One of the most puzzling things that I read in today's public discourse is the fixation on debt. "We're too indebted," people complain. The conventional wisdom is that debt is debt is debt, and there's way too much of it in the "system". You see it in discussions of Greece, the US, and every other depressed country. "You can't solve a debt crisis with more debt" is a common argument against fiscal stimulus in a depressed economy.
It sounds good. And reasonable. But think about it for 5 minutes, and you realize that it's complete nonsense. Not to say that excessive debt for a government, for consumers, or for corporations is a good thing-- being heavily indebted can be a huge drag on economic growth, as consumers focus on paying down debt instead of spending or investing, which in turn drags down demand.
But think about what it means for there to be "too much debt in the system." The implication there is that somehow everyone can be overindebted. But, if anyone has ever looked at a balance sheet, you know that there are two sides to it-- assets and liabilities. Everyone's liability is someone else's asset. And it makes a lot of sense if you cut through the mind-numbing rhetoric. If I loan you $10 plus interest, that loan is an asset for me and a liability for you. There's no way to unbalance the global balance sheet so that there are more liabilities than assets in the system.
Which is why the claim that "You can't solve a debt problem with more debt!" is so ignorant. Take the US. Yes, American households were overindebted in the run-up to the housing collapse. Yes, their finances were a mess once they came to the realization that the house they bought in Florida which they thought had doubled in value between 2002 and 2007 was actually worth half of what they thought. But somehow, because households had ugly balance sheets, the politicians decided that the GOVERNMENT shouldn't borrow. That idea is silly, stupid, and counterproductive.
The government, since the financial crisis, has been borrowing at historically low rates. But somehow, politicians have decided that, because tax revenues collapsed as a result of the crisis and health care spending is on an unsustainable long-run trajectory, the government shouldn't borrow in the short term. That might be good politics for the ignorant, but it's terrible economics. There are two ways for government to help debt-strapped consumers. The first is by putting money directly in their pockets through tax cuts. That's somewhat effective at deleveraging the consumer, but not very effective at restarting the economy. If someone with an income of $40K and $100K in debt gets an extra $1000 a year in tax cuts, all they'll do is use that G to pay off creditors. Without doing anything to bolster demand in the economy. Businesses, in turn, won't be more likely to hire because there's no extra demand for their product to justify that expenditure. If a factory owner has 5 factories, and 3 of them are idle because there isn't enough demand, the factory owner isn't going to build a new factory or hire more workers just because their taxes have been cut-- he'll pocket the money and pay it out in dividends, or just keep it on hand.
And that problem comes into even sharper focus when you consider the unemployed worker who doesn't have the $40K a year in salary anymore due to layoffs, but still has the $100K in debt. He's not getting the benefit of the tax break, and without a job, he has no means to pay down his debt. The solution to that is for government to put people directly to work and invest in building infrastructure, high-speed rail, wireless internet, and other improvements that benefit business productivity. Doing so not only puts more money into consumers' pockets, but, unlike with tax cuts, there's a return on the investment (the government pockets less money when they cut taxes, but there's no guarantee that anything productive is bought with the savings, and with demand generally depressed, investment is unlikely in a depressed market). Now, here, critics argue that we "tried" stimulus when Obama took office and it somehow failed. That claim is also silly. Think about it-- what big public works projects have you seen take place since 2009? Where's the new Hoover dam? The high speed rail line? Wireless internet in our cities? I've been all over the country since 2008, and all I've ever seen that has "ARRA" signs on it are a few road resurfacing projects. Which, fine as they are, aren't going to get a $15 trillion economy with a $1.5 trillion output gap on a road to full employment. So why haven't we seen those big projects? Because, simply, the stimulus wasn't that big, and most of it was aid to states and localities, tax cuts, and social insurance (unemployment benefits, etc.). You're not going to see the impact of aid that goes toward keeping a teacher or a cop who would otherwise be laid off on the job. And tax cuts aren't going to be spent when people have debts to service, but a whole lot of them don't have jobs. And, if you look at the numbers, government employment is actually DOWN since the crisis. So much for "failed" stimulus...
So, really, government going further into debt has a few benefits. It gives people jobs directly, influencing the unemployment rate. Those jobs translate into income that people can use to pay down their debts. And, once those debts are paid off, people will be more inclined to spend, which in turn spurs a self-sustaining recovery that allows government to ease off the spending and work on paying its own debt (which will be easier since an economy that isn't depressed means more tax revenues). Long-term, sure, the government will need to figure out how to control health care costs, which is the key to fixing the long-run budget picture. But, for now, with unemployment over 9% and borrowing really cheap, there's no reason for the government not to take advantage of the free capital to spur the economy. Now if only the politics could catch up to the reality...
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