Thursday, March 1, 2012

Private Debt 2012 (9): Policy forced our hand

All of the drivel and nonsense about the need to cut spending and balance the Federal budget -- where does it come from?

I think it comes from the fact that taxes are high. Taxes are high, and still they have deficits, so they must be spending too much. I think that's the whole argument.

What are the responses to that argument? I see three responses. There are people who say taxes are NOT high, that taxes are the lowest they've been since the 1950s. Those people are fools I think, thinking other people are fools who will believe it.

And there are people who say paying more taxes is okay. But they don't seem to be winning the argument.

And then there are people who say "tax the rich". This is the crudest response of the three. These people seem to be winning the argument. Not winning against the "taxes are high" argument, but winning out over the other two responses. So in the end we're getting something like a movie title: Crude and Cruder.

That's not how you fix the economy.

At Business Insider, a long post from July of last year by Henry Blodget. Mostly charts and graphs, not too much reading. Looks like a pretty good summary of the facts to me. I was pleasantly surprised.

But in all of that post, the word "debt" is used exactly one time: referring to "war debts" as a reason for raising tax rates in 1945.

ZERO mention of private-sector debt.

ZERO mention of economic growth and how debt hinders growth.

ZERO mention of prices and inflation.

In Henry Blodget's article, the whole world revolves around tax rates and government spending. Oh, I know, that's his topic. And the article impressed me. (It surprised me, as I said.) But you can't fix the problem if you don't look at the problem. And tax rates and government spending are not the problem. They are results of the problem.

The problem is that private sector debt increases costs and hinders growth. Government spending on social programs follows from that, as does the decline of living standards. Tax increases come next, and growing budget deficits. And taxes seem even higher than they are because times are tough and living standards are falling, and we get by by borrowing more, and the government encourages that behavior because they don't really know how to fix the problem, and private debt grows more. And private sector debt increases costs and hinders growth.

Oh yeah, yeah yeah: We're deleveraging now. Sure. But creating a depression is not really a good solution to the problem. Anyway the problem is not that we're idiots who just couldn't resist borrowing. Policy forced our hand. Policymakers thought it would be good if we got all choked up with debt. They still think that.

This is the thinking that has to change.


Jazzbumpa said...

Well, I guess I'm a fool.

And I think you are making a mistake by looking at private debt in isolation. Further, there is a whole lot more to tax policy than just balancing the Fed budget.

There is the issue of wealth and income inequality, the issue of the rich having a lower propensity to spend, the issue of speculative excess. This is a package of problems, and policy needs to recognize this big picture.

The way to reduce personal debt is to raise incomes incomes below the 50th percentile. The way to do that is with regulation and redistribution.


The Arthurian said...

It seems to me that your 'best case' scenario would unwind things back to where we were some time before 1980 when we still had regulation and a more equal income distribution.