Thursday, January 3, 2013

A rather pleasant surprise

From The American, the Online Magazine of the American Enterprise Institute: The Tea Party and the Debt Ceiling vs. Economic Growth by Steve Conover:
By focusing on the debt limit, Tea Partiers are wasting valuable time on the wrong issue. What matters most is the size of our economy. We should be focusing on economic growth, not the debt ceiling number.

The surest way to protect the status of our dollar and our sovereign debt is to grow our economy at least as fast as our debt grows. Conversely, the surest way to become "Greece 2.0" would be to detonate our suicide vest — i.e., to default on our Treasury securities after refusing to raise the debt ceiling. Default could destroy the most valuable brand name in the world — the "U.S. dollar"— and, ironically, that destruction would be self-inflicted.

Even more ironic: the debt ceiling serves virtually no financial purpose. The two meaningful numbers are (1) the size of the debt itself (not the ceiling), and (2) the size of the economy. Figure 1 shows the recent history of those two key numbers, as well as the near-meaningless debt ceiling.

Figure 1

The Proper Debate: How Best to Grow the Economy

Instead of political grandstanding around a redundant, made-up number, we should spend that valuable time debating how best to achieve robust growth given our current economic condition. The proper debate would be lively. Contemporary Keynesians advocate top-down, "intelligent design" economics — i.e., trusting government officials, regulations, and spending to foster higher consumer demand for familiar goods, services, and job skills. The Reagan Republicans, on the other hand, advocate evolutionary economics (a.k.a. “complexity” and “emergence”): enabling and trusting the private sector to evolve in favorable new directions through innovation of better goods and services, which require more-advanced job skills.

I have only a little to add. Obviously the important thing is to get the growth. People have all kinds of weird ideas about "the end of growth" and "the government doesn't want to make things better" and "we don't need growth". I'm just dismissing all of that without a glance.

We need growth. We don't get the growth we need, because there is a problem that we have failed to identified. But lots of people know what the problem is: An excessive accumulation of private debt hinders private sector growth.

All we need do is reduce private debt ASAP by every available means until it is no longer excessive, and then the economy will grow like gangbusters.

Soon as it starts to grow, we'll have to institute a few policies to prevent a recurrence of the problem: Give people tax breaks that encourage faster repayment of debt, for example, and don't let the Debt-per-Dollar ratio get out of hand. But once such details are taken care of, we're good.

After that the Keynesians can argue in favor of trusting government officials and the Reagan Republicans can argue in favor of trusting the private sector till the cows come home. But all the while, the economy will be growing like gangbusters.

And one day we may even notice that we trust each other again.

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