Comments to My New Conservative Friends

I have been speaking to a few of my more conservative friends lately and have bumped up against a number of recurring themes I think are worthy of comments. Here is a sampling:

1. The national economy cannot and should not be run as if it were a household. Balancing a family budget or small business is a fine and worthy goal. It prevents a descent into over-indebtedness. Balancing the US national budget would be damaging and unwise. This is because a family or small business cannot print its own currency. The US can. So there is no limit on how much the national government can spend. None. It can fund itself by issuing debt, or by printing money. Either way it cannot go bankrupt. Unless, of course, it decides to.
2. Balancing the budget would be unwise because it would reduce the amount of spending in the economy. At a time when private activity is too slow to engage all the resources in the economy – resources include workers as well as factories and so on – a reduction in spending would mean making more of those resources idle. We would thus increase unemployment and empty more factories.
3. Remember that your spending is someone else’s income. If you save more, rather than spend, you are reducing the amount of income someone else receives. So what appears to be a good intention for you actually hurts someone else. If enough people act this way the private part of our economy spirals down. The more is goes down, the more people save to protect themselves, and the less income there is for others. This is called the paradox of thrift. The downward spiral continues until people are forced to spend again to purchase essential items they can no longer postpone buying. Or until the government intervenes to short circuit the spiral effect.
4. So we need government to keep up its activity in order to offset the void created by the lack of private activity. This kind of policy is generally called Keynesian by the media.
5. This does not mean that budget deficits ought to be permanent. Nor does it mean that lots of government activity is always a good thing. What it means is that lots of government activity is a good thing right now while the private sector heals itself.
6. So talk of budget cuts in Washington is a sure sign that our leadership – i.e. Congress – is not concerned about employment. Indeed it is a sign that it wants to increase the under-utilization of our national resources and idle more factories and workers at least in the short term.
7. Raising the debt ceiling is a good thing. The US national debt is not a problem. Not at all. It has been worse in the past – expressed as a percentage of our national annual income [aka GDP] – and has always recovered as long as the economy grows. So our focus ought to be on getting growth going, not on reducing activity to trim the debt. the correct way to look at our indebtedness is not the amount of debt but the cost of paying the interest. Our interest rates at at all time lows. Debt is cheap. So borrowing is not an issue.
8. Besides: the debt is simply a reflection of past budget decisions, not current ones. The need for debt reflects what Congress – the place where spending is decided – has legislated for already. It reflects decisions and therefore commitments already made. So arguing over the need for new or more debt is a way of reneging on past commitments. It is not an argument over future commitments.
9. Further: we do not run the risk of bequeathing a mountain of debt that will hobble future generations. The debt we are issuing is low cost, so the future debt burden is low. The amount is large, but will shrink as a proportion of the future economy so that it will be manageable. And our greater risk is that we bequeath an impoverished uncompetitive economy with a rotten infrastructure unable to generate wealth for our descendants. We need to focus on that potential and invest to protect it rather than deprive the future of opportunity.
10. Government spending is not out of control. Indeed it is coming down too quickly. Some of you seem to think that our budget has spiraled out of control in recent years and that this represents a permanent shift in our government. It hasn’t and it isn’t. True government spending increased rapidly in the aftermath of the crisis. But this was due to safety net programs such as unemployment payments that always kick in during recessions. Such spending in creased in 1982, but no one accused Reagan of ‘creeping socialism’. What made this crisis different was its size. This was a depression sized crisis. And here’s the crucial point: it would have been an out and out depression were it not for that government spending. So the rise in spending helped, it did not hurt.
11. Moreover, since the crisis started to ebb that emergency spending has also ebbed. So government spending is on a downward path back to more normal levels. So their is no ‘crisis’ in governments pending.
12. What made the federal deficit balloon was the simultaneous rise in this temporary emergency spending, and a drop in tax revenues due to the loss of jobs and profits. As incomes dropped due to unemployment so did tax revenues. As employment recovers taxes will return to normal.
13. Also many of you ignore the impact of state level spending. Because many states have been trying to balance budgets – they cannot print their own money and so do have a debt problem – almost as much government spending has been cut at the state level as has been increased at the federal level. And since the majority of state spending is for teachers, police, and fire departments, the local budget cuts will have a long term negative impact on our national competitiveness.
14. One last thing: we live in an unequal society where incomes for the majority have stagnated and those of a few have soared. This was deliberate. It was not an accident, or an unintended by product of globalization. We did it on purpose. The share of our national income going to regular workers and to small business has shrunk rapidly. The share going to profits and dividends has shot up. This has squeezed the average family’s budget, forced people to borrow more, and has destabilized the economy. It has also reduced the amount of consumption and hence income for households and small business. This entire shift was caused, primarily, by deregulation, particularly bank deregulation. We now live in a financier economy, not a manufacturing or service economy. As long as the banking industry remains deregulated we can expect more, and possibly larger, crises.

In order for the US to ‘get back on track’ we need a more constructive debate about economic policy. As long as the misconceptions about governments spending and its role persist we cannot have that debate. I hope my comments serve to help get us all talking about the same thing rather than at cross purposes.