Tuesday, November 30, 2010

A Matter of Life and Death

"This book is chiefly addressed to my fellow economists." -- Keynes, 1936.  

The economic problem, this time around, will not be solved by economists. For better or worse, it will be solved by ordinary people.

Economists today are always concerned about the fine points. No matter what topic you bring up, a decent economist always responds to an assertion with hesitation and equivocation. It reminds me of the old joke, that if you took all the economists and laid them end-to-end, they wouldn't reach a conclusion.

We have to fix the economy. We cannot wait for economists to reach a conclusion. And if you notice, people are not waiting. Case in point: the recent elections.

The task I have set for myself is to define a solution that can work.

I know. People already have a solution: Cut federal spending. They say politicians just don't have the will to make the cuts that must be made. I disagree. I say politicians have been doing what people say must be done, for several decades now. The fact that the plan has failed is not evidence it has yet to be tried.

As Ross Perot's own graph shows, we reduced federal spending from 23.5% of GDP in 1983 to 18.4% in 2000. But did that fix the economy? It did not.

Did it leave us with an economy that was rarin' to go? Nope. Peak capacity utilization was lower in the years after 2000 than at any time in the available data.

According to Paul Krugman, the economy's performance in the years after 2000 was as bad as it was in the 1970s.

According to Robert Brenner, performance in the 2000s was the worst in our lifetime:

The basic source of today’s crisis is the declining vitality of the advanced economies since 1973, and, especially, since 2000. Economic performance in the U.S., Western Europe, and Japan has steadily deteriorated, business cycle by business cycle... Most telling, the business cycle that just ended, from 2001 through 2007, was -- by far -- the weakest of the postwar period...

The decline of federal spending in the 1980s and '90s did not restore the economy to health. In the 2000s we were as bad off as ever, or worse. And in the last few years, as everyone knows, things have gone even more downhill.

This is my understanding of the popular view: Taxes are too high, and still the federal government runs huge deficits, so they must be spending too much. The solution is to cut government spending until budgets are balanced, or more.

It's a good argument. A bit brief, maybe, but a good argument.

Actually, that's one of my criticisms of the popular view: brevity. It is very limited. It looks only at taxes and deficits -- nothing else -- and immediately goes to conclusion.

Another problem I have with the popular plan is that if we have an economic problem, we ought to have an economic solution. But the discussion almost always comes down to personal, ad hominem criticisms: They are spendthrift. They are corrupt. They lack the will. They are the problem. And that, ladies and gentlemen, just ain't economics.

Another problem I have with the plan is, it is very easy to claim spending is excessive as long as you don't get specific. When you get specific, it almost always turns out that one person's wasteful spending is another person's priority. There's a mix of hypocrisy and wishful thinking involved when people get together, leave out specifics, and agree that cuts are necessary. After all this time, as you know, our newly elected politicians are still saying everything's on the table, and they cannot be specific.

If we can't decide what to cut, then maybe cutting is the wrong strategy. As for myself, I don't think spending cuts are necessary. I don't think they will fix the economy. Smaller government is better government, I'll give you that. But making government smaller will not solve the economic problem. The problem lies elsewhere.

Finally, I object to the popular view because it does not go back to the beginning. It doesn't go back to when our economy was good, and try to figure out where things went wrong. Instead, it focuses on one result of the problem -- the tax burden -- and hopes to improve things by fixing a result. There is no way such a plan can succeed.

My strongest objection to the popular plan is that it failed. We stuck with it all through the 1980s and 1990s, and it just did not work. People who support the plan keep saying we have not tried it, it will work if we do. Hogwash. We tried it. It failed. Now they keep moving the bar. Now, even Social Security is on the table. Where does it end?

The plan was to reduce the size of government. Ronald Reagan said this would restore the economy to health, and things would then improve. And, as Perot's graph shows, we tried that. But things got worse. Things keep getting worse. Thus the popular plan is left with no option but to move the bar.

The goal of Reaganomics was to restore economic growth. As William A. Niskanen writes,

"Reaganomics" was the most serious attempt to change the course of U.S. economic policy of any administration since the New Deal. "Only by reducing the growth of government," said Ronald Reagan, "can we increase the growth of the economy."

As late as the mid-1990s, growth remained the real objective. In To Renew America New Gingrich writes,

The power of economic growth was driven home to me by a study that suggested that a 1 percent increase in our economic growth rate would shrink the federal deficit by $640 billion over the next seven years...

In this world of merely 1 percent higher growth, the Social Security Trust Fund never runs out of money...

Today, we seem to have forgotten that the reason to reduce the growth of government was to increase the growth of the economy. The talk today is only of making cuts to government. Cutting itself has become the goal.

Reagan had the right goal: to increase economic growth. Restoring growth is the only way to solve our economic problems. But Reagan's strategy -- reducing the growth of government -- did not work. It didn't work because the growth of government was not the original problem. Like almost everything else, the growth of government was a result of the problem.

For thirty years or more, we have focused on the federal debt. We have tried to cut federal spending in order to reduce the growth of that debt. But, by any practical measure, we have failed to improve the economy.

The reason for this failure is that we have the wrong solution. The growth of government debt is not the problem. It is not government debt that holds our economy down. Private debt holds us down.

Private debt is the problem. Private debt increases the cost of living and the cost of doing business. Paying the cost of private debt reduces living standards and reduces demand. It reduces profits and reduces supply. The cost of private debt is the impediment to growth.

People say we need credit for growth. We do. But you don't get something for nothing. New uses of credit help the economy grow. That good effect is eventually offset by the negative effect of accumulated debt, which holds the economy down.

I think the trouble with the popular plan is that we got the details wrong. We saw high taxes and big deficits, and said we must reduce the government debt. The fact that it has not worked is evidence we need to re-think the plan.

Our objective must be to reduce private debt, not public debt. For if we do this, the economy will grow again, and the government debt will eventually evaporate.

For the nation, it is a matter of life and death.

// UPDATE 22 Jan 2012: Apparently, the PerotCharts site is gone. The link now displays a screen-snip of the Perot page as it used to look.


Greg said...

I forgot to tell you how much I like this post.

Reagan, when you really examine him closely, did have good goals. He was not an ideologue as he is sometimes portrayed. He truly felt that the size of govt was hindering growth and in some areas he may have been right, but he also raised taxes when necessary and I think if he were alive today would likely be calling for the current republicans to stop worshiping tax cuts in and of themselves as cure alls. He had a pragmatic side that is sorely lacking in todays GOP.

It is ALL about private debt now. You are dead on.

Sackerson said...


The Arthurian said...

Hey, Sackerson.

It amazes me that everyone gripes about public debt, but no one compares it to private debt, and no one looks at the history of that comparison in the context of economic performance.

Good to see you.