Debt Matters

I think Prof. Blanchard's post below is one of the finest analyzes of our situation that I have read.  I think it is both accurate in its depiction of our situation and how we got here.  I was going to comment on his post, but my comment got so long I decided that since I retain authorship rights on this site I would just post the whole damn thing here. Read Ken's post and then the comments to put this in context.

While we play the blame game, isn't it clear that all sides are to blame, even (especially) ourselves?  We have built an economy based on the idea (noted by commenter A.I.) that we are a consumer economy.  But, as Donald points out, much of our manufacturing base has fled the country (I have some level of agreement with Donald about the exporting of jobs).  A society that consumes without producing will find itself in debt.  Is it any accident that the personal savings rate declined at the same time the government was going deeply into debt?  We live in a "live for the moment" society where we are unwilling to make provision for the future.  That is why debt is a moral problem as well as an economic one.  We must learn the old lesson of living within limits.  Both Republicans and Democrats, conservatives and progressives, have sold us a bill of goods on this matter.

Cheney's famous remark to Paul O'Neil (that deficit's don't matter) is true, but at the margins.  Debt does not matter if it is debt for useful/productive things (like a house) and is debt that you can manage.  Our debt is problematic in both ways.  We are in debt because we are transferring wealth from future generations to ourselves in the form of entitlement spending and copious tax breaks.  We are not building anything lasting, just making future generations pay for our consumption.  Also, because of demographics and lack of any planning, it is clear that soon we will be unable to to service our large debt.

Just one word about the Keynesian assumptions of Donald and A.I.  This I think it a fundamental disagreement, and I disagree respectfully.  The purpose of an economy is not to drive consumer demand.  That is a result of a strong economy, but not the purpose.  A strong economy is best defined as being able to efficiently produce goods and services, i.e. produce them profitably.  As I say, consumer demand will naturally follow.  But this is why I think that it is correct to focus on the "supply side" rather than on the demand side.  If goods and services are produced efficiently (i.e., if business is truly productive), then business is profitable and the profits go into expansion of jobs.  As wealth is created people will naturally buy more.  But for economic reasons, and the moral reasons I hinted at above, I think it is problematic to say that we must keep consuming more and more so we can keep driving the economy. 

I think the debt and jobs are linked in at least two ways. First, metastasizing debt means more and more resources will have to be diverted from productive uses to simply servicing government debt.  That's not good.  Second, it creates a level of uncertainty that makes business queesy about acting.  I happen to think the main factor (but not sole factor) hurting our economy now is uncertainty.  It'd be helpful if the Congress and President (and I don't just mean the current personalities; I mean anyone who happens to fill those roles in the coming years) could come to an agreement on gliding towards budget balance.  And we have to actually trust that such an agreement will be honored.  This is why I think that Democrats are more to blame than Republicans because Democrats have made it painfully clear that they don't even think there is a debt problem.  To paraphrase Leo Strauss, they fiddle while Rome burns, but they are excused by two facts: they don't know that they are fiddling or that Rome is burning. 

We shouldn't be shocked that politicians play politics.  It's what they do.  The question is whether there ultimately is any substance behind the inevitable games.  Here I think Paul Ryan is the hero.  Unlike, say, every Democrat in Congress for the last two years and the President this year, he actually has put his cards and the table in the form of a budget (yes, the President had a budget, which he quickly disowned and the Senate voted down 97-0). 

A.I. is simply wrong in asserting the big health care bill saves money.  That has been demonstrated false by everyone who is not a lackey to the administration.  Give the CBO some truth serum, i.e. make them talk about what is likely to happen versus the fanciful promises of the bill, and they will tell you that "Obamacare" is a major contributor to future debt. 

Other than this I have nothing to say.

 

Comments

[Donald Pay]

Get real.

Entitlement spending is not the reason for the present debt. More than half of it was built on Republican mismanagement of the economy over GW Bush's presidency. There was nothing more ridiculous to spend money on than the misadventures in Iraq. The Republicans hucksters didn't pay for their payoff to the drug industry (Medicare Part D). The payoff to the corporate and wealth elite through tax cuts that swung us from surplus to deficits was never paid for. To do this Republicans had to dump "pay-go." The Republicans encouraged a housing bubble through unregulated financial scheming, the bursting of which required massive emergency federal outlays and left the economy shattered. Yes, debt matters. When you use debt in furtherance of government corruption, bad wars, and payoffs to corporate donors you get a wrecked economy as a result.

[Donald Pay]

Let's also consider that Republican class warfare has hollowed out the middle class, which creates the jobs through small business development and through demand. Anti-labor legislation has resulted in stagnant and declining income and wealth in the middle class. Trickle down economics has meant most of the wealth stays at the top and never circulates. The wealthy do not create jobs. They create tax loopholes and special interest legislation that keeps their money from being used productively. Republican trade and tax policies resulted in outsourcing and shipping manufacturing and other jobs overseas.

You can't produce goods and services efficiently if you can't sell them to someone who can buy them. The purpose of an economy is not to produce goods and services that sit on the shelf. It's to produce goods and services for people who can buy them and use them. No demand, no sales, no production. Period, end of story.

[Jon S.]

Donald, I will let readers view the short version of David Walker's film IOUSA. I will post it right after I submit this comment. Let's just say that Mr. Walker, who is former comptroller of the United States and is not CEO of the Peter G. Peterson Foundation, sees the entitlement problem a little differently than you. I think the numbers are inescapable: our present and future debt problems are largely the result of skyrocketing entitlement spending.

I'll respond to your other argument when I have more time.

[Donald Pay]

IOUSA is a piece of garbage that's been widely discredited. See the following for an analysis of the "scenes" of this pseudo-documentary.

http://www.cepr.net/documents/publications/IOUSA_viewer_guide_2008_10.pdf

[duggersd]

Donald, your comment about labor unions is interesting. What industries have become more efficient due to labor unions? And if the wealthy do not create jobs, just who does? And when was the last time you asked a poor person for a job?

[Bill Fleming]

And if the wealthy do not create jobs, just who does?
Entrepreneurs and small business.

[Bill Fleming]

A list of Americas top 30 Job Creators:
http://www.thedailybeast.com/galleries/2010/09/02/america-s-top-30-job-creators.html

[Dan O'Neill]

The idiocy of Donald is constant. First complaining that the tax cut cost too much then stating we need to generate demand to stimulate the economy. A Lefty like Donald will mimic Pelosi stating unemployment checks stimulate the economy producing demand but individuals earning and keeping their money does not. Obviously for Donald if the government does not hand you your money it doesn’t really exist.
In our state alone two major expansions were planned, one in Big Stone, one in Selby. Both would have provided hundreds of jobs both immediate and long term. Both would have resulted in increased jobs upgrading transmission facilities and increased jobs when the wind projects were developed. All of this died with Obama and his EPA. Without the capital investment of major companies, no jobs. Without the jobs, no demand. You want production, construction, demand, then demand a change in 2012.

[Donald Pay]

Pffff. Great one Dan. Coal power plants---another blast from the past by the righties. I know you guys like those 19th century solutions---coal, slavery---but we're past all that.

[Jon S.]

Donald, out of curiousity, is it your intention to persuade anyone, or just vent your spleen? Do you think you make your position any more attractive by comparing those who agree with you to defenders of slavery? Our do you think it more likely that you look like a dyspeptic old ass who no one take seriously? You ought to be ashamed of yourself. If you have arguments against Dan, make them. BTW, you are aware that a large part of our energy needs are still met by coal? And you are aware that this is the 21st Century?

[Jimi]

Donald,

How'd that vote go in Wisconsin?

[George Mason]

Dan gets it right. Donald wants to shiver and starve in the cold. We have great opportunities in Selby, Big Stone and Elk Point to increase necessary energy output as well as providing permanent well paying jobs. The Obama administration continues to produce unemployment through regulation and litigation against all productive businesses while poring billions down the hole of production for which there is no demand or payoffs for his friends. This is why the Tea Party movements seems to be gaining steam again.

[Donald Pay]

The election went pretty well---2 pickups for Democrats. Republicans are now down to a bare majority with one Republican member who has not bought into the Walker fascism, and several others who know they can't go any farther. Next week are two likely Democrat wins. It would have been great to get 3 last night, and the majority, but it was going to be a stretch.

By the way, it wasn't Obama who pulled the plug on these fossil fuel monstrosities. The market kicked them to the curb.

[Lynn]

I get a huge chuckle out of all the fans of electric cars, touting them as the best thing since sliced bread. Just look at all the oil imports I'm saving, they say. Uh, just where do they think electricity comes from, a large share of it that is, approximately 43% - their electric socket?? It comes from coal. Funny how none of the greenies mention that little fact. And just where is the increased demand for electricity supposed to come from for all these little green cars in the future when in their mind we are all plugging in every night?