Tuesday, August 25, 2009

Putting Debts in Perspective

Robert Reich has a post on his blog that gives the necessary perspective on the announced $9 trillion US debt over the next 10 years. First Reich points out it nothing new. Second he points out that it can be fixed with growth, the growth that will come from spending now to get the economy out of its rut. Leaving the economy in the rut is the one sure way to make the debt burden worse.

Here's Reich:
Don't Succumb to Deficit Hysteria

Today, as expected, the White House announced that the deficit projections are worse than it had thought. And as expected, the same old group of deficit hystrics went ballistic. "A 10-year deficit of $9 trillion is $30,000 for each man, woman and child in the United States!" kabaam. "Public debt will total a whopping $17.5 trillion by 2019 — three-quarters of the nation's entire economy!" Kaboom. "The number would send Reagan's stack of thousand-dollar bills into satellite orbit!" Zowee.

Can we please relax?

First, ten year projections are notoriously irrelevant. Remember Ross Perot? In 1992, he predicted that the federal budget deficit was on track to end to the world as we knew it. In fact, the rapid growth of the economy during the following years reduced the deficit to zero (neither Bill Clinton's famous deficit-cutting nor Republican insistence on a balanced budget was responsible; the deficit reached zero before any major fiscal changes kicked in).

Second, deficits and debts mean just about nothing anyway -- at least out of context. In 1945, the federal debt was 120 percent of the entire U.S. economy. Yeegads! Yet only a few years later, the debt as a proportion of GDP had been tamed -- and not primarily because of cuts in government spending. Yes, of course, wartime spending ended. But the big change was in the denominator of the equation. Economic growth kicked in big time, and reduced the debt as a proportion of the economy to manageable levels.

The only item worth looking at is the part of the report that predicts the government will have nearly a $1.6 trillion deficit in the fiscal year that ends this Sept. 30 -- but not because that number is alarmingly large. It strikes me as alarmingly small. I'd prefer the government run a larger deficit. With unemployment and underemployment still rising, consumers still pulling away from the malls, business investment still in the basement, and exports still dead, the federal government has to spend more -- and the deficit has to be larger -- in order to get people back to work.
Sadly the Chicken Littles won't pay attention to the above. They will be too busy running around saying "The sky is falling! The sky is falling!"

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