Debt Dispatch Medley
2026 02 07
This is a great issue of Romia Boccia’s Debt Dispatch with lots of issues with which to agree, partially agree and disagree about. Let’s go!
I
The big issue -- it’s always nice to start with agreement -- is the net fiscal benefit of immigrants. With a budget with tax cuts that reduced revenue by trillions and a deficit of ~6% of GDP, the $ ~ 700 billions per year in revenue net of expenditures from immigrants is most welcome. Clearly this does not get to the immediate policy issue of ICE removing immigrants solely on the basis of their immigration status becasue.
1) They probably earn less than the average immigrants, although they also do not receive social insurance benefits or public assistance.
2) And the contribution to the economy has to be larger than the positive fiscal effect. Fiscal benefits are transfers of part of the immigrant’s benefit from mutually beneficial Capitalist transactions with other economic participants to those other participats. It does not include the direct benefits to the income/welfare of the non-immigrants’ participation in these transactions.
Nevertheless, this ought to increase our credence in the net benefits even of immigrants that entered illegally and so opposition the policy of removing them only for immigration violations
II
In another area of perfect agreement, we read:
Federal tobacco subsidies are fraudulent and contradict federal health goals.
[Tobacco] crop insurance program is “not really ‘insurance’ but rather a way for politicians to smuggle $15 billion a year from taxpayer pockets into the pockets of wealthy farmers.”
Crop insurance for tobacco or other crops and other farm subsidies like for bio-fuels and ethanol are just inefficient transfers even without the fraud and even without contradicting health goals. They shift land use away from its most profitable use, producing inefficiencies in the same way that tariff “protection” shifts resources away from their highest value use.
III
Unfortunately, not all is agreement. DD reproduces favorably:
Claire Jones, Myles McCormick and Amelia Pollard write in the Financial Times: “The Fed’s vast bond buying programmes […], known as QE, expanded the Fed’s balance sheet from less than $900bn in 2008 to a peak of almost $9tn. The balance sheet now stands at $6.6tn, following a three-year reversal of QE. […] Warsh has said he would like to shrink it much further.”
I have criticized the FT piece here for not explaining why Warsh thinks reducing the Fed’s balance sheet ought to be an objective of monetary policy or why acting one this objective would not make Fed management of inflation more difficult.
[Boccia has a piece here about the “potential dangers of using quantitative easing (QE) as a tool for financing government spending,” but that is pretty far removed from advocating _quantitative tightening_ to reduce the Fed’s balance sheet. Using ANY monetary policy tool for fiscal ends instead of for inflation management is a policy and institutional error.
Boccia explains why a smaller balance sheet matters for fiscal policy: “In the same vein that the Fed might be pressured by Congress to fund government spending via QE, it could be pressured to not raise rates when inflation takes hold to avoid an economic downturn.”
The problem here is that even if one agrees that using monetary policy for fiscal ends is undesirable – conventional wisdom that’s, fortunately,^^^^ actually wise – reducing the Fed’s balance sheet does nothing to impede that misuse.
IV
This one is a head scratcher
“Refinancing federal debt steepens treasury yields.”
As I understand “refinancing” if refers to a policy of replacing debt of one tenor and yield with another, presumably to reduce interest costs or better match cash flows with repayment. This is not the same as rolling debt over when the new debt has different terms than the old debt.
These [rollover] dynamics have been part of the reason why the yield curve is steepening.
Not really or only in an arithmetic sense. The yield curve is steeping because rates on long-term debt have risen since currently maturing dept was issued. Now it’s fine to understand that even without new irresponsible policies like the One Budget Bashing Bill and the trillions of deficits it creates, interest rate that the Government will pay on debt will rise. But what “who does what to whom?” policy lesson is to be drawn? That deficits greater than public investment are bad? True, but we already knew that and the harm that such deficits do is far greated than the relatively trivial effect on interest payments.
V
Fiscal dominance at a upcoming CATO event. From these two suggested background readings
I think see some disagreement. “Fiscal Dominance” is not a state of mind or coerced policy of a central bank. Normally, in “Monetary Dominance,” a central bank chooses a vector of monetary policy instruments (let’s say short term interest rates tor simplicity) that, taking account of expected events, including the size of fiscal deficits, achieves a target inflation rate that itself has been chosen to maximize real incomes but with little if any direct feedback from the interest rate target onto real income.
In “Fiscal Dominance” there IS direct feedback. The interest rate needed to achieve the inflation target would reduce real incomes more than exceeding the inflation target. In other words, an inflation tax becomes optimal (given the size of the deficit).
As can be seen, “Fiscal Dominance” is something that happens completely outside the control of the central bank and so “reforming” the Fed would do noting to promote or inhibit “Fiscal Dominance.” Some “reforms” might increase the ability of the Executive to influence Fed policy, which woud be an infringement on Congress’s Article 8 power to issue money and control is value. But such interference is not “Fiscal Dominance.”
[See: the-financial-times-on-kevin-warsh and central-bank-independence-for-what and messing-with-the-fed
Image prompt: Messenger arriving with a news dispatch.
[Standard bleg: Although my style is know-it-all-ism, I do not really think that, knowing that I can be mistaken and am prone to overstate my points. Also, there is an amazing range of views and experiences among readers. Bring those to bear by commenting on these posts. Both other readers and I will benefit]