A nation's economic well-being is based on confidence.
People confident in their ability to pay their bills aren't afraid to spend. People confident that their job will be around a while buy things on credit. Companies which are selling things to these people and who are confident it will continue hire more workers and invest in equipment so they can grow. Banks who are confident in a person or a business' ability to repay a loan lend more money, which allows more spending and investment.
Right now this process is going precisely backwards. Who but the wealthy are going to spend if they don't know if they'll have social security when they're retired? Who in their right mind will spend if they don't know if Medicare will be dismantled and they'll have to fund that $100,000 procedure they'll inevitably need when they're old out of their own pocket? Who will spend if they don't know if public schools will be allowed to rot into the ground so the only tolerable option is to send their kids to $25k a year private schools? Who will spend if they don't know if their job will be around, and they'll be denied health insurance if they lose it?
The Republicans are trying as hard as they can to destroy anything and everything government does (except of course paying themselves salaries roughly 5 times the US median wage, giving themselves Grade A health insurance, and pensions for life around $60k annually).
Any fiscal progress they make in saving a few deficit dollars will be dwarfed by the economic effect of the colossal fear they'll instill in people about the future. If Republicans get their way, anyone who can't entirely self-fund their health care, their schooling, their security, and of course their retirement, will have some serious frightening issues to contend with.
People who are scared to death don't spend. If you're not scared to death right now, you're not paying attention.
So even putting aside the moral reprehensibility of all they're doing, the cold economics of it is disastrous too.
I find your blog very vague on specifics or alternatives. What exactly are you proposing?
ReplyDeleteIf we as individuals and as a country continue to spend more than we earn, then we are screwed. Republicans believe we are already screwed if we do not change course. If you are saying that Democrats should also understand we are screwed, then on that we agree.
Yes, I agree. We can't spend more than we earn. It's a miracle we haven't seen interest rates spike and the dollar crash already. Well, not a miracle - it's due largely to 3 factors in my opinion.
ReplyDelete1) Flight to the US dollar for the "safe" haven of US treasury instruments as the rest of the world looks a bit dicey too.
2) Relentless forced buying of US treasury instruments by China to hold the value of their currency down.
3) The Federal Reserve QE2 process, which gives markets some level of confidence long rates will stay under control.
But of course, your point is right. This can't go on forever. All of these things will go away, and then it gets really ugly. If it's hard to pay our interest on debt at 3%, try 8% or worse.
As far as alternatives, you're right - my apologies, I don't offer any there. This post was meant to narrowly highlight the issue of confidence in a nation's aggregate economic well-being.
To help solve some of these problems, my idea (hardly original - also shared by Bill Gross, James Simons, Charlie Munger, Barack Obama and many others) would be to take the money the world is willing to lend us at near-zero rates and rather than just gifting it over to zillionaires in tax cuts, to invest it in places the US can be competitive over the next decades.
While politically, I think Barack Obama is disastrously wimpy (if you're the leader, you need to tell the truth, not whatever percentage of the truth you think you can pass through the political filter), substantively I think what he said in the State of the Union is right on the money.
That is, if the US doesn't find its competitive legs in the global economy, there's no way we can pay down these debts anyway. No one's going to hire you or me to something they can get someone in China to do at 1/10 the price.
So what are those things that Americans can do for the world that are worth paying that high premium for?
To me the analogy is a lot like a family. Say you have big debt loads, but can't pay them down because you can't get hired because that Joe guy down the block will do everything you do for half price. If you could borrow money at 3% (and oh, you also owned the printing press to print that money in a worst-case scenario), spend that money on either educating yourself to be able to do something Joe can't, or to buy some equipment and start a business Joe doesn't do, wouldn't you do so?
It all boils down to the fact that you can't pay debts if you don't have sufficient income. So I think we should be investing to find that income. I don't think that cutting everything under the sun will bring anything but misery. We've got a test case going in England, and it's not looking good.
Rather, we need to take the cheap money, stop feeding it to zillionaires, and put it into some kind of productive investment that will pay off.
Sorry, I meant to add a couple links to the above comment, but I'm new to blogspot and I'm not sure how to yet.
ReplyDeleteRegarding England:
http://www.guardian.co.uk/commentisfree/cifamerica/2011/feb/01/economy-economics
Regarding feeding cash to zillionaires:
http://www.startribune.com/opinion/commentary/112348434.html
"That is, if the US doesn't find its competitive legs in the global economy, there's no way we can pay down these debts anyway."
ReplyDeleteOn this point - check out the recent NYT article below about China leading the race to make clean energy. This came as a sad surprise to me; I have the American affliction of believing we're ahead of the technology curve, first to market, etc. Being able to offer clean energy at a reasonable price seems like something Joe hasn't been able do...so worth investing in...but we'd better hurry up.
http://www.nytimes.com/2010/01/31/business/energy-environment/31renew.html
Yowza. China really means business, don't they? They're not fooling around over there.
ReplyDeleteThey're doing exactly what I think we should be doing. Investing.
We're just divesting.