Tuesday, February 5, 2013

McArdle: "No one has a plan in their pocket to increase the trend rate of economic growth"

Megan McArdle, from All We Need is Growth:
With robust economic growth, our debt-to-GDP ratio will start to decline, our tax revenues will start to rise, and the rolls of programs like unemployment insurance and food stamps will start to fall. All sorts of problems start looking easier with robust economic growth.

That's right. With robust growth, GDP grows relative to Federal spending. But there's more: With robust growth, the demand for government social spending diminishes. The rolls of programs like unemployment insurance and food stamps will start to fall.

With robust growth, Federal Spending (FS) goes down, GDP goes up, and the FS/GDP ratio improves dramatically. It's like we're burning the candle at both ends.

So why are people focusing on the tedious and painful business of austerity, when growth would be so much better? For the same reason you've probably opted to pay off the Mastercard, rather than waiting until you have time to publish a bestselling novel: it's not so easy to deliver robust economic growth on demand.

Right again: "it's not so easy to deliver robust economic growth on demand."

What we have is (on the one hand) people calling for government to get out of the way so the private sector can grow, and (on the other) people calling for government to step up and spend, to make the private sector grow. You cannot know how frustrating this is for someone who sees a third path.

The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.

Whatever you may have heard, no one has a plan in their pocket to increase the trend rate of economic growth--indeed, so far we've failed to get it back to the levels that preceded this "one time factor". Telling budget wonks that "we need more growth" is a bit like telling a cancer patient "you need more health". I mean, yes, Dr. Insight, but can you be more specific?

Here is the plan: We must reduce private sector debt, because it is private sector debt that hinders private sector growth.

Is this not specific enough?

By the end of this year, the federal debt held by the public will probably be something like 78% of GDP. That may not be high enough to exert a serious drag on growth, but it's getting pretty close.

Seventy-eight percent of GDP, huh? You can see that, in the blue line here:

Graph #1: Federal Debt (blue) and Everyone Else's Debt (red)
(Both relative to GDP) (Federal "held by the public" per McArdle)
Click Graph for FRED Source Page

78% is about where everybody else's debt (the red line) was in the mid-1950s. Since then, it went up. But if Federal debt at 78% is "getting pretty close" to being "a serious drag on growth" as McArdle says, then how about other debt at 100% or 200% or 300% of GDP? Of course it is a serious drag on growth! All debt is a drag on growth.

You might say but Federal debt doesn't produce anything!

No debt produces anything. New uses of credit can sometimes be for productive purposes. But after that money's spent, nothing remains but the evidence that it was credit we were spending: Nothing remains but the debt. Debt is evidence of credit use. And the cost of debt over time is equal to the economic boost we get from credit use. Equal, or greater.

Borrow a dollar today, spend it today, and boost the economy today. Tomorrow, all that remains is a dollar of debt, the cost of interest on it, and the cost of repayment. These costs do not boost the economy. Just the opposite. This is true, no matter who borrowed the money. It is true, no matter what the money was used for.

To boost the economy, a new use of credit must be large enough to completely offset the drag created by existing debt, and then some. But the use of credit makes existing debt bigger. See the problem?

The subtitle on McArdle's post is "Everyone would like to fix our budget with growth rather than austerity. Unfortunately, no one knows how."

I'm telling you how.

No comments: