Fearing More Than Fear (Updated)

The only thing we have to fear, in Paul Krugman’s view, is a Congress without the maturity to deal with the problems posed by the debt we’re incurring now:

Right now deficits are actually helping the economy. In fact, deficits here and in other major economies saved the world from a much deeper slump. The longer-term outlook is worrying, but it’s not catastrophic.

The only real reason for concern is political. The United States can deal with its debts if politicians of both parties are, in the end, willing to show at least a bit of maturity. Need I say more?

Be afraid. Be very afraid.

We are more than 70 years removed from the Congress of the 1930’s that he points to. Today’s Congressman is far more likely to view the job as a lifetime appointment, far more likely to be a career politician, far more likely to be a lawyer than his counterpart of 70 years ago would have been. He is less likely ever to have run a business other than a politically-connected one, ever to have made a payroll, or ever to have had lives depend very directly on his leadership.

And the federal government of today already looms four times larger in the country than the federal government of the 1930’s did.

In the end there are only four ways for the federal government to deal with increased indebtedness: higher taxes, lower spending, more economic growth, or inflation. Inflation will hamper the federal government’s further ability to borrow and will injure members of two of the Democratic Party’s core constituencies: the urban poor and those living on fixed incomes. Higher taxes, particularly higher taxes on business where we have among the highest taxes among developed countries, will reduce growth. That’s something that would be very imprudent when your unemployment rate is in double digits.

Will the Congress have the heart to reduce spending? It’s hard to imagine a Congress that’s in the middle of the biggest buying spree in history making a U-turn to rake back all of that lovely spending.

More economic growth is the strongest and least painful tool with which to fight indebtedness. Unfortunately, today’s Congress knows less, if anything, about what leads to greater economic growth than the Congress of 70 years ago did. I can make a suggestion.

It won’t be through greater education or more healthcare. Faster economic growth will come from increased capital spending by businesses, impossible without a solid financial sector and while businesses are holding on for dear life waiting to see what comes next.


James Hamilton points to the blog Political Math which observes, literally, graphically that the problem with comparing 70 years ago to today is that 70 years ago we righted our fiscal ship by cutting spending, defense spending in particular which was by far the largest component of the federal budget. We can’t make up $9 trillion by cutting defense spending. We don’t spend enough on defense for that to be realistic.

What spending can we cut to make up a $9 trillion hole?

Dr. Hamilton concludes:

If the government tries to double taxes on people like me, it’s in real political trouble. If it doesn’t try to double taxes on people like me, it’s in real solvency trouble.

It looks like we may have a problem here.

26 comments… add one
  • steve Link

    Just a few points. First, I would hope you are familiar with the Romer paper looking at taxes and its effects on GDP. One part often neglected in that paper, is that taxes raised with the express purpose for paying off debt did not affect GDP very much. In particular, the bond market seemed to like it. Small n to be sure.

    Which party is going to reduce spending? Look at the last 30 years since the ascent of conservatives in the Republican party. It just isnt going to happen with either party. Forget it. All those Pew polls showing that when asked to choose what people would actually cut, the only things they can agree on are big spenders like NASA.

    Economic growth is the least painful option. We might not want to follow the example of the last 8 years. Going through a pessimistic phase, I still do not see where demand will come from. Businesses arent going to spend if no one is going to buy. The financial sector needs fixing but I dont see this happening for a while, if ever. As a practical matter, it seems unlikely that there will be major proposals for change while the economy is so tenuous. Once things do get a bit better, Wall Street will claim that it lead us back into prosperity and there will be major resistance. Wall Street will not reform itself from within, and we do not have the political will, maybe not the knowledge either, to reform it. (FTR, I am in favor of simpler but broader reforms. Limit size, separate investment from commercial. Then, let them fail if they fail. You have shown us you are smarter than regulators and have no moral principles.)

    Last thought. One could make a case that it has been our long term educational advantages that have kept us at the top of the heap for so long. That and the World Wars.


  • Education has little or nothing to do with economic growth once you’ve disaggregated the effects of barriers to entry in some fields from the educational requirements. Skill set, yes. Education in the abstract, no. A critical problem is that we’re not creating jobs for people with educations to do.

    India has more than 50 million college graduates and has the potential to produce more college graduates than the United States has population. The notion that any activity that can be done over the Internet will be useful for the U. S. economy regardless of how much education is required is just living in the past. Just for the record, yes, I think that U. S. radiologists are in for a world of hurt. Only legal barriers can save them.

    Note, too, that those with college degrees or post-graduate degrees other than professional degrees aren’t fairing much better than those without higher education in the current downturn.

    Plumbers and electricians make more than people with college degrees alone (who aren’t plumbers or electricians). It’s the barriers to entry not the education.

  • steve Link

    Sorry, was speaking from more of an historical perspective on education. Going forward, education is still important. We will not be a world economic leader by having the most electricians. having the people who create the new electrical devices will make us wealthy. That means physicists and engineers. I am unfamiliar with barriers to entry that will stop people from entering the field of developing new electrical devices. New almost anything for that matter. I assume you are thinking more about union and guild effects by existing professions. Removing those will allow us to spend less on existing services, but not necessarily lead to long term innovation and growth .

    BTW, excellent paper by Chinn and Frieden on debt.


  • Sorry, Steve. Physicists and engineers can’t get jobs here because we aren’t creating jobs for physicists and engineers here. Instead, the number of post-docs is rising rapidly.

    The jobs are being created where the manufacturing is and that’s in China, India, Taiwan, Thailand, Singapore, and so on. The only way that we’ll get a lot more manufacturing here is with a lot more capital investment here.

    The number of jobs created for electical engineers here in the U. S. for the last seven or eight years has been roughly equal to the number of H1-B visas issued. Meanwhile the unemployment rate for electrical engineers here is the highest it’s ever been.

    Producing more electrical engineers or physicists won’t solve that. Especially not when there are schools in India (in particular) that are turning out EE’s by the thousands to spec, i.e. specifically trained to fill the H1-B visa slots.

  • steve Link

    I have made some half hearted attempts to research this. My son is already being recruited by a local university which has a highly rated engineering program. I have talked a bit with several of the professors and they claim, yes I know, that there is a lack of US grad engineers and that there are many job opportunities, the current economy reducing those some. I have probably read 20 or so articles and have come away with completely conflicting opinions depending on whom you read. The engineers in the family, quite a few, claim that industry needs engineers still, but frequently fires them to hold down costs. If you have any definitive data would appreciate posting it sometime.

    See the following link to see what I mean.


    “- The unemployment rate for electrical engineers reached 8.6% in the second quarter of this year, a record-setting number and double the unemployment rate for the group in the first quarter, according to the IEEE-USA.

    The last time the unemployment rate of electrical engineers was anything close to this year’s second quarter level was in 2003 when it reached 6.2%. By the following year, the unemployment rate for electrical engineers dropped to 2.2% and continued falling until 2007, reaching 0.9%, its low.”

    If there was a worldwide shift, I would not have expected 0.9% in 2007.


  • In the rarified precincts of ivory tower of Nobel Prizedom, the erosion and collapse of the manufacturing base means less than nothing to such high falluting intellects, of course. The fact that the government has encumbered itself with the greatest speculative bubble known as derivative securities to the tune of untold hundreds of trillions, why that is irrelevant saith these Laputan folk. Besides Hamilton’s report on manufactures where he establishes the there exists a physically productive economy and attacks Smith’s Wealth of Nations by name is so 18th century. “Why we live on our floating island of Laputa on information alone now” they declaim commiserating with my ignorance. But why should I cast these topics before such celebrated professors in the first place? A fools errand I’m sure.

  • Andy Link

    Krugman’s take on deficits seems a bit different now than a few years ago.

  • Reliable employment statistics on physicists, in particular, are notoriously hard to find. The best proxy is post-docs. The more post-docs the fewer real jobs.

    A few weeks ago I posted a link that showed the number of post-docs has been rising sharply in recent years.

    There are statistics (somewhere) on the IEEE site showing that EE employment stalled from roughly 2000 to 2006. There’s been a little growth since then but not enough to make up for the loss of jobs in the first part of the decade.

    The additional question is how many engineers are working as engineers? I know of lots of engineers who are working as computer programmers. How that translates into a need for more engineers isn’t clear to me.

    I suspect that anybody who’s actually worked for a manufacturer (as I have albeit years ago) can verify that engineering goes hand in hand with manufacturing.

  • To be very clear about my position, I agree that more engineers and scientists will be necessary if we are to maintain a healthy economy. However, I think that Americans are shrewd consumers and won’t spend the time, money, and effort to secure degrees that don’t have jobs that pay decent salaries waiting at the end of the line.

    And that will need a complete sea change in the United States away from the healthcare and financial sectors towards the manufacturing sector. I don’t see that in the cards.

  • PD Shaw Link

    I have a brother-in-law that is an engineer with a major manufacturer, and he filed for unemployment recently as a result of forced furloughs (Two separate weeks this summer, potentially all of December) I don’t think he’s worried about job security, but I’d look closely at unemployment figures that might catch temporary situations. I didn’t know you could collect unemployment for successive furloughs.

    But he also mentioned that the foreign engineers working on visas are concerned that the furloughs will result in a legal obligation to leave the country since they are technically unemployed. BTW/ my brother-in-law had his masters degree (and perhaps some or all of his undergrad degree) paid for by his employer. I wonder how much of that relates back to making a case for H-1B visas.

  • Drew Link

    A few musings:

    1. Don’t worry, send the son to engineering school. They learn how to think critically and then can do just about anything in the world……………like be a private equity investor. Sorry, that’s a wise-crack, but true. Seriously, engineering is a fine profession. But the most versatile version is mechanical engineering. Electrical, chemical etc are fairly specialized.

    2. Perhaps the education vs skills discussion was dancing on the head of a pin. For sure, if you want to be a plumber, you need a finite set of skills…………vs having spent hours studying Skakespeare and Kant. I suspect the latter student however, if not a pinhead, will have greater versatility and career upside.

    3. As you might suspect, I’m admittedly horribly biased. In the end entrepreneurship and technological advance are the roads to economic growth and getting national finances back in order. We had a technological surge a century ago with electrification and “modern” manufacturing techniques. We just went through an information wave. Not sure what might be next, but we may have seen the last tech wave of our working lifetimes.

    So that leaves entrepreneurship. Which is why I simply loathe the current President’s stance, and the Reid/Pelosi mentality.

    Taxing to death the golden goose, regulation, greater government as a share of GDP, chasing industry away for the benefit of unions or the gleam in the eye of “green” energy etc etc is all counterproductive. In fact, its suicidal.

    I share the pessimism expressed about gov’t. cost cutting. Although I have been round and round with Bernard Finel on this, noting that we have a term in our private businesses for managers who cannot find a way to reduce costs: “ex-managers.” But I’m just not sure we have the political will or voter understanding to call BS on our politicians when they invoke “so cut what?”

    4. And as for Krugman, please. As someone pointed out, that guy changes his views on a dime depending on the political wind. He’s today’s Lester Thurow, who sees government intervention as the source of all solutions. Ignore him for peace of mind, hear him at your own peril.

  • Drew, as I’ve said before (even in this thread), I believe that growth comes from capital investment.

    Consider the “technical wave” you referred to. The technical wave followed quite literally decades of investment, decades during which very little in the way of return was realized. I can show you cover articles from Fortune and other business mags in the late 1980’s complaining that the investment in PC’s hadn’t paid off. It didn’t. Until it did which was when the Internet (another longterm investment) was added to PC’s and it created the world we see around us.

  • As far as career advice goes, the only thing I can suggest is follow your bliss.

    I have eight nephews and nieces. One starts his second year of pharmacy school this fall. Another has just begun med school. Another has entered graduate school to become a museum curator (?!). Another seems to have landed on his feet as a salesman for ATT. Another is aiming for a career in journalism, which would seem to be a losing proposition except she’s so darned good at it.

    The last two are still searching. I avoid giving advice.

    If I knew then what I know now I might well be a lawyer. One of these days I need to write a post on the turning points in my career history. The first was when I turned down the job I was offered by the CIA. The second was when I decided not to go to law school.

    The third major turning point was when I decided to go off on my own. That was more than 30 years ago.

  • Andy Link

    Engineering is pretty depending upon specialty. For example, a good friend of mine is a metallurgical engineer who, until recently, worked in the auto industry. Now she’s trying to build her own business – one unrelated to engineering.

    My wife is a nuclear engineer, currently working on her PhD. She’s in the military currently, but her prospects once she gets out are good. There are few nuclear engineers and many are retiring. Another good friend is a mechanical engineer. He has consistently done well since graduating in the early 1990’s.

  • Brett Link

    And that will need a complete sea change in the United States away from the healthcare and financial sectors towards the manufacturing sector. I don’t see that in the cards.

    That’s probably impossible at this point – the US economy is too large, and the manufacturing sector (worldwide, not just in the US) has become too efficient and productive. The only way you could potentially reverse that would be by a slide back into protectionism (which would lower living standards in the US, but probably wouldn’t be as bad as in some other countries due to the US’s gigantic domestic market), and even that’s no guarantee: the Service Sector was already the largest sector in the economy as early as the 1930s (when the US and the rest of the world were in the grip of steep protectionism), and growing.

  • The problem with nuclear engineering has been the same for nearly 40 years: zero job growth. In order to get a job as a nuclear engineer, a nuclear engineer has to retire or die. Under those circumstances you don’t look for a job in the want ads but in the actuarial tables.

  • Drew Link

    “Drew, as I’ve said before (even in this thread), I believe that growth comes from capital investment.”

    If it wasn’t obvious, I agree 100%. Entrepreneurship = sweat equity plus capital investment.


    “For example, a good friend of mine is a metallurgical engineer who, until recently, worked in the auto industry.”

    Said metallurgical engineer is a great Amarican, no doubt a gentleman and a scholar (or gentlewoman) and an all ’round superior being.

    Regards, Drew
    BS – Metallurgical Engineering 1981
    MS – Metallurgical Engineering 1984


    Re: manufacturing. “That’s probably impossible at this point – the US economy is too large, and the manufacturing sector (worldwide, not just in the US) has become too efficient and productive.”

    I have to disagree. As an investor predominantly in manufacturing companies I have to tell you that manufacturing efficiencies, better strategic direction and wise capital investment can render many US companies more competitive with bright growth prospects. I’ve lived it.

    Now, if saddled with horrible public policy like green taxes, new mandated health care expenses, increased levels of income taxation etc then no, I don’t think US manufacturers’ interests – and their employees – are being well served or have the best possible outlook. Now, everyone lamenting the plight of US manufacturing, raise your hand if you voted for Obama.

    “Under those circumstances you don’t look for a job in the want ads but in the actuarial tables.”

    Eewwww….. Or the French want ads.

    Too bad the whackjobs couldn’t decide if they wanted nuclear hysteria or to save the world from CO2. We could have a thriving nuclear power industry, much less angst over Middle Eastern policy and be spared the insufferable Al Gore (which may be the biggest penalty of them all).

  • steve Link

    I mostly agree with Drew above, but to his equation I would add basic research. I think too many people see a hard line existing between academia and industry. I see a lot of back and forth. The guy who makes the the basic science discovery may decide to start a company and make money off of the idea.


  • steve, the track record for basic science research as an engine of economic growth in this country is pretty poor but the track record for mass engineering projects which include building the railroads, electrification, the Manhattan project, the space program, and the Internet (DARPANet) is pretty darned good.

    That’s why I argued for substantial funding for the smart grid as part of the stimulus. While the Obama Administration was throwing money around, they might as well have thrown it at something worthwhile.

  • Andy Link


    That’s true. It just so happens that the retirement of nuclear engineers is peaking. My wife, however, is unlikely to go that route – it’s more likely she’ll stay in government, where nuclear specialists with nonproliferation experience are in high demand. Yay for us on government sector job growth I guess.

  • It just so happens that the retirement of nuclear engineers is peaking.

    Timing is everything.

  • Brett Link

    What’d you need would be basically a combination of announcing (and actually funding) a massive nuclear power plant construction drive, as well as a grant program for tuition to do the nuclear engineering program. As is, there already is some demand appearing in the nuclear engineering job market due to the (tentative) resurrection of the industry, but almost no graduates going into it.

    Or, if you want the power but don’t really care about the jobs, you could probably rely heavily on French expertise while you train the next generation of nuclear engineers in the US. The French are the major players in the UK’s plans to re-start the nuclear power industry there, and their nuclear power companies are always looking for room to expand.

  • Andy Link


    Ran across this, which I figured might interest you.

  • Thanks, Andy. It would have been interesting to see those numbers extended beyond 2000 since employment in engineering and hard sciences has declined since then.

    Note that most of the growth isn’t in science or engineering at all but in “science” and “engineering”. Social workers aren’t scientists. In all but a very few cases systems engineers aren’t engineers.

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