Saturday, January 22, 2011

Dr. Strangeidea, or, How I Learned To Stop Worrying And Love The Debt

Let me first say that I am well aware of the dangers of a massive Federal debt. The title is a reference joke.

I came across this (note that it is from 1996) as I was trying to learn about how economics actually works, at the Federal level. I'm going to re-post each of the fallacies Vickrey addresses one-at-a-time, otherwise it makes my brain hurt.

Let me first say that we have a national discourse that is, to be technical, stupid. It is stupid because it relies on myth and legend. It is stupid because it does not include substantive analysis. It is stupid because we rely on the same set of people who consistently demonstrate that they have no idea what they are talking about. It is stupid because liberals think Keith Olbermann is a fair-minded, honest newsman, as opposed to the partisan hack that he actually is (which isn't to suggest he is always wrong). I won't even address the stupid on the Right side of the talking heads, because my life expectancy isn't 437 years. I'll be writing a lot in the future on the inanity that passes for news and analysis.

Fallacy One is often heard in the argument, "We need to balance the budget." This is called "fiscal responsibility" by some. Aside from the massive hypocrisy surrounding this issue, the premise is incorrect. I once, on a plane trip back East, subjected myself, in the name of being open-minded, to Fox News Channel. I think it was "Fox And Friends." The woman, after a story about the Federal debt, turned to the camera and said something to the effect of, "Well, it only makes sense. I mean, you have to balance your checkbook at home, Why shouldn't the government?" Here's why, twitty:
Fallacy 1
Deficits are considered to represent sinful profligate spending at the expense of future generations who will be left with a smaller endowment of invested capital. This fallacy seems to stem from a false analogy to borrowing by individuals.

Current reality is almost the exact opposite. Deficits add to the net disposable income of individuals, to the extent that government disbursements that constitute income to recipients exceed that abstracted from disposable income in taxes, fees, and other charges. This added purchasing power, when spent, provides markets for private production, inducing producers to invest in additional plant capacity, which will form part of the real heritage left to the future. This is in addition to whatever public investment takes place in infrastructure, education, research, and the like. Larger deficits, sufficient to recycle savings out of a growing gross domestic product (GDP) in excess of what can be recycled by profit-seeking private investment, are not an economic sin but an economic necessity. Deficits in excess of a gap growing as a result of the maximum feasible growth in real output might indeed cause problems, but we are nowhere near that level.

Even the analogy itself is faulty. If General Motors, AT&T, and individual households had been required to balance their budgets in the manner being applied to the Federal government, there would be no corporate bonds, no mortgages, no bank loans, and many fewer automobiles, telephones, and houses. 
A few thougths based on discussions I've had on this subject. First, some people do not understand the difference between "debt" and "deficit." Debt is the total amount owed. Deficit is the yearly shortfall between revenue and spending (including future obligations, like bonds). If I spend $1 more than I make in one year, I just ran a deficit of $1. I also, after one year, have a debt of $1. If I keep it up, I still have a deficit of $1 every year. In year two, I have a debt of $2, etc.

Second, ideology often clouds this issue (and every other issue). Some people think that government spending is almost always bad, per se. Some people think we can just throw money at an issue and solve it. These ideas are unhelpful.  HOW the government spends is the question that matters. To my mind, government investment, whether it be research, infrastructure, education, or other means, can be a decidedly good thing. These forms of investment have resulted , and I think will continue to result, in a multiplier effect (i.e., $1 spent on roads leads to increased economic activity that yields more than $1). Government spending in the form of bombs that explode and then return nothing to the economy, not so much. And so it goes, I think, with certain forms of social spending. Money given to people that incentivizes them to be unproductive and/or dependent is not only economically unwise, but harmful to the soul.

So what we have in our dysfunctional national discourse is one party who pushes, selectively, for a bad idea, namely "Balanced Budgets." Some of these ding-dongs want a Constitutional Amendment to mandate balanced budgets. This is idiocy, nothing less. We have another party who, despite being a supposed "opposition" party, buys in to the fundamental error in understanding. Many of them also think we can just tax and spend our way out of the problem. This too is foolishness, for reasons I'll elaborate on in another post.

1 comment:

  1. Excellent. I like it. However I think I can bring home why it's such a "BIG" deal to the American public people try to relate the federal government to their own lives. Now plenty of people have debt and manage it well. In fact people have horrible debt to income ratios some over 50/50 and even some are in the red every year. While it's just money and there are always options. It's the psychological impact. That is why there is a huge feeling of relief and blood pressure drops when you pay off your all your debt. I am debt free (well till I buy a house). I live off of 25% of what I make I give away 10% and spend the rest at dominos or invest it. Most newlyweds fight over money. Having debt is not natural and so we see the chaos it causes us as individuals and just assume that with the federal government it would be 300,000,000 times worse. However the federal government is different on many levels as you broke it down so well. Also too what people don't talk about is that while we have a deficit or national debt (I love the signs that say each American owes 10,000 dollars) or trade deficit is the fact the US is owed money by foreign governments and business and so that money since it hasn't come in yet is not accounted for.

    Government investments can be good. However like anything the bad investments make the headlines and there has been some bad investments.

    but great breakdown I like your blog a lot and somehow you need to nationalize it.