surpluses to start whittling away at that problem. And the way you go from having a huge government debt deficit, excuse me, to a government surplus, do you think it matters from an Austrian perspective whether you do that flip by jacking up taxes versus cutting spending at the government level? Of course, cutting spending is the way to do it. That would release resources back to the private sector, whereas increasing taxes takes more from the private sector. So it's not, you know, no Austrian would deny jacking up taxes will crash the economy. No kidding. Okay. So that's not hurting us any. What it is hurting is the Keynesian story. The Keynesians are saying, "No, you need government deficit spending to be an extra component in aggate demand. And if the economy is already on the ropes, the last thing in the world you want to do is suddenly slash government spending." That's what caused the Great Depression, they'll say. Okay. So, I'm saying there's all these counter examples that the ECB highlighted in its bulletin of countries that got into debt trouble, solved that problem by aggressive cuts in government spending and their economies were fine. Okay, so that's totally consistent with the Austrian worldview, totally at odds with the Keynesian. Okay, let me now give a little more evidence in the specific case of Canada. And I I know this case well because um back in 2012 I along with uh two Canadian co-authors for this a Canadian think tank we did like a little uh briefing or white papers too grandiose a term but it was like a little uh scenario analysis of this particular episode in Canadian history and uh David Henderson also So if you know him, he also uh in 2010 had done a similar piece for a different out outfit. All right. So here's the story. So I'm reading here from my econ lib article explaining what happened. By the mid1 1990s, the Canadian federal government had been running deficits for two decades with onethird of federal revenue being absorbed by interest payments. Again, a third of their government's tax receipts were being dedicated to just paying interest on their debt. That's how deep in the hole they were. A Wall Street Journal editorial on January 12th, 1995 declared that Canada, quote, has now become an honorary member of the third world and the unmanageability of its debt problem. Okay, so that's what the Wall Street Journal said about Canada as of early 1995, right? So this was serious. So this is me now telling the story. Yet the Canadians swiftly solved the crisis with serious reforms. In just two years from 95 to 97, total federal government spending fell by more than 7%. All right? So that's an absolute terms. Normally when you talk about cutting government spending, you mean cutting relative to what the baseline was, right? Like in other words, oh, spending originally was going to go up 3% and it only went up 2%. So that's like a 33% cut. No, no, no. That's not what we're talking about. They're saying the absolute level of Canadian dollars that the that the Canadian government spent in 95 to97 went down 7%. They literally cut spending over those two years. While the budget deficit that started out at $32 billion, which was 4% of GDP, that changed to a $2.5 billion surplus. Okay? So they went from having a deficit that was 4% of their economy and then in two years it switched to a modest surplus because again cutting spending. Now there were also tax increases but the ratio of spending cuts to tax increases was about 5 to one. Okay. So it was very heavily in terms of that fiscal turnaround going from a big deficit to a modest surplus. that was the lion share of that it was achieved by actual cuts in government spending rather than raising taxes. Canada's federal government then went on to run 11 consecutive budget surpluses. Right? So from 11 years forward they actually had a slight surplus. And what did that do? It caused the overall debt to GDP ratio to go from 78% in 96 down to 39% in 2007. Okay. Again, their debt to GDP ratio in 96 was it 78% and then 11 consecutive budget surpluses it gets whittleled down to 39%. Right? So that can we all agree that is an aggressive fiscal austerity program largely through tax cuts. They go from having a big size deficit to a modest surplus. They run a surplus for 11 years in a row paying down the debt while their economy continues to grow such that the overall debt to GDP ratio plummets from 78% to 39%. Basically getting cut in half. Okay. And so then you say, "Oh, what happened? Did Canada get plunged into a major depression? No. This last one I'll read on this case. In the decade after reform, Canada outperformed all the other G7 nations on economic growth, investment, and job creation. According to IMF data, from 96 to 2005, Canada's average growth of real GDP was 3.3% with the US the runner up with 3.2% growth and the G7 excluding Canada averaging only 2.1% growth. And even in the short term, Canada's dramatic spending cuts and modest tax increases in the mid1 1990s had only mild side effects causing only a temporary uptick in the unemployment rate. Okay, so there you go. Now, I want to just mention so people don't accuse me of dishonesty. Back when the ECB bulletin came out and guys like me were pointing to it and running victory laps and say, "What are you guys talking about, you Keynesians?" There's plenty of examples of history of fiscal austerity working and the times when it didn't work, it's because they raised taxes. Like, so duh, libertarianism for the win. And Krugman went through and he tried to explain away each of those case studies of where it ostensibly worked. And so for Canada, what people will say is, "Oh, well, the reason Canada didn't plunge into depression is that their currency weakened and so they just had a bunch of e net export increases and so that they exported their way out of that. Otherwise, yes, they would have plunged into depression." So very quickly, I want to say yes, that is what happened. But again, that's not like some weird escape hatch that a classical free marketeteer would be baffled by. just in general when the government cuts spending right and the government's debt at least rel in terms of you know relative share of the economy goes down and its interest payments go down right the government is shifting away from consuming resources right and it's you know the government's footprint in the economy is shrinking so what's that going to do that's going to increase the private sector's footprint or put it to this way if the government demand for goods and services from the private sector goes down is a free market tier. What do you think is going to happen? Up permanent unemployment? No. You're going to see that's going to be replaced by selling to private sector buyers, right? And so in general, would you expect that just to happen, you know, just to cater to your own domestic population? No. If the if if the Canadian government stops buying so much from the private sector, Canadian producers, right, then the Canadian producers are going to sell to entities besides the Canadian government to make up for it otherwise they would have to lay people off, right? So who are they going to sell to? They can sell to other Canadians in the private sector or they can sell to foreigners, right? So of course other things equal. Yeah, you would expect if one country in isolation, if its government slashes spending, you would expect that government's private se or that nation's private sector to have more sales to its private sector domestically and increase exports. Why wouldn't you expect to see that? And then when you say in terms of the mechanics, how does that actually manifest itself? Like how how do the people in the system know they need to export more? You want to talk like that? Well, the mechanism is that interest rates on Canadian government debt would go down, right? Because now they're paying down their debt and they're not spending as much. And so that makes people around the world not want to hold as much Canadian debt. And so they don't need to um so so net capital flowing into Canada goes down. And so then that means right foreigners when they were accumulating Canadian government debt they were having to sell imports to can into Canada to pay for it. And so now that that's slowed down or stopped that means Canadian exports can increase right so that's one way of seeing the mechanism. Okay so there you go. All right. Now, let's look at the US example. One thing that of course that table left off was the 2008 crisis, right? Called the Great Recession. Most people think of that as the second worst economic calamity to hit the US after the Great Depression. And that was not at all followed by a reduction in government debt. In fact, in here, I'm I'm just looking at the uh the overall uh level of the the total federal debt that the you know, Treasury puts out. Yeah. If we look from, for example, 2002 through 2007, just to get like a a five or six year jump, total federal public debt went up 44.6%. And then you had the great recession. All right. So when you contrast that with if we put that chart up again, you can see they said, "Oh, from 1817 to 1821 over that four-year period or 5year period, however you want to clock that, the debt went down up and it caused depression, right?" Right? So they're looking at, you know, four year fiveyear periods and they'll say, "Okay, well then is that true that the 5-year period before the great recession that there was a significant payown in debt?" No. The exact opposite. Okay. So there again, we see in terms of the rain dance analogy, right? That oh, we can have a massive downpour that was not preceded by a rain dance. Okay. Okay. So here we can have a global financial crisis that certainly was not preceded by all the governments of the world aggressively paying down their debt. It's not at all what happened. Okay. So clearly there's more to the story that government debt payown is not necessary to get an economic crash. Okay. And now you can say is it sufficient? And so that's what I was getting to like with the Can Canadian examples and the other ones I'm showing in general it's not sufficient, right? Meaning you can have aggressive government debt paydowns that are not followed by a crash. That's that's why that's what I was doing there when I focused on the Canadian example just to relate it to the rain dance thing. Right? So, I'm showing you in general, there's plenty of examples from history of governments aggressively paying down their debt um without there being an economic crash anytime soon. Okay. So, yes, I have done that in general, but now for the US um it's there's a little bit of trickiness going on here. Okay. So one thing is in terms of these six periods that you know Kelton shows in her book and again I've seen this elsewhere too. It's not that Kelton's the only one and admittedly she's re reproducing it from this guy Frederick there um [snorts] and there's also yeah I think he who and who this guy is because I've also if you just go and look at it I found a different website that says Frederick Cer a professor of public administration George Washington University wrote an article titled, "Do balanced budgets cause depression for the Washington spectator on January 1st, 1996." And then it goes through and and lists the stuff. So that's um yeah, that that's exactly what Kelton is is citing too. All right. So I guess this stuff does go back to this guy Frederick They Okay. So what my point is that there's actually a period of aggressive government payown of debt that occurs earlier than this first example he cites. And so you might be tempted to say aha. So specifically, just so you know what I'm talking about, it is again using the official data from the Treasury in terms of the outstanding historical federal debt. Um, from and these are fiscal years, right? So this doesn't quite line up with calendar years. They're off by one. the data set I'm looking at here from the Treasury's fiscal years, but from fiscal 1803 through 1811, the total federal debt was paid down 47.7%. Right? And and it was every single one of those years in between they ran a surplus. Okay? So you can say, "Aha, see unfortunately be careful and I did check to say was there a problem there?" Well, yeah, there was what was called a depression in the middle of that, but admittedly it's tricky because there was the Embargo Act of 1807, right? So, if you go and look and and see um you know, was there an economic problem in the US in this period, they will say yes, there was. But most people agree the US put on this huge embargo and so of course that's going to destroy international trade. All right? So it's hard to disentangle that. So I'm not claiming a victory lap because they could say see that's our pattern. But I'm say we'll put that aside just like I wouldn't claim CO right technically you could say unemployment went way up under CO and hey that wasn't followed by a huge government debt payout but I'm not going to cite that against the MMT because you know that's kind of a wild card for that one. Okay. But I'm saying likewise for here. I'm g say I don't think they can necessarily claim that in their favor. But likewise, we can't claim it in our favor. Okay. What I will say though is what's interesting about these and why what I said with the rain dance example, surely to operationalize that, you're going to have to put some constraints. You can't just say, "Oh, these guys have been doing a rain dance like crazy." And then eventually 12 years later there was a downpour. So clearly right like in other words what would it look like if you were wrong? Wouldn't it look like they're doing a rain dance over and over and over and over? There's no rain downpour. And so I'm saying just look we'll pull up uh the chart that was based on and by the way I just noticed that there's a a typo here. The depressions there in the top right. That's a typo. But notice they've got according to their numbers here. Oh, from 1823 to 1836 the debt was fully paid off, right? And then and notice too they say in the uh you know underneath there in the with the asterisk the debt was actually paid off at 80 1835 and the US was in a surplus by 1836. Okay. So that is, you know, according to their numbers there, that's a good 13 years of straight surpluses and then the depression begins in 1837. So I want to say um if it's the case that aggressive government debt payown causes a depression, isn't that interesting that it took 13 years for it to happen there? Everyone get my point? In other like what would have happened if they had stopped doing that uh you know in 1828 and they had only paid down whatever 20% of the federal debt. Are they saying oh then there would have been a crash in 29 1829 or would there still have been a crash in 1837 and that would have you folks get what I'm saying? Or a different way of looking at it is look at the difference between that first row and the second row. In the first row, they're showing two years of government debt payown, which couldn't have been all that much, right? Because the total over the 5year stretch was 29%. And since I have the numbers, I can tell you in 1817 and 1818, the first year, like I'm showing it as fiscal 1816, there was a 3% reduction and then 1817 there was a 16.2%. So in absolute terms, the federal debt went from 127 million down to 103 million over those three years, right? And that apparently was enough to cause the first major depression in the US, the depression of 18 or the panic of 1819, right? That modest thing. So if that's the case, why is it that from 1823, why did they get all the way to 1836 and managed to completely pay off the debt? And then they had another year where they, you know, had extra money and they had to figure out what are we going to do with this because we've already paid off the debt. And then the depression didn't start till 1837. You see what I'm saying? So clearly even on this table's own terms the connection between paying down debt and a subsequent depression is tenuous. And again I and I would say the same thing likewise if you jump down to the second last one in this table the 1880 through 93 again if that first row we're going to say oh just two years of that debt payown you know which was accumulated from the war of 1812 if just the first two years that was enough to plunge us into the depression of 1819. Well, then how come in the stretch where they're saying, "Oh, from 1880 to 1893, look what happened. Why did it take 13 years?" Okay. And and and then likewise too with that last one. So my and here's something too. Let me mention with a bunch of these examples where they're they're running surpluses after a war for year, you know, for a decade plus, right? Like that's what's going on in the 20s. Of course, it's right after World War I. The US had a huge debt that had it carried over and they were trying to pay it down over time. Cuz what's going on here, folks? Before the rise of Keynesianism, you know, in the 30s, of course, is is when that came to the forefront. Before that, people looked at governments as if they were giant corporations fiscally. And so you could, yes, you could um run up a big debt if there's a crisis, particularly a big war you got to fight, but then the responsible thing to do over time is to pay it down. Just like a household or a corporation, if there's a crisis, they can yeah, you can go into debt, but then you pay it down. So that's what they were doing here. And so I'm saying with these some of these examples where yeah, there was a war, huge debt run up, and then they were paying it down over time. And if you can show, oh yeah, they could go a full decade paying that down. Oh, and then it stops because there's a crisis. Well, again, that doesn't show that the paying down of the debt caused the crisis. Really, this the simplest explanation of that is, yeah, when there's a, you know, a war, you run up the debt, then you're running surpluses and paying it down. And then if there's an economic crash, you're probably going to stop running surpluses at that point because you just had the economy crash. But the fact that in some of these cases it took more than a decade kind of makes it strain to say oh the reason that crash happened a decade later was because of all these payowns of the of the debt. Okay. And then the last thing I'll just say here in conclusion is there is a sense in which I can understand why there could be a correlation because there's some third factor causing this up. Specifically, if the central bank in conjunction with the private banks fuels an unsustainable boom, then that could cause, you know, the economy to rise. That could cause other things equal tax revenues increase. People don't need as much government assistance. And so, government spending is a share of the economy might fall. And so you could see how an unsustainable boom in the Austrian framework could other things equal make the economy tilt towards budget surpluses, right? Like I think that's what happened in the 1990s, right? With the.com bubble under the Clinton administration, there was a few years of a fiscal surplus, right? And then there was the 2001 crash. So there the way I would explain that it's not that Clinton modestly paying down the debt caused the economy to crash. I would say no it was the.com bubble fueled by the Fed and its loose money policies that allowed revenue to soar under Clinton such that he had some modest surpluses but then the economy crashed not because of the surpluses but because of the unsustainable boom. Okay. So I do think there is that mechanism at work and that's why yes you might see in general that it's not just a pure crapshoot that yeah it does seem like there are periods of long periods of paying down government debt followed by a sharp crash but again I would say the causality is not that government debt reduction means a bad economy eventually I think it's that the ostensibly strong economy that allows for the payown of debt is often caused by central bank hanky panky, right? And so with all this stuff, if you had a solid monetary and banking system, then that would no longer play a role. And then I think you really would see, yeah, government payown of debt is consistent with a healthy economy. And there's no reason statistically that that makes you more likely to experience a crash. Okay. Well, I'll wrap it up there. Thanks for your attention, everybody. The takeaway message, paying down government debt is good for the economy in terms of promoting stability and private sector standards of [music] living, both in theory and I would argue in practice. See you next time. Check back next [music] week for a new episode of the Human Action podcast. In the meantime, you can find more content like this on mises.org. [music] Heat. [music]
Is Paying Down Government Debt Bad for the Economy?
Summary
Transcript
[music] This is the Human Action podcast where we debunk the economic, political, and even cultural myths of the days. Here's [music] your host, Dr. Bob Murphy. Hey everybody, welcome back to Human Action Podcast. [music] This episode, I want to go through a sort of one-two punch that the MMT and some other related schools of thought will throw at the fiscal hawks. And so what they try to do is show both on theoretical and empirical grounds, referring specifically to US history, that paying down the federal debt would be a disaster. And so they're going to try to argue that um this will lead to economic calamity and that hey, this isn't even up for grabs. This isn't like a an ideological theory. This is just basic accounting on the one hand and then empirically they're going to say look at the record. Every time the US government has significantly paid down the debt there's been a depression. And so what are you guys doing? What are you thinking? It's not just look at the poor belleaguered people who depend on federal funding, you know, for their subsistence, but you're going to throw the economy into a huge crash. What are you thinking? All right. So, let me first to uh steal man the case. Let me go ahead and just run through this standard MMT type presentation on both of these points. Okay. So, as far as the theory is concerned, they often will appeal to what you might call sectoral balance equations. Um, Michael KI, I don't know if I'm pronouncing his name right, I think he was the one that really drove home this point. I believe he's the one that Stephanie Kelton cites as the authority in her book, The Deficit Myth, for example. And he will go through it pretty straightforwardly, you know, just take standard macro income accounting equations, just do simple algebra on them, rearrange terms and so forth, and end up with statements showing that if we set aside international trade, right? So we assume that the nation under consideration just has balanced trade with the rest of the world. Then in order for the domestic private sector to engage in what you might call net saving or to accumulate net financial assets or sometimes they'll say to increase its net financial worth, the government necessarily needs to run a budget deficit for that period. And then going the other way, they'll say if for some reason the government decides to run a budget surplus, right? So the government's paying down the outstanding government debt that period. Well then necessarily just again in terms of pure accounting. They can show that that means there's going to be a reduction in the net financial assets held by the private sector. And Stephanie Kelton famously summarized this on Twitter. She showed a chart of the federal government's net surplus or deficit and then overlaid that with the corresponding image for the private sector and they were virtually mirror images with you know anytime that the federal government was running a deficit the private financial sector was running a surplus and vice versa. And then she summarized that by saying their red ink is our black ink or or I think I think no more specifically she said something like their red ink makes our black ink possible. I think that's what the exact quote was. Okay. So that's like the theory and again they're saying this we're not relying on Keynesian economics here. We're not talking about aggregate demand having a shortfall. We're not appealing to sticky prices or sticky wages or uh you know the collapse in union bargaining power. They're not talking about any of that. They're not making specific uh assumptions about how the economy works. They're saying just writing out the simple equations summarizing income to the flowing to the various sectors over a period of time out pops that result. Okay. And now so that's again like the the theory saying so do you think it's a good idea to have the net financial assets held by the financials or the private sector going down? Do you think that might cause strain or stress to the to the private corporations and households financially to see their net assets shrinking? Okay. And then to say [snorts] let's let's see let's look at the history books instead of just relying on pure theory. And I've seen different versions of this floating around, but here's one that I saw. I just did the screen capture from a YouTube. Unfortunately, I'm not trying to throw the guy under the bus. I I can't remember where I grabbed this from, but I was watching various YouTube rabbit holes, as you know, as we all want to do at times and moments of personal weakness when you really should go to bed. And I saw this and I thought, "Wow, that's a great thing." And I grabbed it. And so here you can see he's citing this guy Frederick theer who compiled these statistics in 1996 and then apparently uh Kelton you know recycled them and featured them in the deficit myth. Okay which came out in 2020. All right. So you can see here that yep it'll show six major periods in US history where there were prolonged and significant debt payowns. Right. Right? So in other words, the US federal government read ran budget surpluses during these time periods in each of the years. And then it's showing from start to finish over this stretch, how much did the outstanding total debt go down? And then it says, oh, and by the way, can we say anything about what the economy was like during these periods of significant and prolonged debt reduction? Oh, look at that. for every single time you see there was a major financial, you know, they might have called it a panic back in the day, but what we would call depression with a small D, including of course the Great Depression was preceded by the roaring 20s when um the Koolage administration in particular ran a string of budget surpluses. They were trying to pay down the debt that had been accumulated during World War I. Okay. And look at that. So again, the MMTers would conclude, what more do you need to see that especially aggressive payown of federal debt on both theoretical and empirical grounds is going to cause a huge economic crash. So why would anybody want to do that? And let me mention, it's not just the MMTers who say that. I've even seen uh Austrian adjacent fellow travelers who are saying, "Yeah, I'm I understand we can't just keep running up the government debt forever, but let's not fool ourselves and let's be honest with the public when we're commentating on these things or commenting on these things that yeah, at this point, if we were to reverse course and start paying down uh the government debt, we would cause a huge depression." All right. and they think again they agree with that analysis. Okay. So how do I as an Austrian respond to that? Okay. On the theoretical side, I'll just very briefly give my response here because I've done it extensively via you know Mises Institute channels including um my book understanding money mechanics. So I'll link to that. there's a, you know, a chapter in there. And then also perhaps more specifically, um, I [clears throat] had a mises.org daily article that ran years ago and then they reran it once MMT got, you know, had a resurgence in popularity. It was called the upside down world of MMT. So, I'll link to it here, but if you want to try to find it yourself, you just can't wait. Can't be bothered to go through the the links. It's uh, again, Robert Murphy, the upside down world of MMT, and you should be able to find it that way. It it ran at mises.org if that helps you find it. And I just go through this. So, let me just very briefly explain my points and those longer critiques. In so far as it goes, like once you understand what they mean by the terms they're using, yes, the MMT accounting is correct. Right? In other words, I'm not accusing them of an arithmetical or algebraic error. However, their presentation is extremely misleading. Right? When Kelton says, referring to the government's budget deficit, their red ink makes our black ink possible, it leads you to believe that the private sector can't save or can't get ahead unless or or households can't pay down their debts unless there's an accounting mirror image and the federal government is running up its debt at the same during the same accounting period. And that is not true. Okay. what it means when they say for example the private sector can't accumulate net financial assets that word net is doing a lot of work there. So for example it could be the case that all the households in the private sector pay down their credit card debt in a given period. And you might say oh okay so they're they're you know climbing out of debt. The households are paying down their debt. They're uh getting more financially secure and so forth. Okay, that's a good thing, right? And you could see statistics about like aggregate credit card debt in the US going down or stuff like that, household net worth going up. And the trick is they would say, "Oh, no, no, because if you as a household owe Visa $10,000 on your credit card bill and you pay it down to $8,000, well, yeah, your debt went down 2,000, but now Visa's assets went down 2,000, right? because your debt to Visa on their books is a asset to them and so taken as a whole the total indebtedness of the private sector hasn't changed because you paid down your debt to Visa and they would say in fact if we're looking at financial assets right and that's the thing sometimes the MMT people are sloppy and they don't put the word financial in there but to make the claim correct they have to use that modifier financial to say financial net assets in the private sector again if we exclude foreign trade because you know foreigners could owe your your private sector money but if we just look at you know do the domestic situation or if we look at planet earth as a whole where there's no foreign sector visav all of the earthlings um which is a private sector as a whole the net financial assets sum to zero the way the standard accounting is done okay so if uh households have bonds issued by GE E those are net financial assets to the households right they have corporate bonds but obviously those are liabilities to GE and so it cancels out and so the idea is a financial asset by its very nature is something that one party owes money to the other party. Now, maybe it's like a fixed income one, like it's a bond that pays out a different thing. Or maybe it's an equity claim, like you own shares of corporate stock where you don't know how many dollars does is that going to translate to down the road, like if the company pays a dividend. But still, the idea is the way they tend to do the accounting on these things, the standard approach, the orthodox approach is to say the way you compute it that net financial assets in a closed system sum to zero. Okay? And and they do that because they want to avoid double counting. But I want to be clear, even on its own terms, that doesn't mean net assets always sum to zero. No, you can look at an economy that people can live below their means. They can save. They can accumulate. They can instead of cranking out more cheeseburgers and uh sports cars and stuff like that. They can make [snorts] factories and they can build more tractors and 18-wheelers and things that you know are not consumption goods or services but are capital goods and thereby increase the productivity of their labor over time. So their standard of living or their real GDP if you want to use that term terminology goes up over time. Right? So there's nothing about these accounting identities that prevents a population of people, even if they don't have a government running budget deficits, from saving and investing and accumulating and increasing their capital stock over time and the productivity of their raw labor power and having their standard of living increase and having their assets increase, right? that you start out a little mud hut and then over the generations you end up living in huge mansions and, you know, huge fields with, you know, automatic irrigation and tractors that do all the heavy work and so forth. Huge silos full of grain that you've accumulated over the years. That's all possible. You don't need government budget deficits to make that a possibility. Of course not. Okay. But again, the trick is you could have a bunch of genuine real assets like huge factories, rooms full of supercomputers, mining bitcoins, uh you know, satellites up in space doing telecommunications, do all sorts of stuff. And the corporations that owned those things as corporate assets would have those as real wealth, real assets. But then the idea is if the households own shares of stock in those corporations that receive their market valuation implicitly via the net real assets held by the corporation, right? Like if the corporate corporation issued some bonds, then the total market value of the corporation would have to take that into account that it had those outstanding liabilities, right? But the idea would be like to a first approximation the value of all the outstanding corporate shares of stock in that company would refer to its real assets perhaps minus you know the outstanding bonds. Okay. And so the point is you wouldn't want to when you add it up and said where are the total assets held by the private sector in this type of example. You wouldn't want to count up all the oh here's the factories and here's the forklifts inside the factories and here's all of the warehouses full of inventory that we're getting ready for this the Christmas rush. So we're looking at all these coats and uh snowsuits and everything and Christmas presents. All these, you know, toy train sets that we've been building up over the last few months and storing in these big warehouses. We're going to count all that up and we got, you know, hundreds of billions of dollars of inventory and that, you know, those are real assets that that counts as part of the total wealth of this group of people in this particular private sector that we're analyzing. And if they happen to be held by corporations, yep, that's all part of the corporate assets. But then, let's say, you know, that number is whatever $5 trillion. and now the households own the shares of stock that ultimately, you know, point to those corporations. You wouldn't then say, "Oh, the households own $5 trillion of corporate stock also, and so now there's 10 trillion in assets." That's the script. No, no, you don't want to double count. The corporate shares held by the households have a mirror image in liabilities in a sense. They're not liabilities the same way a bond is to the corporations. So that those things net to zero and then you're just left with the underlying real assets that we originally counted as being owned by the corporations. Okay. So that's how that stuff works. All right. I know I kind of had to go through a little detour there to explain that. But once you see that context, now what Kelton is saying again relying on KKI and so forth is that the only way the private sector can hold financial assets, right? Claims that some other entity owes them a flow of dollars in the future in the US context. The only way that can be true on net is if there's some entity that's outside the private sector that owes them that flow of dollars. Oh, the government. That's the only entity that could do it. Right? If we're excluding foreigners, right? Foreigners could own could owe your people a flow of dollars or the federal government could. But if if sort of by definition you're drawing a shell around your domestic private sector and saying any dollars owed internally just sum to zero and then you say yeah the only way some entity outside the private sector could owe the private sector money is if it's the government and I say okay so what because what's odd or ironic is the one entity owing the private sector money that should not be considered as wealth health or financial assets in the same way that a household owning a corporate bond is a financial asset to that household would be the government, right? Because it's not that the government has to generate a profit through voluntary means and that it's buying inputs with its originally justly held property, converting them into goods and services that it sells to its customers voluntarily and then you and earns a profit and then uses that to pay down the debt or to pay interest on the treasuries it's it'ssued over the years. No, that's not how it works at all. The way the federal government services the debt held by the private sector is it either taxes them and says, "Oh yeah, we owe you some money here. We'll tax it from you at gunpoint." And then give it right back to you. There you go. Aren't you so glad you're holding safe treasuries. Or they roll them over. They borrow from somebody else in the private sector to pay off the original lenders. or they run the printing press, which yes, that's a way to get a flow of dollars into the private sector. But is that really wealth in the same way that we're thinking of it when we say, "Oh, the household, you know, has a checking account balance and it's got some bonds and it's got some corporate shares of stock that might pay dividends over time or they could sell it if they needed to at the market price down the road." to say that those are all sources of dollars. Is that wealth in the same way as if the federal government turning to the Fed says just run the printing press and certainly you know for any individual household it might be but in the aggregate is the private sector made wealthier if the Federal Reserve just creates another trillion dollars and hands it over? No, of course not. the the real wealth effects of that you could either say are a wash or I would actually say in general in the long run are negative. It's not just that oh yeah every all prices adjust accordingly and everything's a wash that no I would say that causes the boom bus cycle and actually makes the private sector poor in real terms in the long run. Okay. But for sure to run around saying the only way the private sector can accumulate net financial assets is if the government runs up its debt I think is incredibly misleading and doesn't those terms don't mean in that context what they mean in the normal connotation when you think of a of a single household and it accumulating financial assets that are claims on other private sector entities. Okay. So that like I say is my response when it comes to the the theoretical claims. But now let me tackle those empirical arguments to say, okay, sure, Murphy, you've got your perspective coming from an Austarian ideological view. We've got ours. Let's look at history. Right? If it's really so good and wise for the federal government to pay down its debt and be responsible just like a household is, then how come we see this correlation? Why is it that in US history whenever they do aggressive payown of the debt, it leads to calamity? Right? Okay. So, let me pause for a moment and say before I dive into the specifics here, let's step back and ask ourselves in general, if you've got two people arguing and someone says this thing causes this other thing that we observe in history, what sorts of And then they present and show an apparent correlation where it looks like, yeah, the thing that they're saying is the cause is followed by the thing they're saying is the result or the effect and then the other person disagrees. What types of arguments or evidence could the critic bring up just in general? Right? So, let's say the first person says, "Yeah, I think that rain dances cause severe rainstorms." And here, look at I've got a list of six major examples from this tribe's history where the sheamans did some serious rain dancing. Like the most intense rain dancing we've ever really recorded. And in each of those instances, it was accompanied by massive downpours. Some of the biggest downpours we've ever seen in this tribe's history. So there you go. Clearly intense rain dancing causes intense rain showers. So now you're the critic of that. What do you what would you say? Again, you can't just say, "Well, that's crazy." Because the other person says, "No, I don't think it is. Here's my theory." Da d d d d d d d d d d d d d d d d d d d d d and they go through whatever the theory would be and then here's my historical evidence. Okay, so I think the first thing you would do if you were like genuinely trying to argue with the person or appeal to the the public is you'd say, "All right, your theoretical mechanism doesn't make sense." and you would walk through. I'm not going to go through here and pretend I believe in rain dances, but whatever it is that they said, whether you know they're appealing to the gods or mother nature, whatever, you could go through and try to explain theoretically why no, that doesn't work. I have a different theory as to what causes rain and it does not involve rain dances, right? So, that's one way in which you could try to attack that argument or that proposal or hypothesis. But then when you turn to the historical record, a great way to proceed if the data allowed or allowed, yeah, is you would try to show, hey, are there any instances when the sheamans really did intense rain dances and then there wasn't a big downpour, right? To show, hey, sometimes the rain dances don't work, right? So that would be one feather in your cap. And then could you do the flip side? Could you also point to examples where there were very intense rain showers that had not been preceded by intense rain dances? Right? And so then what you'd be able to show like the fancy way they would say this in philosophy is you would have just if if the historical record allowed you to do that honestly then you could say yep we can see that rain dances are neither necessary nor sufficient for intense rain downpours. Right? because there's times where they do the rain dance, it doesn't rain heavily and then there's also times when it's raining heavily and there's no preceding rain dance. Now notice too, just even I'm going through this silly example just to kind of warm us up and to figure how are we going to tackle the more serious question. You'd have to get a precise, right? Like in principle once somebody does a rain dance are you going to say for the rest of time anytime it rains it's fair to say oh yep see the pattern holds because I can go back far enough in time and see what see that there was a rain dance and so therefore from that point forward every single rain downpour that ever happens we can attribute to that one time back in 1587 when they did rain you see what I'm saying that know there has to be some time interval like to say you do a rain dance and then and likewise too, suppose they do a rain dance and then nothing happens for a while. At what point do you get to say it didn't work, right? Do you just keep waiting around waiting around and as long as you know at some point it rains? Then you can say, "Oh, yep. See, it works." Just like we said that no, at some point for this to be operational, to be falsifiable, to use that term, you'd have to have a time limit on it. So again, since I'm making this up and I don't believe in rain dances, and presumably [snorts] most of you listening don't either, it's not worth getting into the specifics, but the the person who's advancing this theory and gave their theoretical mechanism, you would have to ask them once you did showed your thing. You could say, "Now come back, get a little more specific with your theoretical mechanism, what time frame should we expect?" And should it always be the same, right? Is it that if you do a rain dance then boom 16 hours later the downpour should start or is it like it could be anywhere you know do rain dances have a long and variable lag for precipitation which is I'm making a joke because that's what mantists say right that they there's no tight connection between changes in the money stock and then what happens with price inflation okay and so monists famously say yes there's a long and variable lag, which I've joked in other contexts is like saying this actually isn't true. There's other causal factors at work. Okay, so there you go. All right. And so that's what I'm going to do here. Now, let me say even even having done what I'm going to do and I you folks can probably guess rhetorically in the fact that I'm so proud of myself in this rain dance analogy. I'm going to go ahead and do that with paying down debt. I'm going to show that paying down the government's debt is neither necessary nor sufficient for an economic crash. Right? Namely, I'm going to show there are times when the government's debt was paid down that was not followed anytime soon by an economic crash. And I'm also going to show there were economic crashes that were not preceded anytime in the recent past by significant government debt paydowns. So, since I've tried to show you and and also I could challenge the theoretical mechanisms, that's pretty easy. I don't think I need to do that here in the human action podcast to say why I think the government paying down its debt, right, holds hold taxation constant. Just have the government cut spending so it's running a surplus. that there's no intrinsic reason given the way I think the world works that the government cutting its spending such that it's paying down the debt year after year should all of a sudden cause the economy to crash. At the end of this episode I will bring up a sophisticated uh element where given the way our system works there could be this third factor that kind of causes both. So I'll talk about that near the end, but I'm just saying primmaaccia in terms of economic laws and how do I think the world works and how does the economy work and interact with government fiscal policy. No, in general the government paying down debt should not cause an economic crash. Okay? And so and I'm again I'm going to show you the historical records like that too. Let me say that admittedly and in fairness to the MMTers is not a mic drop, right? Because you could also imagine a more nuanced scenario like something like smoking, right? The opponent of cigarette smoking could say, "Hey, smoking causes cancer, lung cancer, right?" And then the defender of big tobacco could say truthfully, "No, what are you talking about? Look it, I can show you all kinds of case studies of people who got lung cancer even though they never smoke smoked a single cigarette. And I can show you examples of people who smoked a pack a day and never got lung cancer. And in some cases, it's not just cuz they died in a car crash when they were 38, but no, they lived into their 70s, never got lung cancer. So smoking is neither necessary nor sufficient for lung cancer. QED smoking has nothing you see and that last step would be the wrong one presumably based on my knowledge of the evidence and so forth right that but even there you would have to amend the claim it's not that smoking causes lung cancer period the way mass causes gravitational attraction it would be more like smoking is a strong contributor to lung cancer or smoking makes it much more likely that you will develop lung cancer or in the long run or some you know you see what I'm saying okay so again maybe after I go through this demonstration the honest MMTers out there would come back and say okay yes some of the people on our side on social media might make hyperbolic claims really what it should be is that aggressive paying down of government debt enhances the instability in the private sector you know Allah Minsky and so it's not that guarantees there's going to be a crash. It just means year by year the probability of a crash is higher than other. You know, they could say something like that. All right? And then, you know, I would come through and we could go back and forth. Okay? Because with again with smoking, yes, you can find counter examples, but presumably with a big enough pool, you would find that the the probability that somebody gets lung cancer. If you're doing regression analysis or something, it looks like there's statistical significance on their smoking habits in terms of predicting whether that person's going to have lung cancer down the road. Okay. So having gone through all that and giving you the framework, let me now just run through the empirical bit. So for one thing, I would point you to I'll put a link in the show notes page of course. I wrote an article for Econ lib econ library a while ago talking about the economic literature and the case for so-called fiscal austerity. And what I pointed out is if and I and I give examples. I document all this stuff just showing how like Paul Krugman and Christina Romer at the time, this was back during the Obama years during the rounds of QE and then when geez that didn't work, right? the economies of the world in the wake of the financial crisis of 2008, so-called great recession, they were still mired in the doldrums even though they had run massive government budget deficits and that their central banks had slashed interest rates to basically zero and done massive accumulations of uh fixed income assets like government bonds and in the US case mortgage back securities. Gez, didn't it was working. And so then some of them said, "All right, we got to get our fiscal house in order. We just can't keep running these huge deficits. We got to start tightening our belts." And so Krugman and Christina Romer among others came in telling everybody, "What are you doing? This is Herbert Hoover 2.0 if you do that." And they're acting like it was just an insane theory, this notion that somehow paying down government debt might help your economy. And they were saying, "No, it doesn't. That's crazy. There's no evidence of that. There's no theoretical me." Right. Okay. So I was just going through and showing they were completely full of it. And ironically, one of the key pieces in the literature showing the strong effect that government tax policy has on economic growth came from Christina Ror along with her male ROR co-author. So it was really weird in her case. Okay. But in any event, Krugman as well in a different context had also argued that deficit Keynesian deficit spending arguably has one example in history where it worked, right? Krumman from the late 90s that is said that. Okay. So my point was don't listen to them. They're bluffing that there's plenty of stuff in the economic literature backing up this idea that when governments get into fiscal trouble, they need to cut spending and that that will not crash the economy. Okay, so here I'm quoting from the believe it or not the European Central Bank and this might have been motivated by political reasons. It might have been that some major Euro countries like Germany, you know, wanted to encourage austerity and so the people at the ECB knew like, yep, this is what the big boys want and so we're going to go ahead and do this. But in any event, this was what they published. The ECB had a bulletin that came out in June 2010 explaining or assessing the record of fiscal consolidation, okay, in Euro era countries. And this is what they said. The empirical literature offers diverse results as to whether fiscal consolidations in the Euro area have had expansionary effects on economic activity in the short run with reference to the periods of sizable government debt reductions mentioned above. Expansionary fiscal consolidations are suggested in Ireland, the Netherlands, and Finland. Looking at a broader range of experiences, it is found that around half of the fiscal consolidations in the EU in the last 30 years have been followed by an improved output growth performance in the short term relative to the initial starting position. Okay. So what they're saying is they're they specifically highlighted Ireland, the Netherlands, and Finland as as case studies of look at here's examples where they did aggressive debt reduction in their economies were fine. Right? So showing it could be done. And then they're also saying we broadened our our results and looked at over the last 30 years in around half the cases it worked and the other half it didn't. And you might say, "Oh, so it's just a coin flip." Well, no. I don't have it quoted here. But they got more specific and said to try to understand how come sometimes it works and sometimes so-called fiscal consolidation does lead to a bad economy. You know, seeming to justify the Keynesians worry. And they said, "Oh, it's because in those cases where there was a the economy crashed, it's because these governments tried to pay down their debt by raising taxes. In contrast, if we look at the cases where the countries largely dealt with their, you know, debt problem by cutting spending and not increasing taxes significantly. Then they got their debt under control and didn't crash the economy. Right? So that's what they said just looking empirically to try to understand how come sometimes it seems to work and sometimes it doesn't. And so now I'm saying as an Austro libertarian, is that surprising to anybody that if the government's been running up a big debt and people are like, geez, this can't continue. We need to start running surpluses to start whittling away at that problem. And the way you go from having a huge government debt deficit, excuse me, to a government surplus, do you think it matters from an Austrian perspective whether you do that flip by jacking up taxes versus cutting spending at the government level? Of course, cutting spending is the way to do it. That would release resources back to the private sector, whereas increasing taxes takes more from the private sector. So it's not, you know, no Austrian would deny jacking up taxes will crash the economy. No kidding. Okay. So that's not hurting us any. What it is hurting is the Keynesian story. The Keynesians are saying, "No, you need government deficit spending to be an extra component in aggate demand. And if the economy is already on the ropes, the last thing in the world you want to do is suddenly slash government spending." That's what caused the Great Depression, they'll say. Okay. So, I'm saying there's all these counter examples that the ECB highlighted in its bulletin of countries that got into debt trouble, solved that problem by aggressive cuts in government spending and their economies were fine. Okay, so that's totally consistent with the Austrian worldview, totally at odds with the Keynesian. Okay, let me now give a little more evidence in the specific case of Canada. And I I know this case well because um back in 2012 I along with uh two Canadian co-authors for this a Canadian think tank we did like a little uh briefing or white papers too grandiose a term but it was like a little uh scenario analysis of this particular episode in Canadian history and uh David Henderson also So if you know him, he also uh in 2010 had done a similar piece for a different out outfit. All right. So here's the story. So I'm reading here from my econ lib article explaining what happened. By the mid1 1990s, the Canadian federal government had been running deficits for two decades with onethird of federal revenue being absorbed by interest payments. Again, a third of their government's tax receipts were being dedicated to just paying interest on their debt. That's how deep in the hole they were. A Wall Street Journal editorial on January 12th, 1995 declared that Canada, quote, has now become an honorary member of the third world and the unmanageability of its debt problem. Okay, so that's what the Wall Street Journal said about Canada as of early 1995, right? So this was serious. So this is me now telling the story. Yet the Canadians swiftly solved the crisis with serious reforms. In just two years from 95 to 97, total federal government spending fell by more than 7%. All right? So that's an absolute terms. Normally when you talk about cutting government spending, you mean cutting relative to what the baseline was, right? Like in other words, oh, spending originally was going to go up 3% and it only went up 2%. So that's like a 33% cut. No, no, no. That's not what we're talking about. They're saying the absolute level of Canadian dollars that the that the Canadian government spent in 95 to97 went down 7%. They literally cut spending over those two years. While the budget deficit that started out at $32 billion, which was 4% of GDP, that changed to a $2.5 billion surplus. Okay? So they went from having a deficit that was 4% of their economy and then in two years it switched to a modest surplus because again cutting spending. Now there were also tax increases but the ratio of spending cuts to tax increases was about 5 to one. Okay. So it was very heavily in terms of that fiscal turnaround going from a big deficit to a modest surplus. that was the lion share of that it was achieved by actual cuts in government spending rather than raising taxes. Canada's federal government then went on to run 11 consecutive budget surpluses. Right? So from 11 years forward they actually had a slight surplus. And what did that do? It caused the overall debt to GDP ratio to go from 78% in 96 down to 39% in 2007. Okay. Again, their debt to GDP ratio in 96 was it 78% and then 11 consecutive budget surpluses it gets whittleled down to 39%. Right? So that can we all agree that is an aggressive fiscal austerity program largely through tax cuts. They go from having a big size deficit to a modest surplus. They run a surplus for 11 years in a row paying down the debt while their economy continues to grow such that the overall debt to GDP ratio plummets from 78% to 39%. Basically getting cut in half. Okay. And so then you say, "Oh, what happened? Did Canada get plunged into a major depression? No. This last one I'll read on this case. In the decade after reform, Canada outperformed all the other G7 nations on economic growth, investment, and job creation. According to IMF data, from 96 to 2005, Canada's average growth of real GDP was 3.3% with the US the runner up with 3.2% growth and the G7 excluding Canada averaging only 2.1% growth. And even in the short term, Canada's dramatic spending cuts and modest tax increases in the mid1 1990s had only mild side effects causing only a temporary uptick in the unemployment rate. Okay, so there you go. Now, I want to just mention so people don't accuse me of dishonesty. Back when the ECB bulletin came out and guys like me were pointing to it and running victory laps and say, "What are you guys talking about, you Keynesians?" There's plenty of examples of history of fiscal austerity working and the times when it didn't work, it's because they raised taxes. Like, so duh, libertarianism for the win. And Krugman went through and he tried to explain away each of those case studies of where it ostensibly worked. And so for Canada, what people will say is, "Oh, well, the reason Canada didn't plunge into depression is that their currency weakened and so they just had a bunch of e net export increases and so that they exported their way out of that. Otherwise, yes, they would have plunged into depression." So very quickly, I want to say yes, that is what happened. But again, that's not like some weird escape hatch that a classical free marketeteer would be baffled by. just in general when the government cuts spending right and the government's debt at least rel in terms of you know relative share of the economy goes down and its interest payments go down right the government is shifting away from consuming resources right and it's you know the government's footprint in the economy is shrinking so what's that going to do that's going to increase the private sector's footprint or put it to this way if the government demand for goods and services from the private sector goes down is a free market tier. What do you think is going to happen? Up permanent unemployment? No. You're going to see that's going to be replaced by selling to private sector buyers, right? And so in general, would you expect that just to happen, you know, just to cater to your own domestic population? No. If the if if the Canadian government stops buying so much from the private sector, Canadian producers, right, then the Canadian producers are going to sell to entities besides the Canadian government to make up for it otherwise they would have to lay people off, right? So who are they going to sell to? They can sell to other Canadians in the private sector or they can sell to foreigners, right? So of course other things equal. Yeah, you would expect if one country in isolation, if its government slashes spending, you would expect that government's private se or that nation's private sector to have more sales to its private sector domestically and increase exports. Why wouldn't you expect to see that? And then when you say in terms of the mechanics, how does that actually manifest itself? Like how how do the people in the system know they need to export more? You want to talk like that? Well, the mechanism is that interest rates on Canadian government debt would go down, right? Because now they're paying down their debt and they're not spending as much. And so that makes people around the world not want to hold as much Canadian debt. And so they don't need to um so so net capital flowing into Canada goes down. And so then that means right foreigners when they were accumulating Canadian government debt they were having to sell imports to can into Canada to pay for it. And so now that that's slowed down or stopped that means Canadian exports can increase right so that's one way of seeing the mechanism. Okay so there you go. All right. Now, let's look at the US example. One thing that of course that table left off was the 2008 crisis, right? Called the Great Recession. Most people think of that as the second worst economic calamity to hit the US after the Great Depression. And that was not at all followed by a reduction in government debt. In fact, in here, I'm I'm just looking at the uh the overall uh level of the the total federal debt that the you know, Treasury puts out. Yeah. If we look from, for example, 2002 through 2007, just to get like a a five or six year jump, total federal public debt went up 44.6%. And then you had the great recession. All right. So when you contrast that with if we put that chart up again, you can see they said, "Oh, from 1817 to 1821 over that four-year period or 5year period, however you want to clock that, the debt went down up and it caused depression, right?" Right? So they're looking at, you know, four year fiveyear periods and they'll say, "Okay, well then is that true that the 5-year period before the great recession that there was a significant payown in debt?" No. The exact opposite. Okay. So there again, we see in terms of the rain dance analogy, right? That oh, we can have a massive downpour that was not preceded by a rain dance. Okay. Okay. So here we can have a global financial crisis that certainly was not preceded by all the governments of the world aggressively paying down their debt. It's not at all what happened. Okay. So clearly there's more to the story that government debt payown is not necessary to get an economic crash. Okay. And now you can say is it sufficient? And so that's what I was getting to like with the Can Canadian examples and the other ones I'm showing in general it's not sufficient, right? Meaning you can have aggressive government debt paydowns that are not followed by a crash. That's that's why that's what I was doing there when I focused on the Canadian example just to relate it to the rain dance thing. Right? So, I'm showing you in general, there's plenty of examples from history of governments aggressively paying down their debt um without there being an economic crash anytime soon. Okay. So, yes, I have done that in general, but now for the US um it's there's a little bit of trickiness going on here. Okay. So one thing is in terms of these six periods that you know Kelton shows in her book and again I've seen this elsewhere too. It's not that Kelton's the only one and admittedly she's re reproducing it from this guy Frederick there um [snorts] and there's also yeah I think he who and who this guy is because I've also if you just go and look at it I found a different website that says Frederick Cer a professor of public administration George Washington University wrote an article titled, "Do balanced budgets cause depression for the Washington spectator on January 1st, 1996." And then it goes through and and lists the stuff. So that's um yeah, that that's exactly what Kelton is is citing too. All right. So I guess this stuff does go back to this guy Frederick They Okay. So what my point is that there's actually a period of aggressive government payown of debt that occurs earlier than this first example he cites. And so you might be tempted to say aha. So specifically, just so you know what I'm talking about, it is again using the official data from the Treasury in terms of the outstanding historical federal debt. Um, from and these are fiscal years, right? So this doesn't quite line up with calendar years. They're off by one. the data set I'm looking at here from the Treasury's fiscal years, but from fiscal 1803 through 1811, the total federal debt was paid down 47.7%. Right? And and it was every single one of those years in between they ran a surplus. Okay? So you can say, "Aha, see unfortunately be careful and I did check to say was there a problem there?" Well, yeah, there was what was called a depression in the middle of that, but admittedly it's tricky because there was the Embargo Act of 1807, right? So, if you go and look and and see um you know, was there an economic problem in the US in this period, they will say yes, there was. But most people agree the US put on this huge embargo and so of course that's going to destroy international trade. All right? So it's hard to disentangle that. So I'm not claiming a victory lap because they could say see that's our pattern. But I'm say we'll put that aside just like I wouldn't claim CO right technically you could say unemployment went way up under CO and hey that wasn't followed by a huge government debt payout but I'm not going to cite that against the MMT because you know that's kind of a wild card for that one. Okay. But I'm saying likewise for here. I'm g say I don't think they can necessarily claim that in their favor. But likewise, we can't claim it in our favor. Okay. What I will say though is what's interesting about these and why what I said with the rain dance example, surely to operationalize that, you're going to have to put some constraints. You can't just say, "Oh, these guys have been doing a rain dance like crazy." And then eventually 12 years later there was a downpour. So clearly right like in other words what would it look like if you were wrong? Wouldn't it look like they're doing a rain dance over and over and over and over? There's no rain downpour. And so I'm saying just look we'll pull up uh the chart that was based on and by the way I just noticed that there's a a typo here. The depressions there in the top right. That's a typo. But notice they've got according to their numbers here. Oh, from 1823 to 1836 the debt was fully paid off, right? And then and notice too they say in the uh you know underneath there in the with the asterisk the debt was actually paid off at 80 1835 and the US was in a surplus by 1836. Okay. So that is, you know, according to their numbers there, that's a good 13 years of straight surpluses and then the depression begins in 1837. So I want to say um if it's the case that aggressive government debt payown causes a depression, isn't that interesting that it took 13 years for it to happen there? Everyone get my point? In other like what would have happened if they had stopped doing that uh you know in 1828 and they had only paid down whatever 20% of the federal debt. Are they saying oh then there would have been a crash in 29 1829 or would there still have been a crash in 1837 and that would have you folks get what I'm saying? Or a different way of looking at it is look at the difference between that first row and the second row. In the first row, they're showing two years of government debt payown, which couldn't have been all that much, right? Because the total over the 5year stretch was 29%. And since I have the numbers, I can tell you in 1817 and 1818, the first year, like I'm showing it as fiscal 1816, there was a 3% reduction and then 1817 there was a 16.2%. So in absolute terms, the federal debt went from 127 million down to 103 million over those three years, right? And that apparently was enough to cause the first major depression in the US, the depression of 18 or the panic of 1819, right? That modest thing. So if that's the case, why is it that from 1823, why did they get all the way to 1836 and managed to completely pay off the debt? And then they had another year where they, you know, had extra money and they had to figure out what are we going to do with this because we've already paid off the debt. And then the depression didn't start till 1837. You see what I'm saying? So clearly even on this table's own terms the connection between paying down debt and a subsequent depression is tenuous. And again I and I would say the same thing likewise if you jump down to the second last one in this table the 1880 through 93 again if that first row we're going to say oh just two years of that debt payown you know which was accumulated from the war of 1812 if just the first two years that was enough to plunge us into the depression of 1819. Well, then how come in the stretch where they're saying, "Oh, from 1880 to 1893, look what happened. Why did it take 13 years?" Okay. And and and then likewise too with that last one. So my and here's something too. Let me mention with a bunch of these examples where they're they're running surpluses after a war for year, you know, for a decade plus, right? Like that's what's going on in the 20s. Of course, it's right after World War I. The US had a huge debt that had it carried over and they were trying to pay it down over time. Cuz what's going on here, folks? Before the rise of Keynesianism, you know, in the 30s, of course, is is when that came to the forefront. Before that, people looked at governments as if they were giant corporations fiscally. And so you could, yes, you could um run up a big debt if there's a crisis, particularly a big war you got to fight, but then the responsible thing to do over time is to pay it down. Just like a household or a corporation, if there's a crisis, they can yeah, you can go into debt, but then you pay it down. So that's what they were doing here. And so I'm saying with these some of these examples where yeah, there was a war, huge debt run up, and then they were paying it down over time. And if you can show, oh yeah, they could go a full decade paying that down. Oh, and then it stops because there's a crisis. Well, again, that doesn't show that the paying down of the debt caused the crisis. Really, this the simplest explanation of that is, yeah, when there's a, you know, a war, you run up the debt, then you're running surpluses and paying it down. And then if there's an economic crash, you're probably going to stop running surpluses at that point because you just had the economy crash. But the fact that in some of these cases it took more than a decade kind of makes it strain to say oh the reason that crash happened a decade later was because of all these payowns of the of the debt. Okay. And then the last thing I'll just say here in conclusion is there is a sense in which I can understand why there could be a correlation because there's some third factor causing this up. Specifically, if the central bank in conjunction with the private banks fuels an unsustainable boom, then that could cause, you know, the economy to rise. That could cause other things equal tax revenues increase. People don't need as much government assistance. And so, government spending is a share of the economy might fall. And so you could see how an unsustainable boom in the Austrian framework could other things equal make the economy tilt towards budget surpluses, right? Like I think that's what happened in the 1990s, right? With the.com bubble under the Clinton administration, there was a few years of a fiscal surplus, right? And then there was the 2001 crash. So there the way I would explain that it's not that Clinton modestly paying down the debt caused the economy to crash. I would say no it was the.com bubble fueled by the Fed and its loose money policies that allowed revenue to soar under Clinton such that he had some modest surpluses but then the economy crashed not because of the surpluses but because of the unsustainable boom. Okay. So I do think there is that mechanism at work and that's why yes you might see in general that it's not just a pure crapshoot that yeah it does seem like there are periods of long periods of paying down government debt followed by a sharp crash but again I would say the causality is not that government debt reduction means a bad economy eventually I think it's that the ostensibly strong economy that allows for the payown of debt is often caused by central bank hanky panky, right? And so with all this stuff, if you had a solid monetary and banking system, then that would no longer play a role. And then I think you really would see, yeah, government payown of debt is consistent with a healthy economy. And there's no reason statistically that that makes you more likely to experience a crash. Okay. Well, I'll wrap it up there. Thanks for your attention, everybody. The takeaway message, paying down government debt is good for the economy in terms of promoting stability and private sector standards of [music] living, both in theory and I would argue in practice. See you next time. Check back next [music] week for a new episode of the Human Action podcast. In the meantime, you can find more content like this on mises.org. [music] Heat. [music]