I was forwarded an e-mail that made a terrible analogy (my emphasis):
Here’s another way to look at the Debt Ceiling: … You come home from work and find … your home has sewage all the way up to your ceilings.
Sewage would make a home immediately uninhabitable and actively damage the value of the home and its contents. Your first clue that this analogy is a failure is to see that the U.S. debt doesn’t do this. During deficits we’ve had great periods of growing prosperity and people from all over want to come here.
Consider also the huge debt we incurred fighting WWII. If debt were like sewage, we would’ve done more to stay out of the war, or the resulting debt would’ve led us to ruins by the 50s. Instead, high employment (fueled by deficit spending) left us with a strong economy able to quickly pay back that debt while prospering.
U.S. debt is–not coincidentally–more like a credit card. Yes, we’d prefer not to need one, and we must keeping paying on it, but besides the payment, it incurs no other short term liabilities, and no one is demanding we pay it off tomorrow, next year, or in our lifetimes. And unlike most consumers, the U.S. is known to be the most trustworthy borrower in the world, so creditors treat us well, never hitting us with surprise fees (i.e. it doesn’t have the risk associated with a consumer credit card), and in fact they’re willing to loan to us right now at almost no interest on current purchases. (We’ll come back to that.)
We know that credit is helpful during emergencies, regardless of your debt level. If sewage were flooding your home and you had only a credit card to pay with, you’d still call the plumber and charge it.
Back in the real world, a more apt metaphor for flooding in your home is our high unemployment. It is actively damaging human capital as people lose their skills, homes, and families from financial stress. And this damage is not limited to those directly affected. Being unemployed for long is known to reduce the wages you earn for the rest of your working life, which reduces the taxes you can pay, and your productivity, and this makes the country’s long term revenue & growth problems even worse.
The good news is that the waste water is receding. The bad news is that it’s receding slowly, while destroying the value of our nation’s workforce.
Even worse, irrational fears of deficits have distracted us from the real emergency. Politicians and hard money economists have convinced us to choose to accept damagingly high unemployment to avoid using the credit card, and–making the situation even more head-slappingly absurd–is that new purchases on our credit card accrue virtually no interest. We could borrow for almost nothing to help get people back to work doing real productive, useful things growing the economy, but instead we’re a madman yelling, “can’t use the credit card!”, while sewage floods in.
It’s unsurprising that this recovery is slow because it’s the only one in recent history where we’ve simultaneously slashed government spending (mainly at the state/local levels). While politicians complain about our out of control spending–mostly safety net spending that will recede after the recession–we’re fully suffering the effects of austerity, and just like the UK is finding out, it’s painful and ineffective.
I’ve been very much won over by the arguments and real evidence presented in support of Keynes. The hard money advocates have some compelling, ideologically pure arguments, but their models don’t seem to support what we see in the real world during recessions, and getting this wrong hurts millions of people, not just economists’ reputations. Krugman can be a annoyingly partisan hack, but even many right-leaning economists know he’s right on the economics and he regularly posts real data from the economy to prove it. And I’m certain most politicians secretly agree. Watch what happens when budget cuts are proposed in their area. Their argument becomes, “If we cut this (unnecessary) military project it will destroy the town.” And he’s right; government spending can be just as important as consumer spending in supporting an economy. Consumers without jobs can’t buy much and demand drives everything.
That doesn’t mean we should keep unnecessary projects, but at this time there are many useful tasks we should be hiring the unemployed to do. For many it was the jobs they were already doing before state budget cuts–like teaching and policing. This is the absolute best time to bail out state governments and to take up needed infrastructure projects that will have to be done eventually.
Very sadly, neither party will be making the race about the urgency of high unemployment, perhaps because it’s out of sight for them and the unemployed don’t fund SuperPACs. At the very least Obama has tried to pursue legislation like 2011’s American Jobs Act (killed by Republicans).
And despite all the hand-wringing about debt, neither presidential candidate is proposing serious plans to address it. Romney’s tax and growth plans are just fantasy and Obama’s don’t raise enough money to do much.
And if this post isn’t depressing enough, maybe David Frum will work for you.