Friday, October 7, 2016

There is no federal debt crisis

I tried again to counter conventional wisdom with this submission to the Albuquerque Journal. It drives me nuts if I don't keep trying.

In his article in the Journal on October 5, Anthony Davies claims we must cut federal spending to solve the debt crisis. There is no federal debt crisis. Our crisis for over eight years has been slow growth of the economy and too few good jobs. 

First, Davies writes that when interest rates rise to pre-recession levels, the federal government will owe an additional 500 billion dollars in interest. Actually, it would be more than that, but let’s not quibble.

More importantly, we must understand to whom the interest is paid. That would be the holders of all US Treasury securities, which comprise the federal debt: banks, pension funds, mutual funds, wealthy individuals, and foreign central banks. Also, higher interest rates mean more income to our bank accounts.

In short, federal interest payments are income to the private sector. Income to the foreign sector provides dollars to foreigners that can be spent in our economy. 

Second, and more consequential, Davies apparently thinks that government spending can manage the federal debt. Our federal debt is the accumulation of deficits since the beginning of the republic. Deficits are largely determined by choices made in the private sector.

Conventional wisdom is wrong. Our debt provides assets for the future.

Our economic output is measured by Gross Domestic Product (GDP), which is the monetary value of all the finished goods and services produced in our country. 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 would rather 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 too many people being either unemployed or under employed.

Consequently, the only choice is government deficits to increase employment and add growth to GDP. Those deficits depend on household decisions regarding consumption and business decisions regarding investment. Additionally, a poor economy increases the deficit through unemployment insurance for more people and increased support for the poor and disabled. 

Clearly deficits add to our economic growth and well being. To reduce federal spending would make our economy worse.

Davies’ position 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 more favorably upon fiscal measures, which means more deficits. To that point, on October 5, Jason Furman, Chairman, Council of Economic Advisors, published a conference paper advocating a fiscal stimulus as part of a “New View” to replace the “Old View.”

Empirical evidence of the dangers of too-small deficits is found in the Eurozone where deficits are limited to 3% by the Maastricht Treaty. There, only countries with net exports such as Germany can comply readily with the treaty. These countries are compromised further by having given up their sovereign currencies to the Euro. Consequently, they can not “print” money to pay their debts. 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 soon. These economies lie in ruin because they have not been able to run enough deficits in their own sovereign currencies to prosper.

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

1 comment:

  1. I think we need to be more explicit when we talk about the need for for fiscal stimulus. In the political/economic paradigm of today fiscal stimulus and pro-growth policies involve only more tax and regulation reductions. Federal government investment spending can only be done, if off-setting cuts are made to other programs. When we talk the need for fiscal stimulus, we should specifically state the need for deficit spending to inject more dollars into the economy. The economy can only grow if more currency is flowing through the economy. Tax cuts mostly benefit the wealthy who save the tax "gifts" in passive financial instruments, rather than injecting the money into job creation activities.