Thursday, July 1, 2010

O Debt

A man clambers aboard a steam shovel and digs a hole 9.5 feet deep. You happen along, notice that he's botched the job, and take over. Smoothing things out requires another half foot, so you dig it. The man jumps in and starts screaming that you've put him into a 10-foot hole. Worse, he claims, it's the deepest hole ever dug -- deeper than all other holes combined -- and you're the one who dug it. When, with good reason, you want to shave another tenth of an inch off the bottom, he screams even louder: You're making the hole deeper and there won't be any way out. The man's children and grandchildren and great-grandchildren will be stuck in this hole, and it's all your fault.

Incredibly, people believe him because he's shouting so loud and because his friends add their voices to the cacophony. We must, they say, fill in the hole shovelful by shovelful, no matter how many people must fall by the wayside in the process. All work on new buildings must stop in order to fill this hole.

I refer, of course, the federal debt and Republican calls to pay it down now rather than later. Setting aside that they ran up the debt in the first place, their approach amounts to contracting an economy in the middle of a major recession, a strategy that is downright reckless. How taking money out of a the current economy will allow it to rebuild isn't something they address, and with good reason: It's never worked historically and there's now reason to think that now is any different. 

Republicans love to point out that the debt is historically high, and that the accrual during Barack Obama's seventeen months in office exceeds that of all other administrations combined. (This line of "thought" conveniently omits the fact that the Bush administration prepared the 2009 budget.) But is that debt in fact the highest ever? It's rarely a good idea to compare absolute dollars across decades and centuries. Statisticians dislike comparing baseball records across eras for good reason: Too many outside factors render a straight comparison meaningless, so they attempt to compensate by adjusting for era.

It's the same with money. Inflation, economies, wars, population increases and so forth all change the value of a dollar across time. Just as baseball statisticians adjust for era, economists have come up with a way to think about the debt historically. The following chart (courtesy usgovernmentspending.com) depicts the historical debt as a percentage of the U. S. Gross Domestic Product:



As you can see, the debt is high but not unprecedentedly so. The debt's peak came during World War II, after which it declined during a long period of prosperity. Similarly, the economic good times that followed the Civil War (excuse me, the War to Prevent Southern Independence) and World War I contributed to a falling debt.

During the Reagan-Bush I years, the debt rose because the government began a policy of decreasing taxes and increasing spending. The dot.com boom of the Clinton terms helped reduce the debt, but it increased dramatically during Bush II. The reasons why aren't hard to discern: You can't cut taxes, fight two wars, and introduce a major unfunded entitlement (Medicare, Part D) without the government debt increasing. It will happen every time.

What is unprecedented is that President Obama faces high debt and a declining economy. On the other hand, the economy is all but deflationary, so adding money to it isn't an issue. And how else are we going to get out of a recession unless people start spending? The best way I know of to do that is to create jobs, and in a recession, the best means of job creation is the federal government. The government alone has the resources to help states align their budgets (and therefore avoid layoffs and cuts in services), develop jobs programs aimed at upgrading skills, repair infrastructure, and create new jobs for new industries, such as clean energy.

There's nothing new here. The stimulus blunted the recession, but didn't reverse it. Another stimulus is needed, but given the political climate -- which is squarely in favor of addressing the deficit -- that's unlikely. The pathetic part is that voters seem anxious to return power to the crowd that created the problem in the first place, as if strident rhetoric somehow means that they'll get it right this time...

One sure way to reduce the deficit is to pull out of Iraq and Afghanistan. The drawdown is underway in Iraq, but it's time to be pragmatic about Afghanistan: There's no point in throwing good money after bad. It's a losing battle, as it was from the beginning...

Not that it's news, but the Republicans really are a rotten bunch:
The total number of people continuing to claim benefits rose by 43,000 to 4.6 million, the department said. But the number of people collecting extended benefits fell by 376,000, as Republican lawmakers have refused to continue the extra aid... For the third time in as many weeks, Senate Republicans blocked a bill Wednesday night that would have continued unemployment checks to people who have been laid off for long stretches...

Sounds like ice cream and battery acid to me. Aretha must have been in the giving vein...

Republicans often speak longingly of the those halcyon days of the 80s or the 50s or even the 19th Century. But I've never heard of one wanting to take us back to the good old days of 1619. Until now...

Rainbows of death in the Gulf here and here...

Other than attacking President Obama for shaking down BP, the Republican establishment has been pretty quiet about the BP/Halliburton Catastrophe. For one thing, they don't need to make noise as long as they have Chris Matthews and Huffington Post conflating BP and Obama for them. For another, as I wrote the other day, most of them fantasize about being president some day: They can see this happening to them and don't want to be bitten by their own words...

12 comments:

Jerry Critter said...

You are right on point, K. Concerning debt...how many of us own more on our homes than we make in one year? A lot, I bet, and that doesn't include other debt like cars and credit cards. Debt approaching 100% GDP is high, but not unmanageable particularly if we stop subsidizing big international corporations with our money and our blood.

K. said...

Exactly. Plus, it seems to that to address it now plays the conservative "starve the beast" game. Their whole aim is to create conditions where all government spending goes to defense and debt payment. Why play that game, especially when there's no economic need for it?

Remember Reagan caterwauling about the deficit? It was trending to a 20th C. low when he took over. It's amazing to me that they get away with rhetoric completely belied by their actions.

Annette said...

Thanks K, and you are spot on.. I have argued this point more than once.. that if we have a recovery stronger than what it is now.. we will pay down the debt. But the only way to have a stronger recovery is for the spending to continue to help create jobs and keep people in their homes.

Once again the rethugs are driving the message that the president and his administration isn't doing enough... and like you said they are being enabled by Tweety... I get so aggravated with him when he gets on the rant of NO ONE IS IN CHARGE... and then What is the chain of command...

Thanks for your voice of reason on this overblown topic.

injaynesworld said...

Thank you for this well-thought out post.

It doesn't help that a large swath of the populace believes that Faux News is the word of God.

We can only hope the Rethugs will continue to attack Social Security.

I'm desperately discouraged right now.

tnlib said...

Just dropping by so you'll know I've been here. The reason I never blog about finances, the economy or anything to do with money is because I don't understand the first thing about it. You definately would not want my opinion.

Roy said...

Re: Afghanistan... It never ceases to amaze me how little we learn from history. Large countries with empires funding them have been trying to "tame" Afghanistan for millenia now, pouring money, arms, and human lives into those mountains and not making a dent. Alexander tried and failed, ditto Babur. Then came Russia, and the Great Britain (three times), and then Russia again as the Soviet Union. And all attempts failed. What makes people think we'll be any different? It's a country made up of mutually hostile tribes who conduct vicious raids and then disappear into their mountain territories. For a major power like Greece, the Moghuls, Britain, Russia, etc., trying to nail down Afghanistan is like trying to nail jello to a wall. Why oh why do we think we'll be any different? It's a waste of money, resources, and lives, and it's proved to be that time after time after time, and yet here we are, trying again. Stupid!

K. said...

Annette: Matthews is the lead shouter of the Do Something/Anything crowd. Just once, I wish this gang would propose something that (a) makes sense, (b) is doable, and (c) does not let BP off the hook. I haven't heard a single thing that even gets past (a).

Jayne:Welcome to Citizen K.! They can't stay away from Social Security. Talking now about privatization is suicidal, so they're all about cutting benefits and raising the retirement age when the program the program is actually fiscally sound. Why they hate something that helped end old-age poverty is beyond me.

tnlib: Your views are always welcome here!

Roy: Have you read Flashman!, by George MacDonald Fraser. That novel puts intervention in Afghanistan into better focus than a thousand CNN reports. Witty and a page turner, too.

Re the spill, has anyone else noticed that it's turning out that the Administration has perfectly had good reasons for not taking what people have claimed are obvious and easy steps? Tankers with skimmers? It turns out that there aren't any and that they take at least 4-6 months to rig. Oh, and a huge chunk of the tankers sail under a flag of convenience, meaning that they are registered in countries like Liberia and Panama because the safety standards are lax. Introducing unsafe tankers into the Gulf is nuts, especially under the circumstances; if one of them had an accident, you can bet that Chris M. and Huffington Post would be apoplectic about Obama's carelessness.

I wrote about the island berms yesterday, how the delay is due to the scale and complexity of the project, not government inaction. I spent my career taking part in the development of exceptionally complex software (we're not talking iPhone apps here). When the people in charge say six months, plan on twelve, with sacrifices in the planned feature set. If they're doing something that has never been tried before, assume 18-24 months, and keep it in the back of your mind that it may not be doable in a meaningful sense. In this case, someone may eventually finish something called a barrier island, but whether it's useful or works as planned is something else altogether. Under the best of circumstances, I would not hang my hat on these.

Renegade Eye said...

This is more than a cycle in capitalism. It's an actual crisis. When Paul Krugman is talking protectionism, you know things are bad.

What amazes me is how nihilistic the GOP has become. They don't care about effects. They are for partisan reasons trying to destroy the economy.

It's even more complicated when you look at Europe and Asia's situation. See this.

K. said...

Ren: The last time Republicans showed any actual interest in the economy was when Bush I compromised with congressional Democrats to slow the growth of the deficit. This earned him opprobrium within the party, and since then no Republican politician has indicated a serious interest in compromise or in the economy. The Dems have picked off a vote here and there, but that's it.

Thanks for the analysis. Re the United States, it omitted a couple of points.

One, we have one of the developed world's lowest tax rates. There is wiggle room there. Politically, it's tough to raise even the top rates, but Oregon just did it and Washington state may well follow this fall with its first income tax ever.

Two, the American infrastructure -- from bridges and levees to cell phone service -- is in bad shape and needs fixing. Tax dollars aimed at this will not be short-term make work.

Three, the United States is footing the defense bill for much of the world. We could do ourselves a world of economic (and diplomatic) good by completing the withdrawal from Iraq, withdrawing from Afghanistan, reducing or ending military presence in the Middle East, and -- since the Cold War has been over for some time now -- reducing or ending a military presence in the defeated nations of WW2. (Do we really need 100,000 soldiers in Germany or 50,000 in Japan?) A reduction in defense commitments is hard to imagine now, but we may well be forced into it.

But the article made many good points, especially re accumulated government, business, and household debt. And it's overall conclusion that capitalism has put itself is position to implode is hard to refute.

T. Clear said...

Substitute the word "death" with the word "debt":

http://www.youtube.com/watch?v=2xmRWj7gJEU

(This is what I thought of when I saw the title of this post.)

nursemyra said...

I love that Paul Simon song

K. said...

NM, you're not alone. And I thought I was the only one who remembered it! I'm going to have to write about it on my Just A Song blog. Sounds like you had a great trip!