I was doing some writing for a client recently. Basically, I’m writing 570 100-word biographies for a quote site. It’s been an amazing project, mostly because I’ve gotten to learn about a lot of very accomplished people.
One of them is John Maynard Keynes. If you don’t know who he is, let me refresh your memory. He is one of the most well known economists in history, creating an entirely new line of thought known as Keynesian economics. Espousing a mixed economy, Keynes advocated an interventionist government policy, believing that the government should use monetary and fiscal strategies to reduce the impact of major economic events, such as recessions and depressions.
In case you haven’t noticed, we use Keynesian economics, most recently to keep us from falling deeper into a recession or even a depression.
The flip side of the economic coin is laissez-faire economics. Basically, this is a hands off approach, letting the market determine the economy. This is what the current Congress and some State Legislatures are trying to sell us.
In a fairytale land, it would be effective. But it depends on those in business to be honest and fair. And we all know that capitalism is based on making as much money as possible. That is the antithesis of honesty and fairness. So that’s why we end up with the BPs, Enrons and Madoffs of the world. We think the henhouse doesn’t need to be watched. Sadly, some people and some businesses will do anything — including selling their own children or their mother — to make a buck.
Well, enough of the economics lesson. I only bring it up because I got one myself the other day. My girlfriend is working on her MBA and is taking economics this semester. And here’s what she found — that carrying debt is actually good for the economy, not bad.
That goes for you, and it goes for the government. Here’s why. Debt carries interest, which basically is the profit a lender makes on a loan. Without debt, there’s no profit, which is used to make loans to other people. Without debt, there can be no lending.
Now, while it’s certainly true that there can be too much debt, it’s only really bad when it’s unsecured debt. In other words, when push comes to shove, you don’t have enough assets to sell off to pay the bills.
The U.S. government has a lot of debt, true. But it also has a lot of assets to back up the lending and borrowing going on. That’s part of the story that isn’t being told right now. While we really need to stop increasing our spending, we could simply level the spending off, slowly reduce it and start servicing the debt, all without doing irreputable harm to the economy.
Here’s a simple case in point. I have friends who work in government. I have family who are contractors for government projects. And I have still other friends who work in lower echelons of the government in jobs you probably never even think about as being government.
If a program is cut, there is the trickle down effect. The government may shed workers, but contractors are also affected. I remember a basic economics lesson in Seattle when Boeing laid off about half its workforce. In a single year, Boeing’s workforce went from 80,400 to 37,200.
But what we didn’t all understand at the time was that every paying Boeing production job created 10 more jobs indirectly through their spending. When Boeing made those cuts, unemployment shot up to 12% virtually overnight as businesses who catered to these employees had to lay off their own workers. I remember what it was like. My own hometown, Renton, became a ghost town.
In the halls of Congress and the halls of State Legislatures, I see the ghosts of Boeings Past coming back to haunt us at a time we really can’t afford more unemployed, especially those who make good incomes.
Oh, I know. They claim we’re all tired of debt. At the same time, a recent poll showed that 60% of Americans would be happy to have their taxes increased to help pay off the bill. Yet, all we get from Congress are meaningless tax cuts, including those for the uber-rich, that only add to the problem.
Perhaps they should get rid of a few of the 130 military bases we have in other countries around the world or get us out of Afghanistan when we know Bin Laden is really in Pakistan. We could have also done without the new traffic light here on A1A by the way, which was something like $175,000 in federal funds.
Worse, every American who’s saying we need to reduce the debt is blowing it out both sides. We all have debt. It’s part of the American Dream.
If you have a mortgage of say $200,000 at 4% interest, you’ll pay roughly $143,738 in interest on the loan over the course of 30 years. So, in essence, you are carrying a debt of $487,476 over the next three decades, even though you only make $43,000 a year. Add in a car, and your debt increases exponentially. And you think the government is in debt.
You could argue that the car and the house are assets, but not until they are paid off. And the house is never truly an asset since you would have to sell it at the end of the loan to make it an actual asset. If you sell it, you pay capital gains on it, plus you have to plow the money back into something else since you need a place to live.
So, what’s really different between you and the government? Nothing really. We’re all in debt. And because we are, the world keeps turning because the interest we pay is turned into loans for others. Without debt, none of us would be able to get a bloody loan. Or if we could, it would be at Guido rates rather than the rates our Keynesian government sets artificially to keep us from dropping down into an economic rabbit hole from whence we could never escape.
I for one, think it better for the government to be like the rest of us. Manage the debt, try to increase revenue (we would call this a raise or a new job with more income) and spend less but still spend (notice when we stopped spending over the last two years, we created a recession that was worse than it had to be. That’s because 70% of our economy depends on consumer spending. When we stop, the economy goes into the toilet quickly).
Well, that’s enough for today class on my RobZerrvational view of the economy, debt and our leadership’s current obsession with cutting off a hand to spite our face.
Somewhere on the Treasure Coast rummaging for loose change,
— Robb