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“Bipartisan Compromise” As Usual

December 7th, 2010 . by economistmom

Here’s the breaking news on the “compromise” on the Bush tax cuts:

Washington (CNN) — President Barack Obama on Monday announced a deal with Republican leaders that would extend Bush-era tax cuts for two years and unemployment benefits for 13 months while also lowering the payroll tax by two percentage points for a year.

It’s what I expected, because it’s the typical pattern we’ve seen for the past several years.  “Bipartisan compromise” means both sides get what they want, because deficit financing of these policies seems like the painless way to get out of gridlock. Rather than mutual sacrifice, it is mutual grabbing.  We can never manage to “trade off”–we only “pile on.”

Tonight many Democrats are expressing their dismay about the President abandoning his campaign promise to let the Bush tax cuts for the rich expire.  But I would remind them that it doesn’t mean much to “promise” something that you literally don’t have to do anything to fulfill.  Remember, all of the Bush tax cuts would expire under current law if Congress and President Obama just didn’t do anything.  The much more meaningful promise of President Obama was his promise to continue the Bush tax cuts for all households with incomes under $250,000, because it had to become one of President Obama’s own proposals in his own budget in order to keep that promise.  And so far, he’s obviously keeping that promise.

[**UPDATE Tuesday afternoon:  Here's Concord's press statement on the deal, and here's the interview I did first thing this morning on Marketplace Morning Report (please listen as the written transcript isn't quite right).]

33 Responses to ““Bipartisan Compromise” As Usual”

  1. comment number 1 by: rjs

    i have a feeling i’m gonna be turning hawkish…

  2. comment number 2 by: Cadron Boy

    We are so screwed…..

    This welfare gravy chain (unemployment) should be converted to works program after 26-52 weeks — if you want a check then you bloomin’ have to do something more for it than sit on yer butt watching TV. Handing out money and going further into debt is never good — whether it’s the home economy or the federal economy.

    Did our representatives not learn anything — all this talk about reducing taxes (less revenue) and handing out more entitlements (deficit spending) is a diaster in the making. Rather we need to raise taxes and cut spending — BOTH! Instead we are doing just the opposite. Go figure.

    P.S. All my kids and their friends — college age — who have sought jobs this past year found themselves gainfully employed within a week of looking — there’s lots of jobs out there. Maybe not the one you want — and maybe not even one that pays as well as unemployment — but they are out there for those willing to work.

  3. comment number 3 by: AMTbuff

    Diane is right: This is another example of the Two Santas tactic. How appropriate at this time of year!

  4. comment number 4 by: scs36027

    You know Cadron Boy it depends on where you live whether there are jobs available. I live in a small town where there are more businesses closing up than hiring. The closest big city is 60 miles. I read the classifieds everyday, go to the dept of labor weekly and mail resumes out to everyone. I went thru the phone book and mailed a resume to every business in town hoping there is an opening there that they have not advertised. Not everyone on unemployment is sitting around watching tv. My unemployment check isn’t nearly what I was making when I had a job. You don’t get the same amount as when you were working. It’s less than half!

  5. comment number 5 by: Nick Cassidy

    You anti-unemployment nuts amaze me. Not one of you know what you’re talking about. Maybe you’ll meet some unforeseeable misfortune, and you will. By the way, Merry Christmas.

  6. comment number 6 by: Gipper

    Scs36027:

    As Audrey Hepburn shouted in My Fair Lady, “C’mon Dover. Move your bloomin ahhsssss” to another part of the country where there are jobs. South Dakota and Texas seem to be doing OK. But when you’re ensconced in your little flat in the cosmopolitan sections of the NE getting those unemployment checks delivered every 2 weeks while visiting the local pub and bitching about the economy, the justifications for why YOU should be taking responsibility for your own world becomes harder to understand.

    From a politically cynical perspective, I’m happy to see the extension of unemployment benefits. As microeconomic theory predicts, it will only put more hot air in the unemployment statistical balloon. In January 2012 when unemployment is still hovering around 8.9%, what will Krugman being offering as an excuse?

    UI extensions have sealed the Democrats’ doom. This whole stimulus farce will do more to bury the reputation of Keynesian economics than Stagflation of 1973-1975. What a farce!

  7. comment number 7 by: Joe

    It’s easy to come up with reasons that people are in the situation that they are in, but the fact of the matter is that there are more people looking for work than there are jobs. On unemployment you have to look for a minimum of 3 jobs a week and there are millions of people on unemployment, and therefore millions of job applications going out every single week. Some people are making so little on unemployment, they cant afford food and rent, forget about having money to move someplace else. If you want the unemployed to stop living off of government money then instead of giving tax cuts to the rich and fighting a war we can never win, how about investing in America and creating jobs?

  8. comment number 8 by: Arne

    “In January 2012 when unemployment is still hovering around 8.9%, what will Krugman being offering as an excuse?”

    Since he basically predicted it will still be 9.2 percent, he will have to admit is worked better than he thought even though there was very little real stimulus.

  9. comment number 9 by: B Davis

    It’s what I expected, because it’s the typical pattern we’ve seen for the past several years. “Bipartisan compromise” means both sides get what they want, because deficit financing of these policies seems like the painless way to get out of gridlock. Rather than mutual sacrifice, it is mutual grabbing. We can never manage to “trade off”–we only “pile on.”

    True. It’s depressing to see such a total collapse of fiscal discipline. However, I would put much, if not most, of the blame on those who passed the Bush tax cuts to begin with. As I recall, they were made temporary as an accounting trick to make their cost look affordable. Of course, it was totally predicable that low and mid-wage workers would adapt to the new rates and that it would be politically impossible to allow those tax cuts to expire. This is a perfect illustration of how bad a policy it is to pass an unsustainable tax cut under the guise that it is temporary. So how are we going to respond to this lesson? We’re going to pass more unsustainable, temporary tax cuts! People understand that a one-time rebate is temporary. But what makes us think that people won’t adapt to the lower payroll tax rates over a full year and resist having those expire?

    Following is an excerpt from the transcript of Obama’s comments:

    And I’m confident that as we make tough choices about bringing our deficit down, as I engage in a conversation with the American people about the hard choices we’re going to have to make to secure our future and our children’s future and our grandchildren’s future, it will become apparent that we cannot afford to extend those tax cuts any longer.

    I only hope that Obama is right. Otherwise, I fear that it will take a fiscal crisis to prompt us to make those hard choices. Even then, it may be difficult to agree on the cause of the crisis and the proper response. There will likely be a temptation to attempt more seemingly painless “tricks”. I was reminded today of the old cartoon of Felix the Cat and his magic bag of tricks. I think that there are many who believe that deficits really don’t matter and that there will always be another trick (like quantitative easing) that we can pull out of our magic bag.

  10. comment number 10 by: JohnB

    Would like to see something like the WPA or CCC instead of unlimited-term unemployment payments. It’s fair and gives people a sense of accomplishment. Those Depression-era programs created many improvements that we still benefit from today.

  11. comment number 11 by: Arne

    “as I engage in a conversation … it will become apparent”
    “I only hope that Obama is right”

    He is clearly right, but notice that there is a qualification in what he said. Engaging people in a conversation is difficult and the constant push to get re-elected is not conducive to meaningful conversation.

    If the right, center, and left who read and comment on this blog got together - and believed their solution would stick - they would be able to find a compromise solution. Too much of the reticense to compromise comes from worry about what the other side will want afterwards.

  12. comment number 12 by: SteveinCH

    Entirely right Arne.

    At this point, speaking as someone right of center, I have zero faith that the left would live with any spending cap ever.

  13. comment number 13 by: AMTbuff

    Yes, neither party will keep any long-term commitment. In this respect, permanently temporary tax policy is honest.

    Even if Congress achieved comprehensive tax reform, how long would it last? I would expect major changes (e.g., rate increases and tax credits) to begin within 4 years.

    As Mancur Olson has noted, stable rules are crucial to maximizing economic activity. Therefore permanently temporary tax law, not to mention frequent retroactive changes, reduces our economic growth rate. Some economics grad student should attempt to quantify this effect.

  14. comment number 14 by: Gipper

    Arne,

    I laugh at Krugman and others who complain about the inadequate stimulus policies. According to Keynesian economic theory, the “stimulus” is measured as the size of the budget deficit. I know the Krugmans’ and others of his ilk like to focus on the “stimulus package,” etc. But government spending is government spending. Oh, yeah, we can argue the finer points of the “consumption multiplier” for any given program, but if the deficit is $1.5 trillion, then the “stimulus package” is $1.5 trillion. More deficit spending will be heaped onto that amount, and we’re supposed to believe that not enough is being done?

    This is tautological, circularly reasoned, theologically rooted, voodoo economics.

    If Obama really wants to lower unemployment rates and stimulate job creation, then he should limit UI to 26 weeks, lower the minimum wage, and repeal (or at least suspend) Davis-Bacon rules that inflate the costs of government projects, levy an across the board 15% salary reduction to every government employee (excluding military), and hire additional ones with the savings. What’s the consumption multiplier on that?

    Screw what Andy Stern and the SEIU think about it. It’s what is best for the country, but Obama has to placate his constituencies so he’ll ignore the advice.

    The Republicans are lucky to have left-wing Keynesians ruling the roosts of policy right now. It will help their electoral fortunes in 2012.

  15. comment number 15 by: Arne

    “if the deficit is $1.5 trillion, then the “stimulus package” is $1.5 trillion”

    If the deficit was $1.5T last year and you increase spending by $0.1T such that the deficit is $1.6T, then the stimulus that will decrease unemplyment is $0.1T not $1.6T. It sounds like you are saying something different, but I could be misreading you.

    We are in a world of hurt now because we were already running a deficit before the bottom dropped out, so meaningful stimulus looks really, really expensive. We should run a surplus in good times, so we can run a deficit in bad times, but whether for tax cuts or programs, politicians can’t keep their hands off a surplus.

  16. comment number 16 by: Vivian Darkbloom

    The CBO and the JCT have just released their estimate of the effect of the “compromise” tax bill on the federal deficit over the next ten years. Their tally: $858 billion.

    That’s a big number, but it strikes me as highly misleading. This estimate is of the loss of revenues and the additional spending, excluding interest on the debt, over that period. With interest on the additional debt, the increase in the deficit will be much higher than the number the public is being asked to digest.

    It seems obvious to me that by adding an additional $858 billion to the primary deficit, not only will the government incur additional interest on this amount of the incremental debt, but the incremental debt will drive up the interest cost on the existing debt as well as the financing of that existing debt is rolled over. This seems particularly so when incremental debt is added to an already precarious debt situation, as this one is. I think we’ve seen this already with respect to the rise in Treasury rates since this deal was announced. So, the “increase in the deficit” is likely a multiple of this CBO estimate and what one reads in the news.

    I’m curious: Is anyone aware of studies that have attempted to model the effect of such an increase in the deficit on future interest rates and therefore the REAL long-term effect on the deficit? It would be somewhat like the model Keynesians like to use to predict the multiplier effect of deficit spending and what supply siders would use to predict the revenue effects of tax cuts. It seems to me that this effect should be given more prominent attention in government scoring and the media and public discourse.

  17. comment number 17 by: AMTbuff

    The $858B is relative to a fantasy baseline. Forget baselines. As long as the parties use different baselines, baselines will remain merely partisan attack weapons.

    Look instead at the gap between spending and revenues. That’s the actual size of the problem. It’s a lot bigger. Bowles-Simpson took this approach, and so did Ryan. When I see a plan that calculates its benefit relative a current law or policy baseline rather than relative to a debt or deficit goal, I see a non-serious plan.

  18. comment number 18 by: Vivian Darkbloom

    AMTbuff,

    Yes, but my point (and question) are valid regardless of which baseline one uses.

  19. comment number 19 by: Brooks

    Vivian,

    Although I haven’t looked at those reports, I’m assuming your correct about their methodology, and I think it’s worth noting that such a methodology understates the adverse impact of higher deficits in two ways, (1) the way you are pointing out (higher deficits having an upward effect on interest rates and even higher deficits than the initial calculation, and (2) those higher interest rates having a downward effect on GDP.

    Since the debt-related metric we are most concerned with is not debt per se but rather the debt/GDP ratio, failure to factor in the upward pressure on interest rates results in understating the numerator and overstating the denominator, thus understating debt/GDP at both ends.

    A couple of years ago I noticed that in CBO’s Long Term Budget Outlook reports, they were using one set of GDP assumptions (same GDP growth rate for a given year) regardless of which fiscal scenario for which they were showing projected debt/GDP. Obviously a scenario with much higher and more wildly growing debt/GDP would eventually produce much higher interest rates and therefore lower GDP growth, but CBO was assuming the same GDP growth rates under every scenario.

    I wrote to Diane about this, and she wrote this post that you may be interested in http://economistmom.com/2008/08/buffetts-growing-economic-pie-as-quantified-by-cbo/

  20. comment number 20 by: Brooks

    Vivian,

    As follow-up to my comment above, it’s also worth noting that, on the other hand, CBO (last I checked) applied static scoring rather than considering dynamic effects differences in fiscal policy, so they wouldn’t factor in any possible higher GDP growth and revenue feedback effect under a lower tax rate scenario.

  21. comment number 21 by: Gipper

    Vivian,

    Putting on my microeconomics hat looking at inter-temporal equilibriums that determine interest rates, the thing that affect “the interest rate” is the rate of substitution between present and future consumption. The means of financing that consumption vector is the financial veil. You have to look at the underlying real sector to look at the forces truly driving the determination of interest rates. Let’s put aside default risk and inflation as a consideration when we do this.

    Looking at a simple 1 composite good, 2 time period model with a representative consumer utility function and an aggregate production function, the interest rate is determined by the slope of the tangent line where the utility is maximized subject to the production function constraint. Holding things equal, the more resources devoted to current consumption, the higher the rate of interest.

    So what is much more crucial to examine for purposes of interest rates is the level of government spending, rather than whether that spending is financed by borrowing or taxation. Of course, some of that spending is on interest expenses.

  22. comment number 22 by: Vivian Darkbloom

    Brooks,

    Those higher interest rates would indeed have a downward effect on GDP, thereby reducing revenues. I suppose, though, that increasing taxes to reduce the deficit would have a similar effect. And, Keynseans would argue that reducing government spending would similarly reduce GDP, so it is a complicated calculus;

    The CBO only released a spreadsheet summary of the cost, but that summary strongly suggests that they are measuring only the static cost on the primary deficit;

    You wrote: “Since the debt-related metric we are most concerned with is not debt per se but rather the debt/GDP ratio…”. Not so fast. You’re sounding a bit like Krugman. Debt/GDP ratio is an important metric, but I’m also very concerned about the nominal debt level. Increases in inflation cause an increase in the denominator (GDP) but not the numerator (debt) and, in my view, inflation is an evil itself. That’s why the nominal debt number IS an important metric.

    Similarly, Gipper, why should we put aside risk of inflation (and default)? Or, is your point merely to suggest that reduced spending is superior to increased taxation? Perhaps I’m oversimplifying, but I think interest rates are driven by perceived risks versus rewards. That risk basket is much bigger than you suggest, I think. And, if the bond market has anything to say about this, the reaction to the tax bill seems to suggest they are concerned about the increased debt, not increased spending. The bill contains very little increased spending.

    BTW, I was quite interested in the “bond vigilante” discussion by Krugman and Collender and their belief in Augus that the bond market was screaming for more government spending. Now, four months later, Krugman suggests that the recent spike is not due to the increased deficit, but to the improved chances of recovery (even though he and the bond traders didn’t get the supposed desire in increased spending stimulus). Collender is uncharacteristically silent.

  23. comment number 23 by: Brooks

    Vivian,

    Re: You wrote: “Since the debt-related metric we are most concerned with is not debt per se but rather the debt/GDP ratio…”. Not so fast. You’re sounding a bit like Krugman.

    Believe me, viewing debt/GDP as the most important metric — and more important and meaningful than absolute debt level — is hardly a Krugman idea. It’s pretty well accepted and makes sense. Which would you consider a less problematic or risky debt situation: Joe, who earns $1 million per year and has $20,000 of debt, or Bob, who earns $15,000 per year and has $10,000 of debt? (Obviously assets and net worth matter also, but that’s beside the point). Having the denominator of GDP gives us some idea of ability to pay. A fraction of our debt level would be catastrophic for a country with a tiny GDP.

    Re: I’m also very concerned about the nominal debt level. Increases in inflation cause an increase in the denominator (GDP) but not the numerator (debt) and, in my view, inflation is an evil itself. That’s why the nominal debt number IS an important metric.

    Inflation does increase the numerator of debt. Inflation (more precisely, expectation thereof) gets built into the interest rate we pay on the debt. I’m not saying the effects on numerator and denominator would necessarily exactly offset, just pointing that out to you.

  24. comment number 24 by: Vivian Darkbloom

    I’m not saying it’s not an important metric—I’m saying it is given too much weight as the appropriate measure. Of course, inflation, or even the prospect of inflation, will tend to increase the interest cost of the debt. I think that was the thrust of my first post. However, it would take quite a number of years, if ever, for inflation’s effect on the numerator to catch up the effect on the denominator. That would be for two reasons: First, it takes a while for the entire debt to be re-financed, and second, the interest charge on the debt, even if it increases significantly, will not increase as rapidly as the denominator (this could change somewhat if the outstanding debt becomes much larger than GDP).

    With respect to Krugman, you apparently are not paying close attention to his arguments. His real policy goals most often not stated directly. He tends to be more direct when talking about solutions for other countries. Krugman, and others like him, argue that the growing deficit and the debt are not a problem because we’ll just grow our way out of it (the denominator will increase). What he doesn’t say directly is that this “growth” will be triggered largely from nflation and devaluation of the currency (these are, of course related). Krugman doesn’t have much control overy our productivity.

    This type of argument reminds me of a discussion a family might have over its credit card debt. The family might rationalize the growing debt by arguing that everything will be ok because Dad will just continue to get regular pay increases, whether that be due to cost of living increases or Dad’s increasing productivity at work. I hope the analogy is not perfect: Dad always has the option of declaring personal bankruptcy or having his net debt discharged when he dies.

  25. comment number 25 by: Vivian Darkbloom

    I forgot one thing. Another reason I think that the debt/GDP metric is given too much attention is that the amount of the debt (the numerator) is a simple arithmetic calculation that is not subject to manipulation. On the other hand, the calculation of GDP involves some very dubious accounting.

  26. comment number 26 by: Brooks

    Vivian,

    Re: it would take quite a number of years, if ever, for inflation’s effect on the numerator to catch up the effect on the denominator. That would be for two reasons: First, it takes a while for the entire debt to be re-financed, and second, the interest charge on the debt, even if it increases significantly, will not increase as rapidly as the denominator (this could change somewhat if the outstanding debt becomes much larger than GDP).

    Yes, I realize that “it takes a while for the entire debt to be re-financed”. Of course, as you’ve acknowledged, it’s the expectation of inflation that gets built into interest rates upfront, whereas it is actual inflation later that affects nominal GDP, so the inflation-related increase in nominal interest expense for at least the portions of debt that are, in effect, re-financed, will precede the effect of higher inflation on nominal GDP, perhaps by many years (unless I’m missing something). That doesn’t negate your point, but it reduces the degree somewhat.

    I suggest you research the comments of others who are (unlike me) economists and who have testified before Congressional committees and blogged on whether or not Fed monetization of the debt would even really work – i.e., to what extent we could stay ahead of increases in interest rates as the bond market sees what is happening and demands higher interest rates. If you come up with some good links that you can share with others and me, I’d appreciate it. It’s been a while since I read and listened to comments from those experts, and in the bit of time I’ve just spent Googling I haven’t come up with any links to offer.

    With respect to Krugman, you apparently are not paying close attention to his arguments. His real policy goals most often not stated directly.

    I don’t read or hear most of his stuff, particularly over the past several months as I’ve had less time for such reading. In general, if you’ve seen my past comments about Krugman here or on other blogs, you know I consider him a shameless, disingenuous ideological hyperpartisan.

    Krugman, and others like him, argue that the growing deficit and the debt are not a problem because we’ll just grow our way out of it (the denominator will increase).

    Krugman will disingenuously offer up any supposed analytical justification he thinks will fly to promote a policy he desires (and/or wants to advocate as marketing to his target audience of hyperpartisans) See my comment at http://dmarron.com/2010/02/25/the-lost-budget-decade/#comment-2019

    What he doesn’t say directly is that this “growth” will be triggered largely from inflation and devaluation of the currency (these are, of course related).

    I don’t know whether or not that particular criticism is valid, because I’m not familiar with whatever Krugman statements to which you’re referring.

  27. comment number 27 by: Brooks

    And to be clear, I’m not saying monetization of the debt would be anything but a very bad scenario even if it could reduce our debt/GDP.

  28. comment number 28 by: Brooks

    Vivian,

    Also, although I don’t know much about the factors and mechanics driving inflation, intuitively I’m skeptical re: (what I think is) your implication that higher absolute debt level would be inflationary even debt/GDP didn’t substantially increase.

    I could be wrong, but intuitively I think GDP — or factors whose size is largely determined by GDP — would largely determine how inflationary a given level of debt and deficits would be.

    Perhaps someone who knows more about this stuff can help, ideally with a link or two to an explanation from some economist.

  29. comment number 29 by: Gipper

    Vivian,

    If it wasn’t obvious, let me emphasize that I was talking about real interest rates, not nominal rates. The CBO and anyone else can run all the econometric regressions in the world and try to make predictions based on different variables, but without a theory to explain it, it’s just junk math. However, if you did try to run regression models looking at federal debt/GDP you’d probably find very little relationship to any series of interest rates. In theory, you should add in private sector and state govt debt to the federal debt to get an economy wide picture. And what about foreign debt? We have international capital markets, foreign currencies, exchanges rates, etc.

    I’m agnostic about the level of real interest rates in the same way that I’m agnostic about thermometer readings. They just reflect underlying economic forces. High real rates could reflect higher productivity due to innovations that cause a shift toward more future consumption (think 19th century construction of railrods, steamships, dams, etc.) away from current consumption.

    I don’t think anything contained in the tax plan compromise did anything to cause the markets to think there will be a shift in resources away from current consumption toward future consumption. All that probably changed was their expectation of the likelihood that the debt will be monetized in the future.

    Again, it’s not the way you finance the spending that matters. It’s the expected levels of production and consumption through time that matters when determining real rates of interest. The nominal rate will depend upon the real rates plus your expectations of inflation.

  30. comment number 30 by: Vivian Darkbloom

    I guess it is anyone’s guess what drives Treasury borrowing rates, particularly in the short-term. Who knows? Perhaps Gipper has got it nailed. But, for what it’s worth, since this tax bill compromise has been announced, the 10 year Treasury is up about 35 basis points. Gipper’s observation aside, alot of discussion in the financial press indicates that this might be due to inflationary fears fueled by the tax bill. Assmuing that’s right, and this, of course, would be a big assumption, and further assuming, just for fun, that the increase in rates IS a result of the increased deficit from this tax bill, my back-of-the-envelope calculation would be that merely a 35 basis point increase in borrowing rates ultimately results in something north of $50 billion in additional service costs on an outstanding debt of, say $15 trillion. That doesn’t count the additional costs to the private sector. This is just a crude example assuming that the increase in the 10 year rate is a good surrogate for the ultimate increase in Treasury borrowing costs across the board.

    Without wanting to get much more technical about it, I would simply re-assert the original observation that the additional deficits caused, for example, by this tax bill, will add up to alot more than the simple CBO/JCT scoring suggests. Again, very coarsely, the back-of-the-envelope example would translate to an additional $500 billion over 10 years (not compounded) compared to the CBO estimate of $857 for the bill without those costs. This is just the incremental cost of servicing the outstanding debt, and does not the cost of basic cost of servicing the additional $857B.

    Brooks,

    You are referring to the Fed’s monetization of the debt. That might be part of some people’s preferred solution to the debt problem (caused initially by failed fiscal policy), but my initial query was over the effect of fiscal, not monetary policy, on interest rates; but if I come up with something in my spare time, I’ll pass it along.

  31. comment number 31 by: AMTbuff

    IMHO, the Treasury bond movement is due to the market’s expectation that fiscal stimulus will reduce the need for QE2 purchases of bonds by the Fed.

  32. comment number 32 by: Vivian Darkbloom

    AMTbuff,

    Good observation, and likely partially true. The thing is about interest rates, and a lot of other things, I suspect there is not one single cause, although we like to simplify things by pretending there is.

  33. comment number 33 by: Brooks

    Vivian,

    I brought up Fed monetization b/c you expresses a concern about debt/GDP as a metric and made the point that the whole debt is not “re-financed” all at once, and therefore inflation would be reflected in nominal GDP before it is reflected in nominal debt, thus lowering debt/GDP. I would expect that too at least for some initial period. But the extent to which that would happen for how long is a question that has been addressed in discussion of debt monetization. I think the answer to that question would shed light on your assumption and your concern about debt/GDP vis a vis inflation.