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.