Monday, June 27, 2011

Why the government needs to spend more money

This will be the first post of a series on issues facing the country (some financial, some not), as we start the long slog toward the 2012 election. As the truth about many issues is obfuscated by one's political slant and particular media choices, we'll try to explain these topics from first principles. This will be done as part of an overall general policy goal of simply maximizing the country's wealth and the well-being of its citizens, without neglecting the poorest among us. We'll try and throw and preconceived notions out the door. As always, we'll have links a-plenty, and comments are welcome.

We'll start with the state of the economy. As negotiations continue on raising the debt ceiling, I'm afraid the real problems have been brushed aside. There are two major points that people have lost track of. The first is the fact that unemployment in the country as still a major problem. Take a look at this figure. It shows the civilian employment rate (as a percentage), since 1990. You'll notice the drops in employment during the '90-'91 recession and after the tech bubble burst in 2000. With the most recent recession, not only has the drop in employment been much steeper, but there is effectively no sign of recovery in terms of job creation. Compare this lack of recovery with that of previous recessions here. While the general economic malaise is in the news, the dire jobs situation isn't making any headlines. While this is stunning in and of itself, it also ties closely into my second point on the campaign issues and the national agenda.

What seems to be making all the headlines these days is the fact that the country has a debt problem. It does, and that's not really in dispute. The problem lies in the fact that people feel that we should address the issue RIGHT NOW. Politicians and common citizens alike are calling for spending cuts. Everyone has noticed Greece in the headlines; they may have heard of Portugal or Ireland's debt and financing issues. But it is wrong to look over to Europe and decide that we'll soon be sharing their fate. Let's first look at what interest the market is charging Greece, Portugal, and Ireland on their debt. When borrowing for 10 years, Greece is currently paying 16.8%, Ireland 12.1%, and Portugal 11.7%. This is roughly the rate Joe Shmoe would pay on his credit cards... and these are sovereign nations. The US? 2.93% (look at 'bonds' on the right side). It doesn't appear as if the market is sending us any worrying signals. In fact, as this chart shows, 10 year treasury interest rates (i.e., the rate at which people lend to the govt) never dipped below 3% at any point during the Johnson, Nixon, Ford, Carter, Reagan, Bush, Clinton, or W. Bush administrations. Matt Yglesias cites these facts, and justly asks "So why is this on the agenda now?" Robert Frank connects this issue with my first point:

Almost 14 million people — 9.1 percent of the labor force — were officially counted as unemployed last month. But that’s just the tip of the iceberg. There were almost 9 million part-time workers who wanted, but couldn’t find, full-time jobs; 28 million in jobs they would have quit under normal conditions; and an additional 2.2 million who wanted work but couldn’t find any and dropped out of the labor force.

If the economy could generate jobs at the median wage for even half of these people, national income would grow by more than 10 times the total interest cost of the 2011 deficit (which was less than $40 billion). So anyone who says that reducing the deficit is more urgent than reducing unemployment is saying, in effect, that we should burn hundreds of billions of dollars worth of goods and services in a national bonfire.

What has happened is that people are now in the debt-binge hangover stage. While loading up on debt while the bubble inflated, consumers are now paying down the debt and have reduced their current consumption. As roughly 2/3 of the economy relies on personal spending, when everyone reduces it at ones the result is reduced economic output and fewer jobs. However, as we've seen, the US can currently borrow money extremely cheaply. People recently were actually paying the US government to borrow their money. As we have a lot of infrastructure that needs to be built or improved around the country, it would be wise to borrow at these cheap rates and spend the money on the projects (which will have to be done eventually), WPA style; in this manner the government would step in and create the demand, since consumers haven't been able to. Considering the fact that it was a recession-related decline in tax receipts, and not runaway spending, which has exacerbated the budget problem, focusing on the economy to solve the issue makes sense.

With what's going on in Greece, I understand why there would be some concern over our budget. But it would be wise to wait a few years for action, at least until the economy has recovered. For now, the government can borrow cheap, spend the money that consumers cannot, help the economy, and perhaps relieve the unbelievable jobs situation. It's easier to pay down debt when your economy is not convulsing.

Postscript: Bill Clinton and Bill Gross recently talked of (related) ways congress could help stimulate the economy. See here for how the economy has recently (and repeatedly) failed to meet expectations.


  1. Very well put. I know we disagree that our country's debt is not akin to personal debt. But I still think the same principles apply. You can't dig your way out of a hole. You can't borrow your way out of debt. I also don't think that this economy will recover in a few years as you mention in your blahg. I guess I would just like to get spending AND job creation under control ASAP. I don't know anyone who says that reducing the deficit is more urgent than reducing unemployment. Both are crucial. It concerns me deeply that the treasury said they would never monetize our debt and now they have fairly secretly. I don't trust Geithner any further than I can throw him. it also concerns me that civilian jobs are plummeting while government jobs are skyrocketing and the average income for government jobs whallops the average civilian job salary. I like your blahg, Levi.

  2. Oh and I do agree about our failing infrastructure. But I would bet you and I both agree that a high speed rail system is not on the top of our essentials list.

  3. Levi, Interesting take, and I agree with a lot of what you said. I didn't see much about the possibility of interest rates going up--which, when on the heels of a long recession with an over-leveraged government, has been identified by Daryl Montgomery as the tipping point for hyperinflation (if you haven't, check out his blog at If you're going to defend this position, I think you should also defend the idea that interest rates will remain more or less constant through the recovery. I'm curious what your take on this is.

  4. @Mike: You're right, obviously, that you can't borrow your way out of debt. Eventually taxes have to rise or spending needs to be cut (preferably a mixture of both). But, countries are crazy if they suppose that their economy would do great if everyone (govt included) stops spending money. This piece explains how austerity can be self-defeating:

    @Spence: Govt bonds have been in a 30 year bull run. Rates have no where to go but up, but who's to say when that will happen. Bill Gross has been betting big that it'd happen last year and this year. But yet they don't budge.

    The market currently sees inflation staying low for quite some time: and Krugman here explains that rates would stay low despite heavy govt borrowing cause we're in a liquidity trap: As always, however, my crystal ball is cloudy.

    For the govt to build a lot of infrastructure, rates would only have to stay low for a year or two (until we sell enough long term treasuries to finance the projects) and then afterwards I don't think it would really matter.