Is Debt Really the Problem?

With a record growth of the debt, it has become a central topic of the campaign.  The Republicans prominently displayed a ticking debt clock at their convention to remind voters of the debt crisis looming.  Their focus is misguided.

Debt can be a serious issue but to understand its relevance it cannot be considered in isolation.  As an individual, if you were to take out a loan to invest in your business you would expect to earn income from the proceeds to repay the loan and hopefully earn a profit as well.  You may be wrong and you may not profit and may even default on your debt, but at least the intent is to use the debt for productive ends.  Perhaps you could add a wing to your house and hope to regain the value when you sell or refinance your house.

Or you could use the debt proceeds to take an expensive vacation or gamble in Vegas, clearly a non productive use.  The debt itself is neither good nor bad, but how it is spent makes a difference.

Even for productive purposes one can have too much debt and thus be at greater risk if expectations are disappointed.  The Wall Street collapse was largely about too much debt and the resulting inability to navigate a downturn.

Politicians confuse consumption with investment.  They hope that by using the word ‘investment’ voters will be less likely to recoil from the expense, particularly in a time of increasing debt.  But putting lipstick on a pig doesn’t make it a chicken.

Perhaps one could make the case that spending on education and roads will yield tax revenues later, but that case is hard to make with many other federal programs such as unemployment benefits and birth control.  Aside from the obvious moral issue economic growth requires a growing population, and funding a reduction in the population growth reduces economic growth.

Economic growth is the larger issue.  This recovery is less a result of the growing debt than it is a result of the stagnant growth.  At this stage of a recovery GDP growth has historicallyreturned to the mean or even surpassed it to make up for the period of time during the recession when it was below the mean.  This has distinctly not happened during this ‘recovery’. While one may be inclined to blame the previous administration for the recession, the current administration must take responsibility for the failure to recover.

Reagan came into office after a decade of high inflation, stagnant economic growth, high interest rates, and very high unemployment.  He increased the debt by a trillion dollars, but also lowered taxes, considered reckless by many of his own party who were obsessed with the debt,  but in doing so he let loose an economic boom that increased private wealth by 16 billion dollars.  Foreign capital flooded into the United States.

This growth in private wealth continued and was the critical reason Clinton was able to balance the budget.  Clinton even double downed on Reaganomics by further cutting taxes on dividends and capital gains. It was this growth in private wealth that made it feasible to cut the number of people dependent on welfare.

One could also argue that Reagan’s debt was an investment to end the Cold War, but that may have been a lucky break. But it does make the point that economic might was vital to increased national security. It remains to be seen if it will be as effective in fighting non state terrorist entities mired in poverty and religious tribalism.

W Bush inherited Clinton’s surplus. He also faced Y2K, the Dot.com collapse, the explosion of corporate frauds and collapses such as Enron and Worldcom, and 9/11.  His tax cuts and the Fed’s easy money had the desired stimulus effect, but the ensuing debt  was spent on less productive investments such as an expensive senior benefit and two wars.  The benefits of the tax cuts were muted by the fact that they had an expiration date.  When the Democrats took Congress more and more voters expected the cuts to expire and their potential benefit was great lost in its final years in the uncertainty of the growing class warfare.

When the Democrats took the House minimum wages increased 40% in less than two years, just before the economic collapse which Obama inherited.  The stimulus and ensuing debt was not spent to stimulate productive enterprises, but was used to extend unemployment benefits to a new record and support other non productive initiatives.  The Affordable Health Care Act and Dodd Frank took us in the opposite direction from stimulating business growth. And the talk of a union card check bill and cap and trade further stilled business growth. Imagine how bad our economy would have been if those initiatives had passed.  Further talk from the political podiums of raising taxes on the rich and the investors, and the reality of tax increases already passed but not yet enacted, is precisely the opposite of what is needed to stimulate the economic growth that is necessary.  It is precisely the opposite of what Reagan and Clinton did.

If the approach to the debt is to raise taxes the problem will only worsen for it will further retard the economic growth we must have.   The current policies have caused a net outflow of investment capital from the US for the first time since WWII.  Again this is the opposite of what happened under Reagan.

The debt is important, but the more important focus should be on removing the shackles to growth in the private sector that this administration has created.