Unique Implementation of Permanent Primary Deficits? (2024) | Article Review
This is a non-technical review of the paper, "Unique Implementation of Permanent Primary Deficits?", written by Amol Amol and Erzo Luttmer at the Minneapolis Fed in 2024. It is primarily a theoretical paper exploring the possibility space of government deficit strategies using a stylized game theoretic model of the economy.
It should be noted that the paper has not been published in a peer reviewed journal. But the paper's authors are fairly well known macroeconomists.
Summary
At first glance, this paper appears anti-bitcoin. In the paper's abstract, it refers to Bitcoin as useless pieces of paper. However, the paper acknowledges that fiat are also useless pieces of paper:
We could have referred to the useless pieces of paper as money. But that term (money) is usually interpreted as government money. We are interested in an economy with useless pieces of paper that are not necessarily supplied by the government.
Moreover, the central result of the paper is that the presence of Bitcoin can prevent the government from running a deficit indefinitely, and force the government to balance its budget in the long run. Does that sound anti-bitcoin? It sounds like a result that Bitcoiners would celebrate.
I don't know the authors, Amol and Luttmer. I don't know whether they are for or against Bitcoin, or what their views on deficits are. Maybe they think indefinite deficits are good and thus Bitcoin is bad. But I don't think the result of the paper is something that Bitcoiners would see as a negative for Bitcoin.
Do the authors understand Bitcoin?
It's hard to tell. This paper isn't actually about Bitcoin. It's a heavily theoretical paper about what happens to the government's possible deficit strategies when there's a tradeable asset with fixed supply that's not issued by the government and doesn't produce any direct utility flows.
We use Bitcoin as a metaphor for a private-sector security that is in fixed supply and that is not a claim to any real resources.
That's a decent description of Bitcoin, except for calling it a security since Bitcoin has no issuer. However, later in the paper the authors address that. They assume that there is no company that can issue Bitcoin.
Why does "the Bitcoin" prevent the government from running deficits?
Unfortunately, the paper doesn't give much intuition. It's a purely mathematical paper: setting up the model, deriving the equilibrium conditions mathematically, and proving the result from the equations. Not much discussion about the economic forces is given.
To give a flavor of what the writing is like, consider this paragraph in the introduction (which is supposed to be the least technical part of the paper):
Now add Bitcoin and consider a government that targets a permanent primary deficit that is a constant fraction of aggregate consumption. Government policy is not a continuous function of the price of government stock and the price of Bitcoin. It is easy to ensure that policy is consistent with a targeted steady state primary deficit. But we can now prove that, no matter what continuous Markov policy the government uses to rule out a zero price of its stock, there is always another steady state. In that steady stateand the market values of government stock and Bitcoin are both strictly positive. The fact that means that the government must again be balancing its budget.
That's hard to follow, even for a trained economist (but who is not a specialist in macro.) The rest of the paper is even harder to understand (for me).
If I had to guess, I'd say the presence of Bitcoin makes it so that there will be no demand for government debt (what they call government stock in the paper) if the government is expected to run persistent deficits. And the only way for the government to run persistent deficits is if there is always a demand for government debt. Thus, the presence of Bitcoin renders permanent deficits impossible.
Main takeaways for Bitcoiners
I think this paper is a highly technical, theoretical paper meant to be read by people interested in theoretical monetary economics. It's not meant to be read by a lay audience or by non-technical policymakers. However, Bitcoiners may be interested in the main result which is that Bitcoin makes persistent government deficits impossible.
The paper also explores various scenarios in which Bitcoin can be restricted, taxed, or "taken to zero". I don't think Bitcoiners need to overreact to this. It's natural for economists to explore the possibility space of various policies. This doesn't necessarily mean that the authors are advocating for any of these things to happen. And if you were a Bitcoiner, wouldn't you want to be aware of these possible attack vectors?
Moreover, to believe the results you also have to believe the paper's modeling assumptions, which may not be realistic. For example, the paper assumes that current policy can only depend on current prices (and not the historical path of prices), and that the policies must be continuous in prices (so, no trigger strategies or other discontinuous policies with respect to price.) That's not a criticism, because every paper has to make simplifications, and understanding what assumptions lead to what results is the whole point of economics. But what it does mean is that the considered policies to fight Bitcoin may not actually work, since the real world doesn't adhere exactly to the paper's modeling assumptions.
Conclusion
My review is partially in response to #733665, which paints the paper in a very negative light. I'm not sure the negativity warranted. I think @028559d218 (the author of above post), and many of the comments, interpreted too many statements in the paper as normative when they should be interpreted as positive.
- In economics, a "normative" statement is a value judgment about what you think should happen. A "positive" statement (i.e. to posit something) is a value-free statement about what would happen under a particular circumstance. Most of the paper's statements are positive, not normative.
I don't think Bitcoiners need to be angry or overreact against this paper. In fact, we should be happy it exists because we can point to at least one academic paper which demonstrates one of the things we've been saying all along: that Bitcoin is a hedge against indefinite government deficits.