For Every Dollar Borrowed, There is a Dollar Saved
By Michael Norman
In Paul Weinstein's column, "Next, Cut Spending or Debt Will Doom Our Future," (NY Post, 2/10/2009) it's at least nice to see that he acknowledges the need for a stimulus in the face of a frightening decline in output and employment. However, his comments on restoring order to America's fiscal house shows exactly why fiscal stimulus in the U.S. during the 1930s and throughout Japan's "Lost Decade of the 1990s" didn't work. In each of those examples the goal to restore fiscal discipline eventually undercut any stimulus that was applied. In his remarks today Treasury Secretary Geithner made note of this when he said, "previous crises lasted longer and caused greater damage because governments applied the brakes too early. We cannot make that mistake." The secretary is right.
Whether Mr. Weinstein likes it or not (and he apparently doesn't), government spending and investment is a component of GDP and a pretty significant one at that. The $2.9 trillion that the government spent in 2008 is nearly twice the level of private non-residential business investment that occurred. The notion that you can pare down government spending and have that lost output magically and fully replaced by the private sector is wishful thinking at best. Unless, of course, Mr. Weinstein is suggesting that we as a nation accept a lower standard of living: in essence, become poorer vis-a-vis the rest of the world.
The notion that government spending "crowds out" the private sector is a fallacy. Government spending has gone from $92 billion annually in 1946 to over $3 trillion currently, yet total industrial capacity utilization has dropped to 74 percent from 90 percent and the unemployment rate has climbed from 1.2 percent to nearly 8.0 percent in that time. In other words, despite a thirty-three fold increase in government spending, much of the nation's wealth producing capacity remains unused. Where, is the crowding out?
Nor do you see any evidence of crowding out in interest rates: U.S. Government bond yields are at historic lows, yet according to Mr. Weinstein's claims, we should be seeing record high interest rates due to record spending.
Mr. Weinstein's concerns over debt display a complete lack of understanding of double entry accounting, an accounting system that pretty much the whole world adopted about 500 years ago because it's superior to the single entry version. By definition, for every dollar borrowed there is a dollar saved and for every new liability created there is also a new asset. To focus exclusively on the liability side of the balance sheet is to miss half the picture.
The "greatest generation" may or may not have understood this, but it is a moot point. The debts they ran up to fight the war also went to producing factories, plants, equipment, training, educational facilities, infrastructure and many of the real assets that became part of the wealth of the current generation. The deficits came down not because they our grandparents "whittled it away," but because the spending created the real assets that produced wealth far in excess of whatever debt was created.
-Michael Norman is an economist and private investor
8 comments:
Well said!
Scott
Thanks, Scott!
http://www.nytimes.com/interactive/2009/02/04/business/20090205-bailout-totals-graphic.html
link to NYT's tally of all the monies beyond TARP spent - something like 10 trillion or whatever.
http://www.nytimes.com/interactive/2009/02/04/
business/20090205-bailout-totals-graphic.html
I am a little confused by your paragraph concerning the "crowding out". Would not a "supply-sider" say the reason we are not at a higher productivity is due to the government spending. To me it seems you are giving a point for the non spend side. I know that is not what you are trying to convey, so I know I am missing something.
Besides that confusion, I don't see how anyone can read your post and not see the fallacy of Weinstein's column.
A supply sider would say that marginal tax rates are too high. That's what they always say. The inference is that if rates were cut, businesses would be incentivized to raise production, hire more workers, produce more of the real wealth that makes up the economy, etc. Their beef is not with government spending, per se, but in the false notion that the government needs more revenues in order to increase spending and that takes from the private sector by keeping taxes and/or "borrowing" elevated. In actuality the reverse is true: spending by government adds to the wealth of the private sector by increasing the amount of assets owned in the form of Treasuries. It takes nothing away. It only becomes problematic when spendng by gov't uses up the available capital and resources of the nation, which as you can see in the numbers I gave, is not happening and has never really happened. We approached it in wartime years, but never in peacetime.
EXACTLY MIKE,
THE LAUFFER CURVE WHICH IS A BASIC AND NOT EXACT METRIC DOES INDEED SHOW THAT WHEN TAXES ARE TOO HIGH THERE IS LESS REVENUE.
WHEN TAXES ARE TOO LOW THERE IS NOT ENOUGH REVENUE.
THIS BELL CURVE DOES NOT EXIST IN IT'S ENTIRETY FOR REPUBLICAN SUPPLY SIDERS BECAUSE THEY ARE ALWAYS COMPLAINING THAT WE ARE ON THE RIGHT HAND SIDE THAT TAXES ARE ALWAYS TOO HIGH.
THAT MEANS WE ARE NOT ABLE TO MITIGATE EXCESSIVE EXUBERANCE WITH TAX SCRUTINY AND DEFINITELY NOT OVERLEVERAGE - SEE LAST 8 YEARS.
AS YOU POINTED OUT LAST SUMMER - TAX SCRUTINY ON WALL STREET COULD HAVE MITIGATED THE PROBLEM TO SOME DEGREE.
HOWEVER, CALIFORNIA IS BANKRUPT BECAUSE THEY ARE ON THE RIGHT HAND SIDE OF THE LAUFFER CURVE AND WALL STREET WAS ON THE LEFT HAND SIDE THOUGH ALWAYS FEELING ON THE RIGHT.
TOO LATE TO RAISE TAXES NOW, BUT IT WOULD HAVE SLOWED THINGS DOWN TO SUSTAINABLE LEVELS 3 YEARS AGO GIVEN THAT THERE WAS TRACEABILITY OF THE CREDIT SWAP SCHEMES.
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