As the media and political world continue to occupy themselves with the Republican horse race, the elected representatives of both the Republican and Democratic parties are quietly continuing to spend the nation deeper into the debt abyss. While the amusingly misnamed Budget Control Act of 2011 was supposed to settle the debt-ceiling discussion until after the presidential election this November by increasing the amount of permissible debt by at least $2.1 trillion – a mere 14 percent of American GDP – the speed at which the Congress and the administration have been whipping out the government credit card means that there is a reasonable chance that they will burn through that additional debt in barely one year.
This increased federal spending is the source of the economics reports that has been less dismal than expected, which has wrongly been taken as evidence that the economy is finally beginning to recover a little. It can be clearly seen in the Federal Reserve’s credit statistics, as the Z1 report shows that after declining steadily from the first quarter of 2010, the rate of increase in federal debt began to pick up again in the third quarter of 2011. Approximately $389 billion in new debt was amassed, thus indicating an annual increase of 16 percent. At this rate, outstanding federal debt, which by some measures already exceeds the size of the national economy, will double again in six years.
However, this estimate is probably too optimistic, since the overly positive tone of the economic reports combined with the speed with which the federal government is using up its expanded debt ceiling, causes me to conclude that the next report from the Federal Reserve will show that the rate of debt spending growth in the fourth quarter will exceed the third quarter’s four percent and could even reach the nine percent rates of the third and fourth quarters of 2008. This is hardly unthinkable, given that recent revisions to the increase in state and local government debt resulted in a 24 percent increase in the third quarter of 2011 alone.
Now, I am occasionally interviewed on various radio and television shows concerning the present state of the economy, and if there is one theme that is consistent from show to show, regardless of the nationality or the political ideology of the interviewers, it is uniform disbelief when I tell them that the primary reason for this unapologetic and irresponsible borrowing is because mainstream economists do not believe that debt presents any economic problems for a nation. And since the economists assure the politicians that there are no intrinsic problems posed by amassing gargantuan debts whereas there are significant potential benefits, both economic and political, it cannot be surprising that the politicians readily resort to debt-spending at every given opportunity.
It is important to understand that this has always been the case. Implicit in Keynes’s General Theory, the postulated irrelevance of debt was made explicit by Paul Samuelson in his influential 1948 textbook, “Economics.” His argument was that from a macroeconomic perspective that encompasses the entire national economy, debt does not matter so long as one American owes it to another American, because the overall national account is still in balance. Thus, mainstream economists genuinely believe that it doesn’t matter if Paul spends $5 and Peter spends $5 or if Paul spends $1 and Peter borrows $4 from Paul and spends $9. In either case, $10 has been spent and the economy is in balance.
But this is accounting, not economics, and it does not account for the different ways that Paul and Peter spend their money; if Paul spends his money on robots and Peter spends his money on prostitutes, there is going to be a substantial amount of qualitative difference in the material results at the end of the year depending upon whom is spending money. And worse, this macro perspective fails to account for what happens when Paul can’t afford to repay Peter and Peter isn’t willing to loan him additional money; the fact that Paul is no longer keeping the prostitutes employed doesn’t mean that Peter will pay to make use of their services.
So, in light of the inability of the greater portion of the media to understand that debt doesn’t matter to mainstream economists due to their erroneous conceptual models, it was very interesting to read the following article this weekend.
WITH little fanfare, a dangerous notion has taken hold in progressive policy circles: that the amount of money borrowed by the federal government from Americans to finance its mammoth deficits doesn’t matter. Debt doesn’t matter? Really? That’s the most irresponsible fiscal notion since the tax-cutting mania brought on by the advent of supply-side economics. And it’s particularly problematic right now, as Congress resumes debating whether to extend the payroll-tax reduction or enact other stimulative measures.
– “The dangerous notion that debt doesn’t matter,” New York Times, Jan. 20, 2012
Of course, the author fails to understand that the notion isn’t a new one, but has been an intrinsic element of mainstream policy circles, progressive and conservative alike, for 80 years. He also calls for more debt and more spending because he subscribes to the same misguided notion of stimulating the economy through government spending that has failed to end the contraction for more than three years now. But even so, it is fascinating to see that even the most mainstream institution of the mainstream media is gradually beginning to fumble its way toward the recognition that there is something fundamentally rotten about the state of the political economy.
And this is why it doesn’t make any difference whether Newt Gingrich, Mitt Romney, Rick Santorum or Barack Obama is the next president of the United States. All four men subscribe to the same outdated, erroneous macroeconomic model that views debt as exogenous and, therefore, irrelevant. Not only does this render them unable to address the problem, it prevents them from even seeing it as a problem in the first place, their fiscally pious platitudes on the subject notwithstanding.