Sunday, October 30, 2016

Debt crisis, what debt crisis?

I submitted this to the ABQ Journal Oct 20, still no joy. An earlier version in response to the Anthony Davies’ OpEd on October 5 is now past its use-by date. In addition, I have included below links to verify attributions I made and one to John Harvey, who is one of many from academia whose views I share. 

The federal debt has almost everyone in a panic. Most pundits and politicians including those from President Obama to Sara Palin and from The Peter Peterson Foundation to The Committee for a Responsible Federal Budget have agreed that the federal government should manage its debt just like a household. “Government must stop spending more than it earns.” This note disputes that job-killing, intuitive myth.

Since President Nixon took our country and the world off the gold standard in 1971, we have had a fiat monetary system. All our money comes from the US government. Bank loans or federal spending bring money into the economy. 

Under a gold standard the amount of gold held by the government limits the amount of money in the economy. Under a fiat system only our productive capacity, our workforce and facilities, limits us. This is completely contrary to old economic thinking. 

Limited only by our productive capacity, we can afford anything we can do. Because our economy can have all the money it needs, our politicians need not worry about funding but how to grow our productive capacity and where to deploy it for a prosperous future. 

Gross Domestic Product (GDP), which is the monetary value of all the goods and services sold in our country, measures our economy. The elements that contribute to GDP are household consumption, business investment in the means of production, net exports, and the government deficit. 

To grow GDP, we must have people employed in productive activities. In a poor, slow-growing economy household consumption is low, because people choose to pay off debt or otherwise save rather than buy stuff. Also, business investment is low, because inventory is not needed when people are not buying stuff. In our country, net exports are negative, because we have net imports. All this results in slow growth and too many people being either unemployed or under employed.

The only choice remaining for growth is government deficits to increase employment and add to GDP. 

Deficits are not under the complete control of government. They depend on household decisions about saving and business decisions about investment. Additionally, a poor economy increases the deficit through unemployment insurance for more people and continuing support for the poor and disabled. 

Deficits add to our economic growth and well being. Reduced deficits would make our economy worse. Deficits alone do not cause inflation until demand for goods and services exceeds our ability to produce them. Only when all able bodies are employed do we reach our limit of production.

Private debt is larger than Federal debt. Private debt is the problem; it has to be paid back to creditor.

Government austerity represents an outdated economic view. After eight years of sluggish economic performance using the old views that rely on monetary policies to stimulate growth, many economists are looking at fiscal measures, which means more deficits. Recently, Jason Furman, Chairman, Council of Economic Advisors, published a conference paper advocating fiscal stimulus as part of a “New View” to replace the “Old View.” 

Empirical evidence of the dangers of too-small deficits exists in the Eurozone where the Maastricht Treaty limits deficits to 3% of GDP. Only countries with strong exports such as Germany can comply readily with that constraint. Eurozone countries are compromised further by having given up their sovereign currencies to the Euro. Consequently, they suffer under a de facto gold standard. So grave is the Eurozone crisis that the eminent economist, Joseph Stiglitz, has advised both Greece and Portugal to exit the Eurozone, and he predicts that Italy may exit in a few years. These economies are decimated, because they have not been able to run enough deficits to prosper.

Fiscal deficits, used productively, will expand our economy. The resulting federal debt is not a crisis. We never have to pay it off; we outgrow it by keeping our GDP growing.

Recent Furman paper:

Stiglitz Greece and Portugal advice and prediction for Italy:

Prof. John Harvey:

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