Tuesday, August 09, 2011

Another Look at the Government Debt Crisis

R R Reno is not an econ guy, nor a political science guy.  He is an acute observer, however, and calmly asks the right questions.

...it’s the bankruptcy of the larger system—one in which government plays a central role—that now threatens us. Liberalism put the financial muscle of government at the center of economic life. This implicates government in the crisis we are now experiencing, as anxiety in financial markets about problems in Greece, Portugal, Spain, Italy, and other potentially insolvent governments suggests.

This crisis of sovereign debt has only been contained by the supremely credit-worthy reputations of the United States and German governments. Not surprisingly, therefore, it was this reputation—put simply the capacity of the United States to sustain its current trajectory of taxing, borrowing, and spending—that is now being heatedly debated. And in this debate American liberals fail to see that 2011 is not 1932. We can’t expand the already expanded state to deal with a crisis in which the financial role of the state itself—it’s capacity to tax, borrow, and spend in a way that promotes economic growth—is at the center.

The 1930s saw a crisis of capitalism, one that called for rescue by government. Are we now experiencing a crisis of government? It’s overreach? It’s profligacy?

He asks two questions:

1)  Can the USGovernment continue to borrow to fund its needs (we know that merely "raising taxes on the rich" will NOT fund them); and

2)  Even if the Gummint can continue the borrowing, is the size of the enterprise simply too big?

I'd suggest that the answer to 1) is "only for a short time."  And the answer to 2) is "Yes."  That's a good thing, because they are inextricably intertwined.

A frequent commenter is concerned that an overall reduction in credit (total, which includes Fed/State/Muni/Private/Financials/Consumers) will necessarily reduce GDP.  This is supported by the lead economist at Northern Trust and by Ticker to one degree or another.

However, reduced GDP, in and of itself, is not necessarily a trigger of Depression.  If Gummint borrowing is less, there is more credit available for industry/consumer/financials.  The money doesn't disappear, after all.  And if Gummint reduces its regulatory ($15Bn/year) costs--or reduces its tax-costs, industry/financial/consumers benefit.  (Maybe not lawyers or CPA's, but.....)

Hmmmm.

4 comments:

J. Strupp said...

"Liberalism put the financial muscle of government at the center of economic life."

No no no. The late 40's, 50's and 60's experienced solid economic growth, real wage growth, low unemployment and a massive expansion of the middle class. These were the years that the government was apparently at the center of economic life.

It was when our political leadership decided to put the financial SECTOR at the helm in the 1970's and 80's via deregulation, tax incentives and top end tax cuts that real wages stagnated and the middle class got the shaft. Your author is re-writing history.

"And in this debate American liberals fail to see that 2011 is not 1932. We can’t expand the already expanded state to deal with a crisis in which the financial role of the state itself"


Really? Why not? Who says? The market is not worried about the expansion of government. The global economy doesn't give any indication that crisis is upon us. This is a fabrication not based on data.

"....reduced GDP, in and of itself, is not necessarily a trigger of Depression."

But CONTRACTION of GDP IS a trigger of depression.

"If Gummint borrowing is less, there is more credit available for industry/consumer/financials."


But that' a crowding out argument Dadster. There's plenty of credit in the system. But that credit is still searching for a target. Reducing government spending is only going to make the problem worse.

Dad29 said...

So FDR was a potted plant?

(I'm RESISTING........)

And, even if you insist that all FDR's departments and programs were piddlysquat, you really have delusions about LBJ/Nixon/Carter's mad dash for Gummint Goliath.

In your telling, all the growth was at CitiBank and Bank of America.

We can agree that rescinding the firewall between investbk's and commbk's was boneheaded and perhaps morally wrong.

But you can NOT be serious that "the banks" were more significant than the LBJ (et al) Gummint expansion.

As to your contention that 'reducing spending will..make it worse," you can't prove that any more than I can prove that 'reducing Gummint borrowing will re-direct credit to [privates].

We've tried your way. Got us a downgrade.

J. Strupp said...

...by the same rating agency that rated Lehman AAA in '07. The same downgrade that has people running INTO U.S. Treasuries as a save haven investment less than 4 days following this so-called downgrade. It means nothing.

"you can't prove that any more than I can prove that 'reducing Gummint borrowing will re-direct credit to [privates]."

This is like saying that I can't prove that 2-1=1. Your advocating that we try addition by subtraction.

There is NO indication that government spending is crowding out private investment. We have nearly a third of this nation sitting idle right now because we have nothing for them to do.

Dad29 said...

S&P was burned once (or more than once.) You know the saying....

We have two separate but related issues here: first, the debt problem, second, the size-of-Gummint problem.

The Gummint's size forces it to eat everything in sight; lots of people (more than a simple majority) are unhappy about that.

You will not concede that the size is a problem, thus, to you, the debt is not a problem.

We will continue to disagree.