This is what the Republicans straight-facedly propose whenever they don’t have the White House, to remind us how fiscally responsible they are. When they DO have the White House, they quadruple the National Debt (Reagan and Bush 41) and then double it (Bush 43) – with not one peep about the need for a Balanced Budget Amendment.
So, for starters, give . . . me . . . a . . . break!
And for finishers, it’s a stupid amendment no matter who’s in the White House.
I could do the long form of this (how you want the flexibility to run deficits when the economy is weak, and/or to make big compelling investments; how Uncle Sam’s accounting doesn’t distinguish between spending and investing – even when the ‘spending’ is to build, say, the Interstate Highway System, that should be written off over its useful life), but here’s the short form:
Let’s say we ran $300 billion deficits for each of the next 100 years, at the same time as, on average, the economy grew by 4% a year (2% real growth plus 2% inflation).
SPOT QUIZ: Would that be bad?
SPOT ANSWER: No, it would be AWESOME. At the end of those 100 years the National Debt would have risen to $45 trillion but the economy would have grown to $700 trillion . . . making the National Debt barely 6% as large as the GDP. Like a $200,000 home with a $12,000 mortgage. Bliss.
Do we have a crisis today? Yes. Reagan inherited a strong balance sheet – our National Debt ‘mortgage’ was only 30% of the value of our GDP ‘home’ – yet, with the help of two Bushes, handed Obama a weak balance sheet with National Debt rushing past 100% of GDP and an economy in such free fall that enormous further deficits were imperative to get back on track.
We absolutely have to bend the long-term cost curve down and the long-term revenue curve up, so there’s the prospect that, over a long period, our debt will begin to shrink relative to the size of our economy. But in the short run, the last thing we need to do is slam on the fiscal brakes. Quite the contrary. We need to make up for the collapse in private demand with increases in government spending and investment in infrastructure. Which is good. We have enough yachts, toaster ovens, and baggy shorts for now.
I don’t usually use farm analogies, but here’s one. Let’s say the previous farmer left his equipment out in the rain and snow for decades so it froze, cracked, and rusted . . . even as he borrowed like mad to finance an unnecessary range war* and lavish gifts to his richest friends, all the while neglecting the need for crop rotation. Over the years, he ran up big losses and an enormous debt. Okay? Now you’ve just been handed the deed to the farm. The underlying assets are outstanding – fertile soil and a talented local labor force. So what do you do? To right things, do you (a) fire the one mechanic who can actually keep one of the tractors running; stop buying feed for the chickens (you raise chickens); and eschew the additional debt you’d have to take on to buy seeds and plant the summer crop? Or do you (b) stop giving your richest friends lavish gifts, make peace with the cowmen, and borrow enough to plant the crop and get the farm running efficiently?
Short-term you have to do what you have to do. (As in World War II we simply had to win – and ran debt up to 121% of GDP doing it.) But long-term, you set yourself on a path to efficient production and, eventually, to a lower debt ratio.
Even if you don’t buy my farming methods, can we agree that the Republican campaign for a Balanced Budget Amendment is a crude form of fertilizer?
* Oh, the farmer and the cowman should be friends / Oh, the farmer and the cowman should be friends. / One man likes to push a plough / The other likes to chase a cow / But that’s no reason why they cain’t be friends. – Oklahoma
Revised yesterday‘s item upward a bit to account for the value of their tax credits, potentially valuable in a merger.
Quote of the Day
Every debt is ultimately paid, if not by the debtor, then eventually by the creditor.~Jim Grant
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