Why Are We In Debt? – MY COMMENT

by John Brian Shannon

As far as economist’s go, you can’t have enough respect for Professor Paul Krugman. Passionate about his calling, vociferous in his critique of failed fiscal or monetary policy and as fine a gentleman as you could ever hope to meet.

He is so compelling and believes in his mission so deeply that even his fiercest economic critics find themselves nodding in agreement with him – before they snap out of it and return to the party line they were following prior to the beginning of the good Professor’s speech.

He is arguably the leading economist on the planet – and I doubt he would have a problem with me putting his life’s work into those terms as he himself realizes that he is in some pretty fine company.

So why would I, wearing my junior economist hat, ever disagree with him on any matter of economics? Just who do I think I am?

Well, I have found a clearer version of my usual answer and it was the kind Doctor of Economics himself, who provided it to me in one of his recent articles.

To read his article, please visit: The New York Review of Books

How to End This Depression
by: Paul Krugman
http://www.nybooks.com/articles/archives/2012/may/24/how-end-depression/

In case you just got back from Mars, Krugman is famously anti-austerity, regularly informs us of the ills of the American economy and posits remedies for present fiscal and monetary maladies. I should say right now that he is most often right. Depending which year it is, that is usually 364 out of, oh well, 365 days of the year. Just saying.

So, three paragraphs into his fine article, we read this:
“But don’t we have to worry about long-run budget deficits? Keynes wrote that “the boom, not the slump, is the time for austerity.” Now, as I argue in my forthcoming book*—and show later in the data discussed in this article—is the time for the government to spend more until the private sector is ready to carry the economy forward again. At that point, the US would be in a far better position to deal with deficits, entitlements, and the costs of financing them.”

Imagine me nodding my head in full agreement with Professor Paul Krugman! Me – a fervent austerity-booster! Imagine that. Didn’t I tell you that was going to happen? Yes I did.

He does have that effect on economist’s all over the world – including those who disagree with his views on the austerity question.

I too, am a Keynesian and I agree profoundly with those words spoken by John Maynard Keynes so long ago and I’ll prove it now.

Ricardian Equivalence aside, lagging economies do need stimulus! The time for the government to begin spending money to boost the economy is in the first few seconds after an official recession has been called by the market. That’s three consecutive quarters of zero growth or decline, or a mixture of both, followed by an official announcement in order to qualify for recession status.

Irregular government stimulus has been happening since before the stock market crash of 1929 when government intervention began in earnest the American marketplace as a force against market turmoil.

Let me say it as plainly as I can, John Maynard Keynes and Paul Krugman are absolutely right, stimulus has been proven to work, it begins to work immediately and it does fulfill the desired effect. It works every time.

The fact that Ricardian Equivalence kicks in part way through the process to begin the incremental process of diminishing the government stimulus – doesn’t change a thing. The stimulus does exactly what it is supposed to do and the fact that consumers later adjust their savings and spending, resulting in a flat net gain to the economy a decade or two later matters little – because all of that takes place on a completely different schedule compared to the instant economic gratification stimulus spending plan.

To put it plainly, the full effects of Ricardian Equivalence take 10-20 years – and if the stimulus hasn’t recovered the economy before Ricardian Equivalence kicks in, you have way bigger problems than three quarters of net loss in the market!

Spending our way out of recession by virtue of taxpayer-supported government stimulus is the equivalent of knowing well-in-advance the exact future day that your house will burn down — and going to the bank as soon as you find this out, in order to borrow sufficient funds to buy the property next door and build your new house identical to the old house — and having it completed and ready to move into, just hours before your old house burns down.

You are no further ahead in absolute terms – but you have an exact duplicate house and property and the exact same mortgage and you don’t have to sleep in a hotel for six months waiting for your new house to be built. Saving you significant misery – which is the whole point of government stimulus, saving millions of citizens from significant misery in the 0 – 10 year time-frame.

This is the secret of government stimulus spending. The government can spend as much stimulus money as it wants. If government stimulus is large and the spending commences soon after the announcement of recession, the economy begins improving almost immediately.

If it spends the stimulus money too slowly, over a ten year period for example, the effect is greatly minimized and could end up a complete failure in every sense. The law of diminishing returns is what happens when government begins a large slow-motion spending program designed to stimulate the economy.

But when it begins immediately and is targeted to produce the best results, it is the exact medicine a country needs – even if, sometime past the ten-year mark, the national economy is no further ahead in absolute terms on account of that stimulus.

Why is stimulus important? Because it immediately and dramatically begins to lower the misery felt by millions of citizens who suddenly become unemployed during recessions. In fact, government stimulus spending creates jobs and can prevent further job cuts as the market sees the strength of the economy and the level of government commitment to the economy. Many a recession has turned out to be a paper recession because a government took early action, spent much – and pushed the evil day farther down the road.

We’re here at the evil day. And if not now, certainly by the next recession – which used to be farther down the road, but is now close to where we live these days.

Keynes wrote that “the boom, not the slump, is the time for austerity.”  – That is very true.

As Professor Krugman wrote in his article which I quoted above:

“Now, as I argue in my forthcoming book… is the time for the government to spend more until the private sector is ready to carry the economy forward again. At that point, the US would be in a far better position to deal with deficits, entitlements, and the costs of financing them.”

Which decade after decade, continues to not happen. Many multi-billions have been spent on government stimulus but none, not one, of those borrowed multi-billions have ever been paid back. Deficit after deficit has accumulated since before there were rocks, and now the debt is piled so high we might not have the chops with our lenders to borrow stimulus multi-billions so that we may assist those who are in unemployment misery – or worse.

The simple fact is, governments can borrow as much as they like and not pay it back – ever! And they have. But eventually, a day will arrive when nobody will lend us more money. Whether this is the case now, or whether it waits till the next recession, we are at or near the end of this particular paradigm of borrow, stimulate and not pay it back during the boom times.

We can’t blame the economist’s – their job is to help the economy progress, to create wealth, to lure capital, to innovate new ways of using money for the good of the nation – and so much more. But economist’s do not have secret powers to force governments to “pay off deficits and pay down debt when times are good” as John Maynard Keynes many times suggested.

We can’t blame the Russian’s anymore – this wasn’t their fault.

We can’t blame our politician’s – because any politician who brings up the topic for even a nanosecond – simply does not get elected!

We want our nice life now, we want our tax breaks now, we want our government spending programs now, we want our toys now, and we don’t want to hear about paying for them.

Why are we in debt? Because that’s what we have asked for every year since before there were rocks.

If we want to continue as a solvent and sovereign nation, we need to authorize a President and a Congress (at the same time!) to print enough money to cover next year’s deficit, effectively clearing our current account to zero. We need to pass legislation that will eventually outlaw deficit spending – except during times of national emergency. We need to pass laws that will force the government to pay down the accumulated government debt by 2% per year until it reaches a sustainable level, say debt-to-GDP ratio of 50%, or less. And we need to start living within our means as a civilization.

Other nations cannot be expected to take the lead on this and until the U.S. begins to do so, western countries will remain uncomfortably near the end of this present paradigm, living uncomfortably close to economic disintegration.

An economic netherworld beckons.

Follow John Brian Shannon on Twitter: https://twitter.com/@JBSCanada

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Related articles

Greek and French Voters Overturn Austerity

By John Brian Shannon

Greek and French voters have overturned austerity in Europe, but voters have really overturned a change to sustainable economic policies.

The structural changes there have caused some level of financial problems for individuals and families.

But the alternative was to let the outrageous, drunken-sailor spending continue until there was nothing left of the economies in question. Eventually that would have caused a real pan-European depression  – instead of five years of austerity in only those countries foolish enough to have overspent themselves for decades.

It is the obscene deficits which have run year after year (and have piled up into unaffordable debt) that are responsible for the lowered credit ratings in those countries and the poor economic performances found only in those particular European countries, it must be said. I note that the rest of Europe is doing quite well – even accounting for the combined drag and multi-billion euro bailouts of Greece, Portugal and Spain.

Blaming austerity, is like blaming the doctor who is now fixing your broken arm for the original accident — as you drunkenly stumbled out of the casino! The Greek economy was a basket-case long before austerity ever arrived and it will be a basket-case now that austerity is leaving Greece.

Greek and French citizens have voted for the former glory days of unrestrained spending with lots of toys and goodies from their governments – and to hell with paying for it!

“Let the EU bail us out forever, for tonight, we drink like drunken sailors!” And, if you think that isn’t being hollered at full volume at many thousands of cantina’s and spilling out on to the streets of Greece tonight, you’ve never been there!

Follow John Brian Shannon on Twitter: https://twitter.com/@JBSCanada

The Debt of Democracy!

Democracy is, by definition, always a work in progress. That’s not a knock against democracy, for every other system so far, has turned out to be worse. But it is a realistic appraisal of our system.

One of the things about the democratic system which is in drastic need of improvement is the present election cycle which rewards politicians with more terms in office for tossing unaffordable goodies at taxpayers, usually just before each election.

We keep falling for it! Is is “their” fault, or is it “our” fault?

Well, we keep re-hiring them! So, it’s our fault!

Not only that, it’s worse than that! Remember former Prime Minister Jean Chretien and his Finance Minister Paul Martin?

Weren’t those the two that took Canada from near ‘junk-bond’ status – well on-track to be in worse shape than Greece (!) is now, and within 6 years returned Canada to a zero-deficit condition AND… AND(!) with significant government debt pay-downs?

Well, yes they were.

For that stellar accomplishment Jean Chretien and then Paul Martin were booted out of office!

I say we get the governments we hire, the governments we deserve, and the governments that spend more than we can afford, because that is who we as a people are – rotten little children. And then we compound that by being profoundly ungrateful towards those who actually do something to restore our fiscal balance.

Until we grow up as a society and learn enough to know better than to hire over-spending politicians we will ever be in a state of near-economic peril.

In the meantime, I’m a big fan of balanced-budget legislation for all levels of government. Not only that, Canada’s total accumulated debt is obscene for a first-world nation with uncountable resources and a small population, we must do better than merely balancing our budgets every year, we must pay down our debt to reasonable levels.

My goodness, little Leichtenstien with next to no resources nor territory runs zero deficits and has no debt at all!! Many other well-run countries do well with tiny deficits for convenience-sake, not for the sake of crisis management and barely noticeable government debt. None of them has Canada’s advantages – for crisis’ sakes!

Wikipedia has some good but basic information on this, check Wikipedia “Economy of Sweden” “Economy of Norway” Economy of Australia” – same goes for Leichtenstien, Oman, Qatar, Argentina (yes, Argentina), South Korea and many others.

Apart from having 40% debt-to-GDP ratios, or less, and low government debt, all of the following countries are otherwise “normal” having excellent growth, low inflation and unemployment figures, they score well on the global competitiveness index and their citizens enjoy good-to-excellent living standards . They also have low per capita crime rates and fine health care systems. Two, effectively have 0% debt-to-GDP.

For example:

http://en.wikipedia.org/wiki/Economy_of_Australia

http://en.wikipedia.org/wiki/Economy_of_Liechtenstein

http://en.wikipedia.org/wiki/Economy_of_Qatar

http://en.wikipedia.org/wiki/Economy_of_Oman

http://en.wikipedia.org/wiki/Economy_of_Kuwait

http://en.wikipedia.org/wiki/Economy_of_Sweden

http://en.wikipedia.org/wiki/Economy_of_Switzerland

http://en.wikipedia.org/wiki/Economy_of_South_Korea

http://en.wikipedia.org/wiki/Economy_of_Argentina

http://en.wikipedia.org/wiki/Economy_of_South_Africa

http://en.wikipedia.org/wiki/Economy_of_New_Zealand

Finally, the best link on global debt belongs to The Economist:
http://www.economist.com/content/global_debt_clock

For plenty of links on these topics visit my blog:
http://www.scoop.it/t/politics-in-the-21st-century