jobs

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Jobs Data: A Turn For The Worse?

Just as I caution not to take a single week or month’s data as a sign of a turn in a tide, I must remind myself not to get too worked up over today’s surprising uptick in first time claims for unemployment insurance. Last week’s level of 474,000 was up from the prior week’s 457,000 and marked the first time in a month and a half that the improving trend has been broken.

Do we panic?

No. The improvement since the summer is widespread and well entrenched. The deterioration in the labor market seems to have reached an end. The gains recently have shifted the weekly loss rate from being within the 500,000 to 525,000 range to their level and I expect that kind of steady improvement to continue. A good indicator of this trend is the four week moving average for first time claims which has now dropped for fourteen weeks in a row, and currently sits at 473,750. Naturally last week’s blip threatens that long streak of improvement, but the outlook is decidedly better now than it was in late spring.

That is as long as the economy overall maintains a growth path. If we sink backwards at all then, obviously, all bets are off.

The disturbing aspect in the jobs market presently is the intractable nature of long term unemployment. Since this time last year first time claims are down about 11%, but continuing unemployment – people who have been laid off and cannot find work over a prolonged period – has risen by 31%. It is this huge reservoir of long term unemployed that is beginning to weigh so heavily on the economy. Not only is it a massive personal blow to the unemployed workers involved, but it also implies a heavy fiscal burden on the states making the unemployment payments. If there is one good place to spend Federal money it would be in the provision of aid to states to alleviate that burden.

The overall message from today’s data is that while the short term situation seems to be under control, it is not improving fast enough to prevent an accumulating, and potentially destabilizing, level of long term unemployment.

The administration is absolutely right to call for action against this long term problem. I wish they had come to that realization earlier in the year, and had more courage in their convictions. As I wrote yesterday the amount of aid the administration wants to funnel into its new jobs programs is insufficient to make serious progress quickly. I assume they are content with prolonged high unemployment. Perhaps they have a limited view of the improvement that renewed government aid could bring. Either way we need a much more concerted and larger effort if we want to break the back of the rotten jobs outlook.

Meanwhile let’s not panic over today’s poor report. Wait for another week or so to start that!

Addendum:

Paul Krugman does us all a favor by calculating a ‘benchmark’ so we can get a handle on what a ‘good’ performance would be in the labor market.

His argument is simple: we need to add about 127,000 jobs a month to keep up with population growth. As long as we are adding that number the unemployment rate won’t rise. Next we need to replace the 8 million jobs lost during this recession, but since that seems unlikely any time soon he sets a less ambitious target which is to replace those jobs over a five year time span. Given that we are two years into this awful jobs market that means the following:

127,000 * 84 months = 10.668 million jobs. [seven years of population growth to absorb]

10.668 + 8 = 18.668 million jobs [regain the jobs lost during the recession]

18.668/60 months = 311,133 new jobs a month. [gain those jobs over five years]

This looks like a huge stretch to me. For this economy to go from where it is now – it lost a net 11,000 jobs last month – to a monthly gain of 300,00+ will take a very dramatic turnabout. I don’t see any evidence of that kind of change occurring soon. So the outlook is a for a persistent moderately high level of unemployment over a long period, the economic and political consequences of which cannot be positive.

Such is the damage the banks did to us. And they wonder why we get annoyed at them.

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Son of Stimulus? And Bonus Bonanza

Some of you will find it odd that I link bonuses for bankers and Obama’s latest attempt at getting a jobs program organized, but in my mind the two are inseparable. After all the distorted short term incentives awarded to the folks in our big banks were a primary cause of the crisis, one effect of which is the continued need for stimulus. Put another way: were bankers paid properly we would not be talking about bailing out from a horrendous recession.

So the two fit together. We should never look at one without vexing over the other.

First let’s look at Obama’s next foray into stimulus land.

Right from the get go we have to avoid calling it a stimulus. That word has become a no-go zone for the administration, bent as it is on avoiding any confrontation with centrists. Our apparent need to allow the likes of Olympia Snowe to run the country implies that we tread very carefully around issues such as government spending. Having so ceded control the administration now likes to position itself as an involved advisor nudging, but never bullying, Congress in the right direction. One such nudge is the proposed set of job creating activities that Obama unveiled this week. So far we have been told little of substance, so it is very difficult to assess their likely impact. Having said that if the rumored cost is correct – $70 billion – then we can almost guarantee they will produce a mediocre result.

As you can tell from my tone of voice I have now sunk into a frustration with the administration that prevents me from cheerleading anything it does. Limp is in. Compromise dominates boldness. And self-imposed limitations constrain our imaginations. We must not dream too expansively for fear of upsetting folks. I would be fine with this, even though I would still champ at the bit, were our circumstances to match its mellow low key theme. But the world is a whole lot more harsh than the administration wants to believe it is. There are some really nasty problems lurking out there in the weeds. Some of them are quite big. They require equally big responses.

Allow me to quote Robert Reich at length:

“Main Street is hurting worse than ever. Ten percent unemployment translates into roughly 18 percent of our workforce unemployed or underemployed. Housing markets are in terrible shape: One quarter of homeowners are paying more each month than their houses are worth; the rates of tardy mortgage payments continue to rise. Thirty percent of American households contain someone who has lost a job and can’t find another, and yet almost all households are dependent on more than one wage earner in order to make ends meet. A quarter of all American children are now dependent on food stamps.”

This is the country we are. These are the issues that press down hard on the economy. My view of the world demands that I take these things seriously and that I support appropriate action to ameliorate them. $70 billion just doesn’t cut it. It is nowhere near enough.

So I am left, once again, with a sinking feeling. I have to ask why it is that Obama and his cadre of advisors hesitate to act on behalf on the people Reich talks about. Why is it that we, as a nation, cannot be led sufficiently strongly that we come together with enough resolution to deal with the horrible plight so many of our fellow citizens? Why is limp so popular when the problems are so muscular?

I have not re-run the numbers myself recently so I cannot speak directly to Reich’s advocacy of a jobs plan of about $400 billion. But it looks about right given that the last time I did such a calculation I thought the stimulus plan was about $500 billion short. The economy has improved a tad since then so Reich’s figure is certainly plausible.

So why is the administration not asking for something of that order of magnitude?

Politics.

Or so I am told.

The political landscape is so infested with ideological traps that we, as a nation, would prefer to wallow in mediocrity and court constant disaster, than stir ourselves to do the right thing.

I was always taught that politics is a malleable art. That politicians can shape the debate. That they can alter the balance rather than simply accept it. Obama clearly doesn’t agree. He seems to think that the ideologically crippled playing field presents a permanent constraint on his actions. He accepts this limitation and so modifies his agenda – which is certainly progressive in its underlying philosophy – to the landscape.

Hence his avoidance of the word stimulus.

Would it not be healthier for the country to be told clearly that a stimulus is necessary? That the stimulus has to be large? That it will add to our debt? And that we will all have to sacrifice at some point to repay that debt? Would this not allow the inevitable anger to be channeled constructively towards reform of the system so that we avoid future similar crises?

But I misread the lay of the land.

Instead we are treated to half measures because it’s any easier sell.

$70 billion just won’t do. They know it. I know it. You know it. Why we are being pulled through this charade is beyond me. Because we are afraid of opposition? Then challenge the opposition to articulate an alternative. Expose that alternative for what it is – more of the old Reagan/Bush same. More of what caused this mess. I would applaud the emergence of a healthy debate about our national choices. But that requires enough courage to wade into the swamp first. I call that courage leadership. It’s what we, as a nation, are lacking.

I have said it before: the debt hawks are right in the sense that we will need to reduce our deficits. There are three ways to accomplish such a reduction. Raise taxes. Cut spending. Inflation. Preferably a little of all three. But we should never be afraid to pile on the debt when it will assure our survival. Like now. In any case we need to discuss, like adults, which of the three we most want to enact. Wd cannot perpetually avoid the subject. Especially what to do about our debt.

Not using debt at the moment is a bit like refusing to lower the lifeboats on a sinking ship because we don’t want them to get wet. That’s what they’re for. We can clean them up later.

Likewise our ability to run deficits is essential in times of crisis. It’s in times of prosperity that we need to be fiscal hawks. It is apparently too hard a task to articulate that clearly. So debased is our discourse that all our politicians would prefer to avoid the word ‘taxes’, and the inevitable backlash it would create among voters. So childish have we all become that Obama is seemingly forced into tepid and convoluted policy advocacy instead of telling us straight to our faces what the cost has been, and will continue to be, of the mistakes we made over the past thirty years.

You see, the years of illusion were based on the childish notion that we did not have to make choices. We wanted to believe the sugary message that the American economy, by simple dint of being American, could defy gravity. We could consume our capital and indulge in debt ridden ways and never pay the price. The hard choices, like if we want to have a huge military with which to tame the world then we have to … ummm … pay for it, were never presented. So we borrowed.

The game worked on so many levels.

We all did it.

We all loved that inflation drove our home prices sky high. We never imagined that it was dumb luck. We all preferred to think of ourselves as clever. We were smart investors. Smart real estate dealers. Smart shareholders. And smart bankers.

And we all turned our eyes away from the flood of statistics that started to show that the wheels would come off. The illusion was more fun than the real world.

Especially, it turns out, if you were a banker.

So let me provide the link I mentioned at the outset.

Bankers live in an illusory world. Despite all the evidence of the last two years, they actually think that they’re smart. They still do. Witness their determination to pay themselves earth shattering bonuses even while the rest of us drown. They think they are skillful. They get all hissy when anyone dares suggest they cut back their egregious ways. Some of them threaten to flee to more supportive climes [ to which I say please don’t wait].

In the UK this attitude has elicited, at long last, a counter attack by the government. Over there, serious consideration is being given to a special, one time, windfall tax on bonuses. The logic is compelling: the UK government deficit is huge and needs to be closed; those most able to pay need to chip in more than those less well off; and bankers are demonstrably better able to pay. In fact they flaunt the fact. Moreover, and this is the important part, the business conditions in which bankers earn the profits that they then pillage for bonuses rather than pay on to shareholders, are set by government policy. The low rate, safety net protected, liquidity flooded, and reduced competition arena in which the big banks now play is government sponsored. It is the taxpayers largesse that permits those profits being accumulated. We set the game up that way to protect ourselves from further predation by the bankers and their ill advised activities. We did not set them up so that bankers could pay themselves massive and socially abusive bonuses.

In other words they’re not so smart after all. Not only did they just create the mother of all recessions through their collective ineptitude, but their current profitability is simply a function of our efforts to clean up after them. They owe us one. Big time.

Now, if the administration needs to provide itself with enough popular cover so that it can do the right thing and spend $400 billion on getting middle America back to work, why not go after American bankers? They’re the root cause of our malaise. Making their lives miserable would be an easy sell to the public. And they’re deserving. They can also afford to help out a good cause. A good cause such as America.

So how about a ‘Get America Back to Work Tax’ aimed at banker bonuses?

I know it will provide only a drop in the bucket of the amount we need. But the popular support could propel even our timid administration into action on behalf of the regular folks who have been left to languish in the dust while Wall Street lavishes both largess and praise on itself.

Bankers love helping charities. Since they turned our economy into a ‘charity case’, they can think of the special tax on their bonuses as a charitable contribution.

A non-deductible one of course.

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Jobs: Christmas Comes Early?

I held off commenting on yesterday’s weekly unemployment report, even though it was a generally positive one, because today we were to find out about the monthly unemployment rate.

Wise choice: the news was better than expected and, if continued, surely, marks a turning point.

The national unemployment rate fell from last month’s high point of 10.2% to 10.0%. Not much of a drop certainly, but it stops the steady rise we have been suffering. The rate of job losses also fell to a mere 11,000 in November the best performance for two years. Unfortunately that slight loss means we have now witnessed twenty-three straight months of job loss, during which time we have lost a cumulative 7.16 million jobs. It is this context that today represents such an important moment – perhaps the holidays have come early.

Yesterday we learned that new claims for unemployment insurance fell below the 500,000 mark for the first time for a long while as well.

Taking the data as a whole the picture is more encouraging than most people, including myself had imagined it would be. But before we get too carried away we should take pause: the number of long term unemployment is still rising and very high at 5.9 million or 38.3% of the total jobless. Taking the unemployed figure and combining with the ‘grey unemployment’ represented by discouraged workers we end up with a figure of 17.2% for a more comprehensive view of what the jobless situation is.

So we must take the balanced view and keep our enthusiasm for the drop in the overall unemployment rate in perspective.

Let me make two points:

  1. One month is not a trend. The decline in unemployment in November has to be backed up over the next few months as well. The key question we need to ask, and answer, is how quickly will the job market generate enough jobs to absorb that huge increase in long term unemployed workers, and to re-absorb all those five plus million people who have lost their jobs in this horrible down cycle. All the signs indicate a long slow, and difficult, improvement. I think we can congratulate ourselves if we see the unemployment rate much below 8.0% this time next year.
  2. The drag on consumption, consumer sentiment, and thus the economy that unemployment represents will thus continue well into 2010, and possibly well into 2011 as well. The cost in human terms – diminished skills as well as lost incomes – is piling up and effectively reducing our future potential. The sooner that we create sufficient jobs the better. I continue to think that policy initiatives, let’s not call them stimulus for fear of spooking the opposition, should be a priority.

With that in mind Obama has called a large group of ‘leaders’ together to discuss potential actions we can take to get the economy generating jobs. Not a moment too soon. I am always skeptical of such gatherings – I see them as attempts to create the illusion of action and thus as attempts to distract from prior inaction. At no time since this crisis began has the unemployment problem been a minor one. It should have been up front and center throughout. That we are only now getting around to a discussion about what to do seems a little tardy to me.

Better late than sorry.

Meanwhile let’s all take some holiday cheer from today’s news and the very first signs of an improvement in the job market.

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Beware: The Hawks Attack

I understand if few of you know who Charles Plosser is. Most of you don’t even care. Maybe after you understand what he said in a speech yesterday you’ll pay attention.

Plosser is the head of the Philadelphia Federal Reserve Bank. Mercifully he will not have a vote on the Fed’s monetary policy setting committee until 2011, because he is a committed interest rate hawk. He wants to raise rates sooner rather than later, if not now.

His argument is straightforward: the economy is now growing, the crisis is dealt with and we should now start to return Fed policy to its anti-inflation task. That implies undoing much, if not all, the extraordinary ‘pump priming’ the Fed has engaged in over the last year or so. This should be done with urgency and aggression since the threat from a surge in inflation is deemed to be very high.

Plosser uses all sorts of sporting analogies and along the way seems to conflate ice hockey and monetary policy as only a true ‘jock’ could. Generally I find discussing policy issues in terms of ice hockey unhelpful, but apparently Plosser thinks otherwise.

Lets see what he said:

  1. The economy is now safely on a growth track. He expects GDP to grow 3% in the fourth quarter and by that same amount all nest year.
  2. He acknowledges that the stimulus is wearing off and that the inventory adjustment is fading, but he sees consumption as robust enough to carry the load along with a slow bounce back in real estate.
  3. He talks about unemployment in what I consider glib terms. He sees it as lagging the recovery – it always does – and so the fact that it is above 10% and was rising until very recently is of no real concern. It will come back down in due course. Besides there’s not much we can do about it.
  4. There is no immediate likelihood of either deflation or inflation. Both are under control because economic conditions are generally benign currently.
  5. But: inflation is a very real threat in the medium term – two to three years hence. This is because of all that cash sloshing about the economy as a result of the Fed’s various bail out and monetary stimulus actions. This cash represents a real threat since it cannot be absorbed by growth and so will find its way into prices. Hence inflation.
  6. The argument that inflation is not an issue because of all the slack in the economy is dismissed on two grounds: first it is difficult to measure ‘slack’; and second, we have had high inflation during periods of high slack anyway – e.g. the 1970’s.
  7. Apparently the markets agree with this assessment and are concerned about inflation down the road – the highly sloped yield curve suggests a high inflation risk premium for five year and beyond money.
  8. So … drum rolls please … the Fed should begin to rein in its activities; reduce the cash in the system; and raise interest rates. This will get it back to its anti-inflation stance [a.k.a. ‘encouraging price stability’] which Plosser says is the Fed’s raison d’etre.

Where do I begin?

He may be right about GDP growth. I think he is at the higher end of the optimistic forecast range, especially for next year, but let’s allow him his 3% growth rate.

He slips right by unemployment as if it is an awkward side issue. While he agrees that it is unfortunately high, he doesn’t perceive the need for any action – unemployment will take care of itself in due course. In this he is correct. What he misses is any notion of whether that timing is acceptable – do we really want high unemployment for the next five years? And, he fails to address the obvious problem that high unemployment could undermine growth through its sapping at both consumer confidence, and more concretely, at wages available for spending. He makes no comment on either of these issues and blithley sidelines the entire jobs discussion as being secondary.

I have warned you about this syndrome before. Its the ‘sound central banker syndrome’. They just love being seen as scrooges. It gives them a puritanical sense of rectitude: they are the bulwark against the follies of mere mortals like you and me who want a more secure future along with a job. In the eyes of central bankers the only security worth fighting for is ‘price stability’. Low inflation. Once this is assured the economy will take care of itself.

This is very laudable. And I agree that stable inflation over the long haul is vital to economic health.

But we don’t have an inflationary threat. There is none. Nada.

This is where Plosser’s ideology takes over.

You see, he’s a Chicago school guy. A proud one too. To those folks economics is really simple: scale back the government so it doesn’t get in anyone’s way; abolish all regulation; let the markets rip; and keep prices stable. Oh, and by the way, it is the Chicago school that teaches that there is no involuntary unemployment. If only those workers would accept lower wages they’d all have jobs.

Given this ideology it is hardly surprising that Plosser neglects to mention that the Fed has two goals in its Congressionally provided charter: price stability and low unemployment.

Conservatives do this all the time: they look at the part of the charter or article they prefer and ignore the other part[s]. They do that with the Second Amendment all the time – the constitution says absolutely nothing about the right to bear arms outside of the context of a ‘well armed militia’. And the Fed is supposed to put equal emphasis on unemployment and inflation.

Finally, Plosser’s notion that a steep yield curve supports his argument is a common hawk position. It fails the test of even mild scrutiny. Medium and long term interest rates are now back to more normal ranges. They are no higher than they usually are in periods of GDP expansion. They are certainly well in line with rates back in the earlier 2000’s. The steepness of the yield curve comes not from high long term rates – which is Plosser’s argument – but from historically low short term rates. Why are those short term rates so low? Hmmm. Banking crisis? Recession? Credit market chaos?

So Plosser’s entire discussion is supposed to lad us to the point of agreeing that raising rates is now, or soon will be, an imperative. But nothing in his argument, not even all that ice hockey jazz, actually supports him. His is an argument looking for a problem.

Presently all the analytical signs indicate that the Fed should keep rates low. Possibly for another year. The so-called Taylor Rule, the rule of thumb analysis that balance the Fed’s two targets of inflation and unemployment, produces a negative Fed Funds rate, as low as -6%, still. This may be off the mark, but at least is has an air of analytical rigor to it. Plosser offers no such rigor, simply an ideological viewpoint. Given a choice between analysis and Chicago school ideology I would prefer to put my money on analysis.

Keep rates down for a while yet.

Are there risks to this? Absolutely. The biggest being that our hyperactive banks will use those low rates to gamble and thus inflate a new bubble. There are signs that this is already happening in emerging market stock and asset prices.

But the downside risk to low rates is more than offset by the damage a rate hike would inflict on our economy.

If you believe, as I do, that growth is fragile, then a rate hike runs the risk of plunging us back into recession. There is too much rubbish still cluttering up bank balance sheets and more is on its way via the commercial real estate market. A second recession could undo all the good work we have done in patching up [but not fixing] the banks. So a double dip recession represents, to me at least, a far more dire threat, than that of excess liquidity slopping about global markets.

Basically it all comes down to whether you think unemployment matters enough to be a focus of policy.

To me it does.

To hawks like Plosser it doesn’t.

So beware: the hawks attack!

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More Debt Hysteria

I have often wondered how easy it would be to write a completely silly article and still get it published. Now I know. Emund Andrews did it this morning. You can read his foolery on the front page of the New York Times.

Yet more debt hysteria I am afraid.

This is getting a little monotonous, but as in any epidemic, we must not let our guard down. We must confront this hysteria front on wherever we come across it. I just didn’t expect to find it on the NYT front page.

What really annoys me most is the amazing lack of analytical thought going into these articles. They simply seem to be a re-hashing of the same tired, and by now thoroughly debunked story. This is, of course, familiar territory: there is a school of thought out there supporting the notion that repetition can convert a falsehood into a truth. So we are bombarded with ever increasing frequency about the impending perils of America’s debt crisis.

It would nice were there some facts to document this crisis. Apparently I am asking too much.

But a crisis is assuredly is because Mr. Andrews breezily asserts so. Or more to the point he simply wonders aloud about the consequences of said crisis, presumably taking its existence as a given.

So allow me to be boring. Let me talk facts. I realize it’s less inflammatory and makes for a dull headline, but, given the enormous consequences of incorrect policy actions, I think we need to be quite sober when we discuss our national debt.

So without the hyperbole here goes.

Taking a look at the way in which our budget has fallen afoul of the recession we need to pick apart the causes of the rising Federal deficit. That is to say we need to know why we are in debt. To do this we should compare budgets, one put together before the crisis, and one that includes all the actions and expenses of the crisis. Given that we are supposed to be facing a tsunami of debt we need to look out a few years so we can identify when we get swamped. So lets look at our forecast budget out ten years. The ‘before crisis’ budget was about $8.3 trillion better off than the ‘after crisis’ budget. So the hysteria is over that addition of $8.3 trillion to the debt. As a proportion of GDP this addition drives the US debt ratio from about 40% up to around 70% over the ten years – a significant jump. Significant enough to cause all this panic.

Now let’s look at the books:

  1. First we see that projected discretionary spending does indeed increase. Somewhere in the region of $1.3 trillion over that period. This is the category that covers stuff like bail outs and stimulus packages. So this is where Obama’s fiscal folly would be accounted for.
  2. Second we see that debt servicing – the cost of paying interest on all that debt – also goes up. In this case by about $1.5 trillion also. Now let’s be clear here: much of this cost is baked into the numbers because the debt already exists. The Treasury has been active in extending maturities lately to take advantage of low interest rates. But there is also a huge amount of short term debt that needs constant refinancing and so could be re-priced at higher rates. Given that short term rate are practically zero currently any move would be up. But the budget allows for that. So let’s go with the budget figure.
  3. Next comes mandatory spending on things the law says the government has to do. That goes up about $0.8 trillion.
  4. So, thus far we have accounted for a big chunk of the deterioration between the ‘before’ and ‘after’ crisis deficits: $1.3 + $1.5 + $0.8 = $3.6. Hmmmm. The total dent in our finances is $8.3. We have not accounted for over half the problem, and yet we have accounted for all the changes in spending. I wonder what could create that other chunk? We need to find another $4.7 trillion.
  5. Well its the recession stupid. By far the biggest reason our budget appears in the hole right now is because there’s a recession going on. Whoops we forgot about that. Revenues have imploded. Tax intake has dropped like a stone. That’s the big issue here. Revenue decline accounts for over 50% of the debt bulge everyone is getting panicked about. Sorry everyone but we don’t have a spending issue we have an income issue. And a temporary one at that.
  6. Even more: the after crisis budget has a much reduced number for GDP in 2018. That means any ratio of that figure is going to be higher than it would have been had GDP not been reduced. This phenomenon is called arithmetic. So naturally the debt looks a lot worse – that 70% number – when the debt is expressed as a ration of a recession hit and therefore shrunken GDP.

This is why I get annoyed. The tsunami becomes a normal wave when you look at it clearly.

Obama’s reckless budgets are not our problem. The recession is. I thought we knew that by now.

Apparently not.

Once the economy starts to grow much of the deficit melts away of its own accord because Federal revenues will recover. This is not including any tax increases, or even the elimination of the infamous Bush tax cuts that created a far larger deficit issue than all the bail outs and stimulus added together.

This is what we call a ‘cyclical’ debt problem. Bush created a ‘structural’ debt problem by cutting revenues and getting no increases in GDP or cuts in expenditure to offset that loss. The Bush deficits are the permanent bit of our problem.

In contrast the bail outs and stimulus spending is temporary. Yes they added to our debt. But the deficit won’t stay that way. It will shrink as soon as we get going. Leaving us the Bush debacle to fix. If we have a debt problem it’s that one, not the one caused by recession.

I hate having to belabor all this, but it is vital we separate the issues so we can deal with them sensibly.

The US has long term fiscal problems. It has Social Security and Health care costs that need controlling. More importantly, ever since Reagan began to use the Social Security surplus to offset the regular budget deficit we have managed to avoid looking at the true gap in our everyday spending. Reagan was the first president to use a combined budget. Up until then we saw two budgets: one for the everyday stuff, and one for Social Security. So for thirty years we have been bamboozled into thinking our budget was in better shape than it is. That way we could avoid having to cut or control costs. This was vital to Reagan because he wanted to inflate defense costs and hide the impact – basically he used debt and Social Security income to fund defense. The key he wanted to get around was having to raise taxes to pay for that defense build up. His great twin legacies were the loss of truthful accounting and the illusion that borrowing could go on interminably.

The irony now is that it is his ideological successors who are raising the panic about deficits and debt – these are the very folks who looked away during the Reagan and Bush debt frenzies.

So there you have it.

Yes our debt ratio will get worse. We’ve just been hit by a horrendous recession. Duh. And, yes we can pay for it – it is all very manageable – as long as we get our economy humming again. It will take a few years for the debt levels to fall back to more ‘normal’ levels, but frankly we haven’t had ‘normal’ levels for three decades anyway, and we might not get back there for three more decades.

The key is to remember why the debt ballooned, and to keep our focus on the really big job at hand. That is to get the economy growing sustainably. That means jobs. It might even require more debt. The number one task right now is still recession fighting. We can begin the switch to fiscal rectitude afterwards.

Let them eat cake is not a particularly palatable economic policy, but it is the logical outcome of this bout of debt hysteria. If we get our priorities backwards and look to balance budgets and reduce debt loads before the economy is safely back on track then we run the risk of repeating the 1930’s. Allowing the bond market – or rather the supposed bond market since the actual one doesn’t seem too worried at the moment – to take priority over things like jobs programs is dooming us to a decade of horrendous human cost. That road is known to us. It is an ugly one.

Which is why we need to defang this hysteria before it sweeps us in the wrong direction.

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