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| Graph #1: Federal spending as a % of GDP (blue) and Federal deficits as a % of Federal spending (red) Click Graph for FRED Source Page |
In the green circle: Federal spending as a percent of GDP, and Federal deficits as a percent of Federal spending, both high for 15 years beginning with Reagan.
If your plan is to fix the economy by expanding government spending, well, your plan has already been tried. It didn't work.
Why didn't it work? To be blunt, it didn't work because we didn't have a Depression in those years. A Depression would have wiped out a lot of private debt while the government spending was pumping money into the economy. That didn't happen.
Instead, the private sector took every new dollar of government money and diced it up into many more dollars of private lending and debt. Instead of falling, private debt increased.
Of course, we don't have to have a Depression to minimize the growth of debt. It can be accomplished by policy. But it can not be accomplished by policy until policymakers decide this is the right thing to do.
And in order to convince the policymakers, I must first convince you.
2 comments:
Private debt did increase, instead of falling. However the ratio of private debt to government money fell during that 15 year period. Here's one of your old charts with a line (heavy black) added for leverage.
Does decreasing leverage support the notion that expanding government spending "worked" in the sense of reducing instability by reducing leverage?
Oh! Geerussell, you made me look at graphs for an hour... Thanks!
"Does decreasing leverage support the notion that expanding government spending 'worked' in the sense of reducing instability by reducing leverage?"
Defining "leverage" as the ratio of Private to Public debt... I like that.
Yes, I suppose so... I hesitate to pin it down to "reducing instability". But I am reminded of the Wray quote and the graphs in an old Asymptosis post -- Does Reducing the Federal Debt Cause Financial Collapse?. Reduce the Federal debt sufficiently and you can create a depression.
I usually think of this leverage ratio as having an effect on growth. When it is low, the private sector can expand. But private sector expansion pushes the ratio up. And when the ratio is high, the private sector has trouble expanding.
But what if it's not really the ratio that matters? What if it is the level of debt in the private sector that is key? In that case, increasing public sector debt does little or nothing to solve the problem.
Financing contributes to both the production and consumption of output. But financial costs interfere with both. As debt increases, financial costs increase.
When the Private/Public debt ratio is high because private debt is high, financial costs are not reduced by increasing Public debt. Reducing the ratio by increasing the Public component only increases total financial cost.
That's why I wrote "it didn't work because we didn't have a Depression in those years."
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