By Elvin Lim
It is often said that the public debt is a burden we leave to our children and grandchildren. Even Barack Obama said the same when he was a Senator. Invoking children is a great way to make a moral argument without sounding moralistic, but it is a spurious way to make an economic argument in committing the fallacy that all borrowing is deferred charge.
The American people should know that it is not as if the $14 trillion public debt is owed to foreigners. Actually, Paul Krugman (not surprisingly, a Keynesian) thinks that the figure that matters is the debt (or federal securities) held by foreigners and institutions outside of the US, which is about $9.6 trillion. The remaining $5 trillion or so, called intra-governmental debt, is the debt the federal government owes to itself, such as in the form of debt owed to trust funds like Social Security. The cries against burdening our children and grandchildren are are illegitimate here. Borrowing by the federal government is itself a market transaction and an investment decision in which the lender forgoes the present use of her money, and purchases a security in return for interest. This interest is socially costless because it is simply a redistribution from all tax-payers to bond-holders. This is a transfer payment, not robbery.
What is missed in the intergenerational-robbery fallacy is that deficits actually help present working cohorts to invest in the increased supply of assets, generated by the debt. Far from being a burden to their children, the present working cohort are, if they are not also building tangible assets made possible by the money raised, at the very least saving for their retirement and doing their part to ensure that future generations are not called on to fund their retirement (either personally, or by public programs). We don’t even have to get into Keynesian arguments about how debt possibly increases aggregate demand and jobs to show that government borrowing in such instances does the exact opposite of burdening future generations. This is what makes government borrowing a potent instrument of fiscal (read “stimulus”) policy, and it is the real reason why deficit hawks are against it.
Debt sounds like a bad word only because we are falsely analogizing from the personal, or the household, to the public sphere. But what is prudent for the individual or the household is not necessarily prudent for the market. (That’s why the economy needs us all to go out and buy even if we don’t feel we should.) Yet the false analogizing isn’t too surprising if we recall that one strand of ideology in this country has always started off from the perspective if the individual, and the other, the collectivity. We can argue till the cows come home on the latter, but the idea that the public debt is always and entirely a burden to future generations is simply and certifiably fallacious. We are the children and grandchildren of people living during WWII, during which time the public debt as a percentage of GDP was even higher than what it is now, but I don’t think anyone will argue that we’re now paying off their debt.
OK wait, maybe some will.
Elvin Lim is Associate Professor of Government at Wesleyan Un
By Elvin Lim
The Obama White House has announced a series of personnel changes in recent weeks, ahead of the November elections. The aim is to push the reset button, but not to time it as if the button was plunged at the same time that voters signal their repudiation on election day. But the headline is the same as that of the Carter cabinet reshuffle in 1979: there is a crisis of confidence in the Oval Office.
The process this year has been more gradual but equally insistent. Two weeks ago, White House Senior Advisor David Axelrod announced his plan to leave the White House in early 2011. Last week, Rahm Emmanuel stepped down as Chief of Staff to pursue his political ambitions in the mayorship of Chicago. This week, we learned that National Security Advisor James Jones would be stepping down and replaced by his deputy, Tom Donilon. (Earlier this summer, Robert Gates had already registered his intention to leave in 2011.)
The biggest reshuffle has occurred for the economic advisors. Before year’s end, chief economic advisor Lawrence Summers will be out. Meanwhile, White House budget director Peter Orszag and White House Council of Economic Advisers chairwoman Christina Romer have already left the administration. That means three of the top four economic advisors will be out by the end of the year, registering perhaps, the president’s general sense that he really needs to up his game on managing the economy and his particular desire to mend fences with (and via a few strategic appointments from) Wall Street.
There is much truth, then, to the Republican taunt that this is an administration in turmoil. This is a lot more change we are seeing compared to the Bush White House two years in. Chief of Staff Andrew Card stayed on for 6 grueling years; Condi Rice stayed on as national security advisor till 2005 before she moved to State; and even the highly unpopular Donald Rumsfeld lasted till 2006 despite constant calls for his resignation.
The contrast between this and the last White House highlights two profiles in presidential confidence. Bush may have been populist in style, but he stuck to his guns, whether it came to war in Iraq or his management of the White House. The irony is that while Bush was unapologetic about Iraq and Rumsfeld until at least 2006, Obama is already practically apologizing about stimulus spending and health-care reform.
Doubt is a good thing in the classroom, but it does not work in a boardroom or in the White House. If Barack Obama does not believe that government spending will stimulate the economy, then it won’t. Consider the Keynesian multiplier – the idea that every dollar spent by the government becomes income to some consumer who then spends a portion of it. This, in return, becomes income to another consumer who again spends a portion of it. This process is reiterated several times, and the sum of its effects is called the Keynesian multiplier.
Why hasn’t stimulus spending worked, as some argued it did during the Great Depression? Well, maybe Keynes and Hicks were just wrong. Or maybe, according to George Akerlof and Robert Shiller, the missing link this time is the “confidence multiplier” (or the fact that “stimulus spending” have become foul words.) Consumers hold back spending if they are not sure if government spending (i.e. deficits) can continue indefinitely, and even if they wanted to spend, banks are withholding credit because they are not sure if government would be in a position to bail them out when creditors default. Yes, confidence is grounded in real-world conditions such as the size of the US public debt. But confidence is also grounded in raw animal spirits. Myths as real or unreal as the dreams of our presidents.
If Obama lacks faith in his advisors, it must be because he lacks faith, ultimately, in himself. His faith in
