Interest On The National Debt

Summary

• iMFdirect: Countries must get their fiscal houses in order by gradually lowering debt to prepare for the next downturn.
• Russell Investments: The “$20 billion club,” the largest publicly listed corporate defined benefit plans, are markedly de-risking their portfolios.
• Thought For The Day: One ideal that is universally embraced but seldom mentioned in discussions of fiscal policy is the value of freedom.

DB Plan De-Risking

"After several years of little news on the investment policy front, there have been big changes in asset allocations for [DB plans with liabilities of at least] $20 billion... Fixed-income allocations are up 5%, while equity allocations are down 5%. This shift in asset allocation is the largest de-risking move in recent history in a continuing shift out of risky assets." (Russell Investments)

Trade Biggest Loser In Trade War

"China's total trade with the U.S slumped by 11% in the first three months of this year, according to the latest customs department data. That's mainly due to a 28% slump in U.S. imports to China for the first quarter, in yuan-denominated terms. Exports to the U.S. fell 3.7% over the same three months." (Wall Street Breakfast)

Dr. IMF's Fiscal Prescription

"Everyone's opportunities for a good education, along with their job prospects, healthcare, and retirement income, depend on the tax and spending choices governments make as they respond to these challenges. What should policymakers do?... we argue that they can take a long-term view to foster higher and more inclusive growth. This means getting their fiscal houses in order by gradually lowering debt to prepare for the next downturn and upgrading fiscal policy to invest in people's futures. This requires… creating more room in the budget…" (iMFdirect)

Thought For The Day

The International Monetary Fund has offered some generally good, and broadly ignored, advice and encouragement to member countries since the financial crisis a decade ago. Today's installment, published on SA by iMFdirect and quoted immediately above, is the fiscal parallel to a monetary concept which has gained acceptance. Central bankers, at least in the U.S., have attempted to normalize interest rates in an upward direction to give themselves wiggle room to lower them again in an economic downturn.

By the same logic, the IMF calls on governments in advanced economies to reduce debt levels in order to "make room in its budget to help the economy during the next downturn." But the IMF goes further, clarifying that the maneuvering room it recommends is not merely to weather a downturn but to essentially (my words) maintain a functioning society where citizens can meet their educational, employment, healthcare and retirement income objectives. Here is one obvious example where budget flexibility and a functioning society go hand in hand. I quote from iMFdirect:

In advanced economies, whose populations are rapidly aging, we project that age-related public spending, such as pensions and healthcare, will consume a quarter of GDP by 2050."

Among the items crowding out funding for Medicare and Social Security is interest on the national debt, which this year totals $393 billion and will reach $479 billion in fiscal year 2020. That level of debt equates to 8.7% of GDP for this year - a level higher even than the financial crisis year of 2008 - and 10.1% for next year. For comparison, the 2020 budget allocates $679 billion for Medicare and $418 billion for Medicaid, according to data compiled by The Balance.

A budget is, in a sense, a political allocation of citizens' values. It is clear that people have differing political preferences, which is why people prefer this or that leader and this or that party. That is a truism. But there is one ideal that is universally embraced but seldom mentioned in discussions of fiscal policy, and that is the value of freedom.

When 10% of a budget is committed to "mandatory spending" such as interest on the debt, there is less scope for "discretionary" items such expenditures on behalf of veterans. In that sense, our freedom is constrained.

One difficulty that developed economies grapple with is the multiplicity of definitions of freedom. But I would suggest that upon some reflection most would agree that discipline is what paradoxically enables and structures it. For that reason, iMFdirect is certainly correct that "upgrading fiscal policy" makes it possible to "invest in people's futures."

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