It is ideas, not vested interests, which are dangerous for good or evil.-John Maynard Keynes.
As the debt negotiations on capital hill continue, our elected officials have been working diligently within the debt super committee with the purpose of introducing spending cuts. The underlying premise behind the debt committee is centered upon the fallacious assumption that a portion of our sovereign debt must be reduced. Despite the potential results of this committee, the vestiges of deficit reduction will most likely continue to cast its shadow, and definitely obstruct discussions involving the passage of a second stimulus. The logic behind this assumption is derived from two facts that have been a core component in more recent times, and have also maintained a prominent feature in political discourse during previous eras as well. These two facts stem from the observation that the conventional wisdom of deficit reduction is not just a byproduct of modern phenomena, but also a hallmark of American political discourse. Therefore when current lawmakers stress the need for deficit reduction, they are expressing a sentiment that has been popular throughout the history of our law making bodies. For example, In 1937 FDR attempted to balance the budget despite the advice of economists, and thereby such actions created a recession. In addition to this, when Ike Eisenhower was still in office, he apologized for running a deficit during a period of poor economic growth. Today lawmakers are still obsessed with the idea of deficit reduction despite a high unemployment rate, and such things as a weak stimulus package, and the debt committee is proof of this. In brief the impetus to call for more deficit spending, and spur further job creation has been hindered by a uniquely held American political view. A political view that has been exclusively linked to the mindset of elected officials, which will likely persist even after the committee, reaches a deal. Henceforth, it has been demonstrated that this political view has permeated throughout the minds of lawmakers both past and present, and the current thinking about the Federal debt will likely continue to persist. Therefore, throughout the history of our government it would appear that when the situation calls for an increase in government spending, there exists a deeply held bias against it, and the current debt committee is merely just another reflection of this trend. A trend that at most only serves to reinforce those values of our lawmakers, and at worst, could potentially hurt the economy like it did in 1937.
The very notion that our legislator is currently debating ways to reduce the deficit is preposterous, and contrary to what should be done in lieu of the current economic conditions. Increasing austerity measures before the labor market has recovered is an unintelligible position of the highest order. Likewise calling for deficit reductions in the midst of 9% unemployment is a viewpoint counterintuitive to the fundamentals of Macroeconomics, as well as the lessons of our past. Moreover, such sentiments are diametrically opposed to the ideas postulated by John Maynard Keynes. Keynes to his credit, not only shaped the modern foundations of Macroeconomics, but also ushered in the age of depression economics with the publication of his magnum opus in 1936. The title of his greatest work “ The General Theory of Employment, Interest and Money”, provided an economic doctrine which suggested that a government should deficit spend, and avoid debt reduction until the worse was over. The logic of Keynes theory was well understood prior to the publication of his book, and the message had been forwarded to both policy makers and the public alike through letters, and interviews. Prior to 1936 he proclaimed in an interview with Redbook magazine that increases in “spending” are essential for generating an economic recovery (1). Furthermore, In 1931 Keynes attacked Ramsay Macdonald’s National government for cutting “road building and house construction programs out of the budget “(2). Despite these efforts the learning curve for policy makers was rather pronounced, and lawmakers didn’t learn the lesson of Keynesian economics until 1937, when FDR’s attempt to balance the budget merely prolonged the great depression. In brief the very idea that legislators are currently debating spending cuts not only defies the foundations of modern macroeconomics, but it also shows that lawmakers are willing to forgo these lessons in the aftermath of the recent financial crisis. Is it too much to ask our Senators and Congressmen to allow the lessons of history, and economics to decide what should be debated? Should the general public stand idle, and allow this erroneous manner of thinking to shape the economy? In short, not only is the current discussion intellectually insulting, but it also presents a huge risk to the public just like it did in 1937.
Unfortunately, the current political dialogue is still centered upon the idea that deficit reduction is of a primary importance, and the aforementioned debt super committee serves as evidence to this observation. Furthermore the noted trend for legislators to think wrongly in terms of economic policy, suggests the current discourse will continue to be based off of this principle. Fortunately, by highlighting a few simple facts about our current deficit it is possible to correct such erroneous thinking. Therefore the following passage will be dedicated to the argument that spending cuts are unnecessary according to some important indicators.
The ability to pay off current debts, and create new debt obligations is largely dependent upon the interest rate on our bonds. For example in “2002 Japan was downgraded by S&P”, but despite this downgrade the “interest rate on the Japanese Ten year bond is still one percent in present times” (3). Therefore Japan, which has a higher GDP-to-Debt ratio when compared to us, is still able to run a deficit. Thus as long as the interest rates on our bonds remain low, the United States can continue to run a deficit, but most importantly the lesson is this. As long as our bonds continue to posses a low interest rate, then it is most likely that investors will continue to help fund our debt. Furthermore even if an independent credit rating downgrades us, it doesn’t mean the United States runs the risk of a sovereign debt crisis. Instead it simply implies that the final arbiter in regards to our deficit is the interest rate on our bonds.
Finally, the previous paragraph mentioned that Japan has a higher GDP-to-Debt ratio than ours. This is important because according to the book “This Time Is Different: Eight Centuries of Financial Folly”, there is an historical threshold strongly associated with indicating the risk of a country going into default. Historically countries are more likely to reach default on their debt “ when government debt-to-GDP ratio rises above 90%”.(4) The article which borrows this number from the previously mentioned book adds onto this figure by claiming “…the U.S Debt-to-GDP-ratio will pass the 90% threshold in 2011 and reach 102% by 2016”(4). The prediction itself may be alarming, but similar countries such as Japan currently have a GDP/debt ratio of 199.70 % and have not defaulted (5). Thus even if the United States surpasses this historical threshold; there is still a strong argument that the government should pass another stimulus, and failure to do so would only prove that legislators have ignored two simple lessons. The first being the fundamentals of Macro, and the ability to perceive basic indicators such as the interest rates on our bonds. Secondly any call for further reductions in the deficit would show that legislator’s biases are immune to the lessons of the Great Depression, and the recession of 1937.
The claims of Occupy Wall Street may not be based on economics, or history, but this shouldn’t matter. After all, it has been shown that the nature of discourse on capital hill is counterintuitive to both of these things. In brief the ongoing dialogue constructed by our representative’s is currently immune to both the lessons of history, and economics. The vested interests of politicians have proven to be unassailable when put against the wisdom of greater minds. Indeed it is quite disappointing that the minds of legislators have done nothing, but seal off the introduction of sound economic policy. Fortunately the barriers to changing political discourse could break in the face of protest, and finally allow the ideas of public intellectuals to lay siege to the current nature of debate. The individuals in power have neglected simple truths, but their arrogance cannot persist against protests, which are currently shaping the world. In the end the catalyst for the implementation of Keynesian economics was World war two, and not simply the efforts of intellectuals. In other words policy makers may thumb their nose towards some basic principles, but they will eventually become more responsive to the tide of public sentiment. In the short run, the assault on the current nature of debate has been dealt a minor blow, but in the long run the weather will eventually improve, more people will come, and the movement will become better organized. The nature of politicians may be to ignore such lessons, but history has shown that forces outside of their control will eventually force them to think differently.
1)Buchholz, Todd G. New Ideas From Dead Economists: An Introduction to Economic Thought. New York: Penguin, 2007. Print. Page 219.
2) “John Maynard Keynes-Timeline: Treatise on Money and the General Theory of Employment, Interest and Money 1927 to 1939.” Maynardkeynes.org, N.D. Web.
3) “ Credibility, Chutzpah and Debt” nytimes.com. Paul Krugman Web. 7 Aug. 2011.
4) “US Debt to GDP Ratio, the looming Debt Crisis” tradingonlinemarkets.com. N.A. Web. 4 April. 2009.
5) “Country Comparisons Public Debt” CIA World Fact book, CIA.gov. Web. Accessed on November 13th 2011