Thursday, December 09, 2010

It's not about left and right, it's about national bankruptcy

Someone who calls themselves Electablog argues over on Daily Kos that liberals ought to be happier about the tax deal that Obama struck with Republicans because liberals got more of what they wanted than Republicans did. Electablog adds up the score and declares victory for the left, $500 billion to $75 billion.

I consider myself (mostly) a liberal, but I don't feel like a winner here. The left may have won, but the country has definitely lost. What both sides seem to have lost sight of is that the U.S. is rapidly careening towards national bankruptcy, and while $75B worth of extra revenue from rich people will not make much of a dent in a trillion-dollar deficit or a multi-trillion-dollar debt, it is worrisome that despite lofty rhetoric, neither the left nor the right seems to be taking the problem seriously. We are in a deep, deep hole, and this compromise just digs us in deeper.

What has just happened is rather like a married couple in deep debt arguing over whether they should cut their vacation or buying a new car. They compromise by deciding to go on vacation and buy a new car and charge it all to their already overloaded credit card. Maybe both sides feel like they've won, but as one of the people who is ultimately on the hook for paying the credit card bill, it doesn't make me feel any better. And you shouldn't either, because even if you don't live here I guarantee you will feel the pain if the U.S. goes under.


Don Geddis said...

Your analogy sounds compelling, but a nation state with fiat currency differs in a few ways from a couple in debt. Macroeconomics is not identical to household budgeting.

There's a strong (Keynesian) argument to be made that, given the current unemployment and inflation rates, the current Fed Funds interest rate (despite being near zero) is much too high. And because of this, it is choking the economy. (E.g. look at what Krugman notes about the Taylor Rule.)

You're right that debt got us into this mess. You're right, that in the long term, we need to reduce the (growth of the) debt load or the country will go bankrupt.

But despite that, there are strong arguments that suggest it may be counterproductive to attempt to reduce the debt load right now. Nations can grow their economies out of debt (via both real GDP growth, and inflation), in a way that households really can't.

Ron said...

> Macroeconomics is not identical to household budgeting.

Of course it isn't identical, but the fundamentals are no different. Nations can grow their way out of debt, but so can individuals. If an individual borrows money to pay for an education or buy equipment for a new business they "grow" their way out of that debt. National growth is nothing more than that process writ large. What matters is not so much the debt per se as what you do with the money. If you buy assets then you win. If you buy liabilities then you lose. We're using borrowed money to pay for wars, keeping old unproductive people alive, and building an oligarchy. Those aren't assets.

There are two things nations can do that individuals can't to get themselves out of fiscal messes: they can tax, and they can devalue their currency, but even devaluation is really just a regressive tax on savings. That gets money flowing, but it's not so good for capital formation.

The real problem is the mindset. Sooner or later someone is going to have to make some sacrifices. At the moment, we're putting the burden entirely on the young, the poor, and the weak. It's morally wrong, and if we stay on that trajectory it is not likely to end well. Raising taxes on the rich would not have a big impact on the economics one way or the other. But it might have made have made (or at least indicated) a difference in mindset.

Don Geddis said...

Agreed, it matters what you do with the debt.

The problem is that we've had ~10% unemployment for ~2 years. Like network bandwidth, this is a lack of wealth production that you can never get back.

The important thing, is growing real national wealth, by putting those people back to work. That's much more important than dealing with long-term debt today. Even worse, the tools that nations have for addressing excessive unemployment, are close the opposite actions that would reduce long-term debt.

So, as much as long-term debt is indeed a long-term problem, focusing on that issue today is self-defeating.

The easiest way to deal with long-term debt is to grow real wealth. And the easiest way to grow real wealth is to put the unemployed back to work. And the easiest way to do that, is to accept more debt today.

Lasserith said...

While the issue of a growing debt may be one troublesome effect of this agreement, I find the growing burden of our nation's tax code another (bipartisan even) problem. Just today in The Wall Street Journal I read a great piece about how ephemeral the tax structure has become with 141 provisions that have to be renewed. The surprising thing is that there isn't more impetus to attempt to streamline this system, but then again I suppose getting anyone to agree on taxes long enough to simplify them remains an impossibility. (The article was "'temporary' Tax Code Puts Nation in a Lasting Bind")

Ron said...

> I find the growing burden of our nation's tax code another (bipartisan even) problem.

That's certainly a problem. But that problem in and of itself is not going to bankrupt the country. The debt WILL unless we make some kind of RADICAL course correction and do it soon. Alan Simpson put it well: we need to "sober up or sleep in the streets." By Simpson's estimate we have about ten years before we hit the wall. That's not a long time, and the longer we wait the harder it gets to fix the problem.