Friday, December 23, 2011

"The Meme that Refuses to Die"

At EconoSpeak, a good one from Peter Dorman. (I can't take an excerpt from it; you sort of need to read the whole thing.)

In the comments, Don Levit asked a good question and I gave an impromptu answer.

I often have second thoughts when I don't put enough time into something I write. So I'm looking again at my reply, giving myself a chance to fine-tune it.

Anyway, here is my comment, tweaked:

Don's question is excellent:

How was the economy able to do so well for the years 1950-1980 with very little government debt, yet for the last 30 years, with huge government debts, median households have lower incomes?

The answer is found by comparing the level of government debt to the level of private debt. For it is private debt, not government debt, that holds back private sector growth.

For the last 30 years, private debt has been so vast that all of the growth of government debt we've had was not enough to generate vigorous growth.

For the 30 years before that, private sector debt was relatively low, so it was able to increase rapidly, creating vigorous economic growth.

The changes of the past 30 years -- Reaganomics -- skewed income toward the top. That's why the median income fell. And the fall of median income is a problem. But those changes were designed to solve a prior problem, the problem that GDP (total income) growth was too slow.

GDP growth was already inadequate in the 1970s, because of excessive private debt.

1 comment:

Jazzbumpa said...

Just a hit and run today - off to Toledo.

There are other valid answers to Levit's question. Or more specifically, he's asking the wrong question. The level of Govt debt, per se, is irrelevant to how well the economy does.

1) It's the level of spending, not the level of debt. Debt is a resultant, not a goal. NOBODY seems to understand this.

2) When the economy is expanding, there is much less need for gov't spending. This used to be understood as Keynesianism.

3 In those days, we taxed to cover expenses. During the Viet Nam war there was a surtax, for Christ's sake, to pay for the god-damned war. But this was pre-Reagan, and fiscal responsibility was still a concept that meant something.

Hence my link in comments to this post.

Merry Christmas! Up to my eyeballs in family stuff through Christmas day.