This is not a political post.
I think partisan politics is one of the worst traits of our country. Now, however, as we continue to see the line between political policy and economic policy blurred, we're encountering the absurdity of partisan economics. For me, there is an essential truth we must acknowledge before even beginning this conversation: debt is not partisan. Debt doesn't care if you're liberal or conservative, democrat or republican. Debt is mathematics.
I don't agree with everything Karl Denninger writes, nor with his ceaselessly hyperbolic delivery, yet he has been adamant (and correct, in my opinion) about one thing for the last 2 years in his blogging - debt is exponential, and you can't borrow your way out of a debt problem. The concept that you cannot borrow your way out of a debt problem is an important one (one that I've touched on many times before, and I would have thought, a simple one), but it's even more important in today's fiscal/economic landcscape - we'll get to that in a minute. Denninger takes issue with two widely read authors this week. First, Nobel Laureate Paul Krugman's NY Times piece titled "Fiscal Scare Tactics." Krugman writes:
"Let’s talk for a moment about budget reality. Contrary to what you often hear, the large deficit the federal government is running right now isn’t the result of runaway spending growth."
as well as some choice words for Krugman.
I take issue with Krugman's "partisanization" of economics - if I could coin a new word. Krugman writes:
"True, there is a longer-term budget problem. Even a full economic recovery wouldn’t balance the budget, and it probably wouldn’t even reduce the deficit to a permanently sustainable level. So once the economic crisis is past, the U.S. government will have to increase its revenue and control its costs. And in the long run there’s no way to make the budget math work unless something is done about health care costs.
But there’s no reason to panic about budget prospects for the next few years, or even for the next decade. Consider, for example, what the latest budget proposal from the Obama administration says about interest payments on federal debt; according to the projections, a decade from now they’ll have risen to 3.5 percent of G.D.P. How scary is that? It’s about the same as interest costs under the first President Bush.
Why, then, all the hysteria? The answer is politics."
No, No, No, No, NO Dr. Krugman - the answer is MATHEMATICS. By politicizing the issue, Krugman is the one who is shirking the truth. I would think that a Nobel Prize winner in economics would understand the concept of max-debt, yet Krugman cavalierly compares the current situation to one twenty years ago, under the first President Bush. Let's go to some more charts!
That's government debt as a percent of GDP. Again, you don't have to be a Nobel Laureate to see how debt has become a larger portion of our financial world in the last twenty years (the chart shows that the current ratio is DOUBLE what it was under the first President Bush). Krugman wasn't referring to the Debt/GDP ratio - he was talking about the interest/GDP ratio - but you can't look at the latter without taking into account how much the former has grown - you have to pay back principal too! I don't know when we will reach "max debt" but I do know what we're closer to that point than we've ever been before, and to simply write off concerns as partisan politicians trying to stonewall Obama's agenda is naive, not accurate (although Conservative critics may indeed be trying to stonewall the Administration), and partisan in its response.
Robert Reich wrote the other piece which I found mind boggling. I"ll give you Denninger's take first. Reich inquires:
"Alright class, here's your assignment: Look at President Obama's budget proposal, spending freeze, jobs bill, stimulus, tax hikes on upper-income individuals, and proposed deficit commission. Also take a look at the fees he wants to impose on the biggest banks, and his proposed regulations of Wall Street. Look at his stalled trade agenda. Now, explain the big picture."
"Ok, I'll take a shot:
$500 billion in newly-embedded STRUCTURAL deficits in concert with rapidly-falling tax revenues = ultimate insolvency of the US Treasury.Oh wait, you didn't like that answer. Here's what Reich said:
If you're about to write "more taxes and more spending," you're either not thinking hard enough or you're a Republican running for office this November.
To see the big picture you need to keep your eye on three big things. The first is the extent of government spending needed to offset the continued reluctance of consumers and businesses to spend."
And then Denninger gets to the first of his two essential points:
"It's not reluctance. It's inability. That's usually what happens when your general mantra is "I can't be out of money - I still have checks left!" and then try the same trick with your credit card only to have it come back "REALLY DECLINED.""
"You don't have to be an orthodox Keynesian to understand that as long as the private sector is deleveraging the public sector has to borrow and spend in order to keep the economy moving forward."
Which Denninger sharply and accurately refutes in a few simple sentences which are the key to the entire economy for me:
"I don't have to have an IQ larger than my shoe size to understand that when the private sector has reached it's leverage limit it is not possible to "spur" it to take on more leverage - that is, to borrow and spend that which isn't earned in the present tense.
All government borrowing and spending does in that case is make the ultimate deleveraging (across the entire economy) WORSE."
Again, I don't think you have to have a PhD in economics to understand that we're in a relatively unfamiliar spot in our economic landscape. We're out of (or running out of) borrowing power. Ned Davis Research publishes a chart of consumer debt to GDP:
Yes - I believe consumers have reached their debt limit - but the problem, as the chart I posted further above shows, is that the Government is also closer to reaching ITS debt limit than ever before. No one knows if or when China will stop financing our economy, but to bet our entire stack on the fact that China has no choice but to continue to buy our debt - since they face a prisoner's dilemma otherwise because they already own massive amounts of it - is the equivalent of fiscal Russian roulette.
A final chart I'll reference is total credit market debt to GDP - it's a combination of the federal and household charts above, along with all other corporate debt (courtesy of Barry Ritholtz).
One more gem from Robert Reich:
"The federal budget deficit is a huge problem, to be sure. But if you want an A in this course you need to distinguish between deficits occurring this year and next when the economy is still trying to climb out of a hole, and deficits five to 10 years from now. If government doesn't spend enough in the short term to get jobs back, those out-year deficits will be even larger because tax revenues will be lower then, and government will be spending more on unemployment benefits."
Reich is actually claiming that if we don't spend more now to "get jobs back," then we'll have to spend more later on unemployment benefits. He's ignoring the fact that the spending we're doing now is much more than the spending we'd be doing on unemployment benefits! Otherwise, we'd just magically spend to create jobs instead of paying unemployment. Of course, he's also using the classic Ponzi logic that a debt to be faced in the future is not as big a concern as a debt to be faced today. I wholly agree with Denninger's comment on this that attempts to spend our way out of this crisis inevitably make the eventual reckoning (deleveraging) worse.
Which brings us back to politics. One key realization I got from my sit down at the Treasury several months ago was that, although they didn't say this explicitly, the officials at the Treasury had realized how political economic policy was. They were smart enough to understand that you can't make debt go away by borrowing more, yet they lacked the political will/ability to attempt any other option. In my opinion, President Obama's biggest failure was his refusal to make the tough choices (which to me means recognizing bad debts, insolvent banks, etc, instead of trying to pretend they don't exist) early on in his presidency . Obama's gift is his incredible eloquence, and the mandate he had (which would give him a very wide berth in any policy decisions) from the people who were starting to realize just how "up a creek without a paddle" our country's economic direction was heading. I think he was one of the few presidents in recent memory who had the ability to recognize the bad debts, take the pain, talk the nation through it, and begin the road to recovery. Instead, he did what almost any other President would have done - tried to avoid the inevitable - but we're quickly realizing that it's unavoidable. Now, however, it may be too late to change course and make the really hard choices, as the pain involved will be worse, and some support for him has waned.
I can't help but think of the lyrics to the Grateful Dead's Touch of Grey:
"I know the rent is in arrearsThe dog has not been fed in yearsIt's even worse than it appearsbut it's all right.
The cow giving keroseneKid can't read at seventeenThe words he knows are all obscenebut it's all right"
I don't think we can talk our way out of this recession - I think the remedy calls for drastic, painful action that will result in a lot of losses for a lot of people and corporations. However, such action would avoid the state we're in now: where our nation, our corporations, and our consumers are virtual debt-zombies, unable to borrow more, and unable to pay back the debts we currently have. After taking the pain, the spending done by the government would have real "oomph" behind it - and could potentially fuel a legitimate recovery, but it won't be easy.
note: please think carefully before leaving off topic partisan political comments blaming Bush, Obama, Democrats, Republicans, or Tickle Me Elmo for the current economic problems. The point is how we FIX the problems, not placing blame for causing them.