There is a very important debate going on in the country right now as I have discussed in my last three posts:
- The Republican presidential candidates are proposing big tax cuts to stimulate the economy but at the cost of huge increases in annual deficits and the accumulated debt.
- The Democratic candidates want to raise taxes on the wealthy but even raising the top tax rate from 39.6% to 50% would have only a modest effect in lowering income inequality.
- The Tax Foundation has an excellent plan to lower tax rates for all in a revenue neutral manner by closing loopholes and limiting deductions. Their plan would give the economy a big boost and actually lower deficits by bringing in more tax revenue.
Now comes Paul Krugman in Friday’s New York Times, “Austerity’s Grim Legacy” saying that “Some of us tried in vain to point out that deficit fetishism was both wrong-headed and destructive, that there was no good evidence that government debt was a problem for major economies, … And we were vindicated by events. More than four and a half years have passed since Alan Simpson and Erskine Bowles warned of a fiscal crisis within two years; U.S. borrowing costs remain at historic lows.”
How can such an obviously intelligent and articulate economist miss what is so very, very clear to so many lesser mortals? Interest rates will not stay low forever! And when they do go up, interest payments on our rapidly expanding debt will skyrocket! The Congressional Budget Office estimates that the interest payment on our debt will increase from 1.7% of GDP today to 3.6% of GDP in 2025, or $827 billion in 2025 compared with $227 billion in 2015. Where will the money to pay this new $600 billion expense come from?
It is absolutely crazy not to take our enormous debt seriously. We simply must put this huge debt on a downward path as a percentage of GDP. It can be done but it will take a concerted effort by our national leaders to do it.
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I hope I am not too ignorant when it comes to matters of the economy and international relations when I ask a couple of questions. First, I think in individuals’ debts there are often times when bankruptcies and related defaults occur. I don’t doubt that in 2025 and hereafter there will be many failed economies with practices of capitalism, especially because of the boom and bust cycles. So, how does the economist shift away from a promissory note and specific things, i.e. food, clothing and shelter along with fixed items such as land or related relatively permanent things? Is the borrowed amount a promise or a real thing? Second, who is most affected from a bankruptcy? For example, would the lower class people be as harmed as were the German working classes between the two wars. In short, who are we trying to protect when it comes to the public-at-large? Third, many college students with excessive college loans are repeatedly close to bankruptcy. Should we dismiss those loans?
Please help me understand the basic principles.
Here is a very general response to your comments. The risk with huge debt is that it will eventually cause run-away inflation, like in Germany between the wars. Paul Krugman says that inflation is so low that we shouldn’t worry about it and that only the “Very Serious People” whom he derides actually do worry about it. But inflation and interest rates are low because the economy is stagnant, i.e. at 2% growth, and we can’t assume that this will last forever. In fact most people would prefer faster growth in order to raise wages and create more full time jobs for those who want them.
So what is better, to have slow growth and low inflation like we do now, and not worry about the deficit or rather to have faster growth and therefor likely higher inflation which we do need to worry about?
It is indeed scandalous that there are so many recent college graduates with huge debt, and even worse yet, the people who dropped out of college without a degree but are still in debt. We need a solution to this problem but even more fundamentally we need to figure out, as a society, how to make college much less expensive. What has happened is that as more money goes into government financed student loans, colleges simply keep raising their tuition rates because they can get away with it.
On a personal level the answer is Don’t Do It, i.e. don’t go into gigantic debt for an education, go instead to a less expansive school and ignore the prestige factor unless your family can pay for it.
But this doesn’t help the many people who are taken in by the prestige factor and go to colleges they can’t afford. My solution is to limit the overall amount that an undergraduate can borrow from the government, let’s say to about $25,000 or $30,000. This is a government spending issue, of course, but it’s also an attempt to address a situation which is hurting a lot of young people.
That’s all for now. I may elaborate on this in my next post!
Your response is thoughtful and reasonable. Some day we must sit down and discuss how one gets those who are most fortunate to appreciate, and maybe even enjoy helping the poor and unfortunate. I understand humans must always focus on self-interest. What bothers me so much about the capitalistic ethic is not only the focus on one’s self and immediate family but now the wealthy do everything feasible to assure generations afterwards shall be secure. And worse, as my mother taught me, much of the security is intangible, thus in my mind not only are they selfish but silly, if not cruel when so many in the world suffer.
The irony is that most wealthy people I encounter in my work as a psychotherapist are miserable and overworked trying to provide for family and simultaneously have no time for their members.
So we proceed down separate thought patterns for now.
I suspect that we have a lot more in common than we have differences. For example, I’ve never been especially interested in making money, so to speak, but rather having an interesting job that pays an adequate salary. I suspect that you have the same attitude.
However, I also believe that free enterprise, i.e. capitalism, with all of its flaws, is still by far the best economic system so far discovered because it does the greatest good for the greatest number. In fact it is capitalism, pure and simple, which has lifted hundreds of millions, if not billions of third world people out of poverty in recent times.
In a way I feel sorry for the type of wealthy people you view as miserable. By working hard they are boosting the economy and apparently not able to really enjoy their wealth.
In short, I think we’re on fairly similar personal paths.