Perseverating

Perseverating on the lacklustre deal that the President and Speaker are inching towards, I see that Nick Gillespie and Veronique de Rugy have pointed out the elephant in the room:

In a paper released this year, economists Carmen M. Reinhart, Vincent R. Reinhart and Kenneth Rogoff said that periods of debt overhang — when accumulated gross debt exceeds 90 percent of a country’s total economic activity for five or more consecutive years — reduce annual economic growth by more than one percentage point for decades.

Over 20 years, the authors write, there can be a “massive cumulative output loss” that reduces gains by 25 percent or more. The U.S. went over the 90 percent threshold after the 2008 financial crisis. At $16.3 trillion, our current gross federal debt represents more than 100 percent of 2012’s total economic activity or gross domestic product.

The challenge therefore is to produce real economic growth in excess of 2% per year without adding to the debt. I remain unconvinced that simply spending the money for additional spending into existence will not produce far worse consequences than slow growth.

When borrowing is counterproductive and just spending is intolerably dangerous, what can you do? My answer, as it has been some time, is to bite the bullet and stop doing things known to be economically inefficient in favor of doing things that at least have a chance of being more efficient. I’ve given examples of that in the past.

We’re not in this fix because of the 2008-2009 recession. We’re in it because spending has exceeded revenues by too large a proportion of GDP over the period of the last forty years and, when a severe recession actually emerged and timely, prudent, counter-cyclical spending might have done some good we a) already had too much debt; b) didn’t produce a timely stimulus; and c) didn’t spend prudently.

10 comments… add one

  • We’re not in this fix because of the 2008-2009 recession. We’re in it because spending has exceeded revenues by too large a proportion of GDP over the period of the last forty years and, when a severe recession actually emerged and timely, prudent, counter-cyclical spending might have done some good we a) already had too much debt; b) didn’t produce a timely stimulus; and c) didn’t spend prudently.

    Read that Michael. Read it a couple of times.

    Then read this, and the comments. Note that the liberals, the ones you crow are oh so in touch with reality….they have their heads just as far up their asses as the conservative commentators.

    But what I’ve written is not too different from what Dave has written (wow, I wrote that over 4 years ago).

    Tell me Michael, is Dave a clueless moron who is out of touch with reality and thinks Jesus rode a dinosaur?

  • jan

    Steve Verdon

    What more could be added, as you said it all!

  • Andy

    Added to it all is the demographic “bubble” called the baby boomers is bursting as we speak.

  • Drew

    I have to tell you, Mr Verdon, I don’t like the tone of your voice.

    You simply do not understand, despite 40 years of abject government failure, we now have a transcendant President who, by shear intellect, will, a boffo teleprompter and perhaps a most excellent Ouiji board will lead us to the heights of unheard of orgasmic nirvana of robust growth, social justice and just all-round neato stuff.

    Michael, Ed Schultz and Chris Mathews told me so. So it must be true.

  • jan

    Quite a sense of humor you have, Drew.

    BTW, did you have your surgery?

  • steve

    Somehow, people always seem to keep forgetting that the private sector was even worse when it came to running up debt. The reason we needed to have lower public debt was so that we could rescue the private sector from its excess.

    Steve

  • Relevance?

    The article quoted in the op-ed cited in the post is about how public debt overhang stunts GDP growth, generally for a very long period. It’s silent about private debt.

    The relevance of that finding to the problem we have is obvious: increasing public debt as a device for dealing with private sector downturns whatever their cause is a solution with a sell-by date and, through bipartisan policy fecklessness over a very long period, we’ve past that sell-by date.

    My point is something I’ve been saying for the last forty years: we should be doing what Keynes said, i.e. spending counter-cyclically, paying down the debt (saving) pro-cyclically. By not doing so we’ve created a condition in which counter-cyclical spending is decreasingly effective, ineffective, or counter-effective in spurring economic growth.

    Citing private debt is just a tu quoque response and in irrelevant one at that. If you’re saying we should have stricter regulations on private debt, I agree. In the final analysis that’s irrelevant to running public debt past 90% of GDP, heading for 100% and beyond.

  • steve

    I agree with the counter-cyclical spending approach for public monies. This is one of my main departures with conservatives. Cant tell with libertarians. Thinking it over, I think you are largely correct. However, mu guess is that lower levels of private debt entering an economic downturn will lead to less need for counter-cyclical spending and mean quicker recoveries. While we continue to have endless discussions about how to handle our public debt, there remains little discussion about what, if anything should be done about private debt.

    Steve

  • Somehow, people always seem to keep forgetting that the private sector was even worse when it came to running up debt. The reason we needed to have lower public debt was so that we could rescue the private sector from its excess.

    Ahhh, the shifting sands style of argument! It wasn’t about providing stimulus to the economy, but about dealing with private debt.

    Never mind that part of our problem with private debt is in part due to government bailing out creditors when it is deemed necessary to save the “system”.

  • TastyBits

    @steve

    I am not a fan of fractional reserve spending. It is not necessarily bad, but it is usually allowed to become bad. Limiting the amount of money available for lending will lower private debt, and this can be done through capital requirements. Asset requirements could also be changed with or without capital requirements.

    Eliminating interest deductions would also lower private debt. The standard deduction could be raised to offset the deduction, and renters would benefit also.

    I am not a fan of regulation, but the Financial Industry practices have put the lie to self-regulation as an integral component of the free-market. On the other hand, the regulators have aided and abetted the practices causing the financial debacle.

    I would appreciate an explanation of why a crack dealer is not included in the pantheon of free-market capitalists. Why is the crack dealer responsible for the behavior of his customer, but the loan officer is not.

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