What in the world is Robert Reich talking about?
When I was a small boy at the start of the 1950s, my father gave me my first economics lesson. “Bobby,†he said with obvious concern, “you and your children and your children’s children will be repaying the national debt created by Franklin D. Roosevelt.â€
I didn’t know what a national debt was, but I remember being scared out of my wits.
Dad was wrong, of course. Even though the national debt then was a much higher percentage of the national economy than it is today, it shrank as the economy boomed. My children have never mentioned FDR’s debt. My granddaughter (almost 2) will never pay a penny of it.
Courtesy of the very useful U. S. Government Spending blog I have posted a graph illustrating the federal deficit in real dollars from 1930 to the present. The area under the curve represents the cumulative deficit. Essentially, it’s the amount that’s been added to the debt.
Note carefully that the tiny dips below the baseline, times of surpluses, in the 1950s and the larger one in the 1990s have never equalled the areas above the baseline, times of deficits. The relative size of the economy is irrelevant to whether we’re continuing to pay interest on the debt of 70 years ago. Only the areas under the curve matter for that and, as you can see, the cumulative real surpluses since 1950 have never equalled the deficits
Now I suppose there’s an argument to be made somewhere about the role of intragovernmental loans in all of this or, said another way, the way in which surpluses in FICA have been used to offset the shortfalls in other revenues to boost spending. Unless you’re arguing that default on Social Security or reducing Social Security benefits to the level of FICA receipts is a viable alternative, it’s merely sophistry. Go ahead, make my day. I eagerly await Dr. Mr. Reich’s arguing that we should limit Social Security spending to the level of FICA receipts. Now might be a good year for it since by all indications revenues will fall below outlays.
You could also argue that we’ll never pay down on the principal sum of the debt. I doubt that Dr. Mr. Reich’s granddaughter will take much solace from that since she’ll be paying interest on that amount, in all likelihood at ever-increasing rates, for the rest of her life.
I don’t remember to whom I said this but just the other day I repeated something that I believe: governments are just like families. It’s okay to go into debt for large capital investment-type purchases that you’ll pay for over time, e.g. a car, a house, a college education. It’s not okay to go into debt to pay the electric bill or the rent. If you must do that, you need to economize.
I might add that education is only a capital investment if you choose a field of study that will make a return on the investment. I’m not denigrating learning for its own sake. If you elect a major in art history or French literature, it’s like going to the theater. It’s something worth doing but it’s an operating expense rather than a capital investment.
Of course, there are some big differences between families and the federal government, too. The federal government can print money. You could argue that we’re going to inflate our currency to the point where the debts we’re incurring now no longer matter. I don’t take much solace from that and I doubt that Dr. Reich’s granddaughter should, either. I note that China is talking about letting the yuan rise against the dollar.
Here’s something I will leave as an exercise for the interested student. What rate of growth would we need to sustain and how long would we need to sustain it in order to pay down the debt we’ve incurred over the last three years without cutting federal government expenses, the bulk of which are defense, Social Security, and healthcare, or reducing the growth in employment below the level we’ll need to put a good chunk of the people who’ve lost their jobs over the last couple of years to work? I’ll give you a hint: we’d need to grow faster over a longer period than is reasonable to expect of a country of our size, level of development, and in our niche of the world’s economic ecology.
Saying it doesn’t make it true, Dr. Reich. We’re still paying FDR’s debts. I’ve been doing so all of my life and am content to do so for its remainder. Fighting World War II was something we genuinely needed to do and we couldn’t do it except by shifting its costs into the future.
Context. Wasn’t it Greenspan who suggested in 2000-2001 that it was somehow bad to not carry some debt? We had surpluses for several years, but he was concerned about those going on to the point of not carrying any debt. I would have to reread that since it never made much sense to me, so correct me if I am wrong.
In order to pay down the debt, we need growth above what is needed to match population growth. IIRC, that is in the neighborhood of 3%. The other thing we need is to control medical care costs. If we can reduce the actual costs of medical care, we reduce Medicare and Medicaid, the biggest part of the increase in entitlements. It should also, in theory, return money into more productive areas of the economy.
I remain concerned about our lack of innovation. My current theory, which changes too often, is that when economists look back on the last ten years, they will see that that we had an innovation shortfall sort of like what we had in the 70s and 80s which lead to decreases in productivity. In this case, part of our problem was siphoning so many people into a financial sector that innovated and made money for itself, but no one else while eventually crashing the world economy. Imagine if all of those bright young folks had gone into engineering or something useful.
Steve
The growth in the 1990’s was founded on 20 years of capital investments by businesses which really didn’t start paying off until then. My argument against the tax cuts of the early part of the current century was that we hadn’t seen a decline in consumer spending but in business investment and that the tax cuts would mostly spur more consumer spending rather than more narrowly targeted tax cuts that focused on increased business spending.
As long as the only likely jobs are in healthcare and government, we’ll see more students taking majors which lead them to jobs in those sectors. If we want to see more engineers here, we’ve got to see more jobs in engineering here. The number of new electrical engineering jobs in the U. S. 2001-2005 was roughly the same as the number of H1-B visas issued for electrical engineers 2001-2005.
‘s. If we want to see more engineers here, we’ve got to see more jobs in engineering here. ”
I knew you were a demand guy. 🙂
Steve
I want to thank you, Dave, for posting what is one of my favorite graphs. There are certain observations that naturally come from this graph, that I will once again make. They have been routinely pooh-poohed before when I have made the case, perhaps you will have better luck.
First, let’s set aside the partisan BS. If memory serves, the last balanced budget was in 60 or 61. Look at the graph. Setting aside academic smoothing exercises, just look, this country has run consistent and increasing annual deficits for 50 years. (Excepting the fraudulent accounting and bubble induced late 90’s situation – Anyone who wants to defend that is an idiot and not worthy of debate.)
So what are the drivers? Entitlements like SS and Medicare/aid……and an endless stream of new or expanding government departments: Education, Agriculture, Energy……etc.
And I haven’t even mentioned cost shifting to state and local.
Dare I say the one national government expenditure that behaves as a businessman, or economist, might like? Defense. I don’t know what the “right” defense expenditure number is. But I do know it has declined as a percent of our collective resources (GDP) in the timeframe we are talking about from, oh, 10% to about 2-3%. And filling in the spending opportunity right behind have been these social expenditures, with no change in trajectory in sight.
As your friendly LBO man I’m certainly no reflexive adversary to debt. But Dave makes the correct observation, in my opinion. We can take on debt for any number of time financed investments like cars, houses, working capital (inventory and receivables financing for growing business) or new manufacturing capacity. That’s natural. Further, we can take on risky and return enhanced investments. All good.
And perhaps (OMG, here comes my UofC stuff – what is optimal cap structure!!) the US had a period in its history where debt to GDP could grow. But folks, we are beyond that now. We are drunken sailors.
So lastly, Dave asks – “what rate of growth?” And hence my Obama invective. The right number? I have no clue. All I know is that bending the two curves: cost and revenue (GDP) will eventually work. The time frame? I dunno. I just know from financing and investing in businesses for 20 years that if we get moving on the right direction it will be OK. Capital markets forgive. But with this Obama crew? Ideological marching into the ozone.
In our businesses, we have the will and expertise to change those curves. Sometimes it takes 3 years, sometimes 5, sometimes 7. But it works. Its made me wealthy, and our companies successful, with the attendant benefits of job creation and, sigh, taxation. Obama, and Obama supporters are guys who are ideologically beating their heads against the wall. Government is just terrible at this exercise.
End of sermon. But my head is in the right place. The left, not so much.
Simple arithmetic tells you that the greatest drivers of deficits at the federal level are rising costs of Social Security and the various healthcare subsidies. When you venture a little beyond the federal government to state and local governments, you find that the most important driver of deficits is rising healthcare costs. After that public employee pensions.
Education costs (fifty states+federal government) are at roughly the same level as Social Security.
However, I think that the most important factor (as opposed to driver) is the ratchet effect caused by every spending program having a constituency that will fight to the death to preserve its mite.
Dave –
Understood, especially your last paragraph. So count me as one who would not approve one more program………
Robert Reich is a lawyer, not a PhD, calling him a doctor is kind of…weird.
He likes to write on economics, but his over all training in the topic is, best I can tell, extremely informal and ad hoc, hence his often sloppy statements.
Thanks for pointing that out, Steve. I was under the misapprehension that he was an economist. It explains a lot.