Issue #23, Winter 2012

Rethinking Debt

Washington refuses to understand that debt can be an essential tool for economic growth. Can we overcome this irrational and destructive fear?

But “Minsky insurance” can’t be the only thing we learn from the debt bubble and the great recession it caused. A key insight from the 2000s, when the debt bubble was inflating, is that in the midst of the lost decade for middle-class income growth, debt acquisition became the only way for too many families to get ahead. We can and should impose regulations to break the financial instability cycle—public policy doesn’t do people any favors when it supports unsustainable loans in place of earnings. But we must recognize that absent income growth, if channels of overleveraging are blocked, middle-class living standards will be that much more vulnerable to stagnation.

That suggests an investment and jobs agenda that would take me well beyond my scope. My point here is simply that we will be unable to support that or any other progressive agenda, in the short or long run, if we fail to understand the role that debt can and should play in our economy and society. But I’d go further. Our misunderstanding and irrational fear of debt and deficits prevents us from resolving the most important policy question we face: What should be the size and role of government? As long as Republicans want to cut deeply into government spending and Democrats’ main distinguishing feature is the desire to cut less deeply, we will never answer this question.

The debate on this foundational issue cannot begin from “How quickly do we get to primary balance?” or “At what year in the budget window does your plan have the debt-to-GDP ratio declining?” That is government by accounting, motivated more by fear than vision. And it is a debate structured to shrink government.

My analysis of future challenges—demographic, economic, and environmental—leads me to believe that in coming years we will need a stronger and larger government sector than we have had in the past. Others see the future differently. Our two sides must debate this question from the bottom up: from what we expect and need in terms of investment in public infrastructure, retirement security, health care, defense, safety net protections, education and other mobility enhancers for the disadvantaged, countercyclical policy, innovation, and so on. To begin this debate from a position of deficit reduction—no new taxes, only spending cuts—is to tilt the result against progressives from the start. It is to begin from the assumption that we can’t afford the above functions, that we’re broke, or worse: We’re Greece!

Despite what so many people say, we are neither. We are fully capable of paying for, in a sustainable manner, a government that meets the functions enumerated above. But to do so requires a rational rethinking of debt and its role in the economy and society. I recognize that rational thought on matters economic, especially this one, is in short supply these days. But while its supply is down, demand is up, and the more we’re promoting that discussion, the better.


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Issue #23, Winter 2012
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Ever hear of the agency problem of economics? Well, the government has it. In spades. So more debt to an incompetent government, who engineered the crisis, and to its venal and equally incompetent campaign contributing revolving door bank cronies, will do nothing whatsoever. Except maybe land you a cushy sinecure, you damn proto-wannabe bureaucrat.

Dec 13, 2011, 2:53 PM
Robert Walker:

Mizrahi -- your comments (well, actually, one posted twice) are quite substantive and important to a resolution to our problems.
(Sadly, the vitriol almost sent me running before I took the time to see what you're trying to say.)
It would be insane to keep expanding a government with a poor track record. At some point, drastic measures need be taken to change the way government operates.
We hope we can accomplish this without resorting to anarchy while waiting for a new government to evolve.

regards, common man bob

Dec 13, 2011, 5:42 PM
Steve Bannister:

I would add Evsey Domar to the wise troika. He formally and clinically defined debt sustainability.

Dec 14, 2011, 7:14 AM

I don't really see any validation here of your claim that debt is an essential tool for growth. You say "Borrowing from the future to invest in the present is one way to improve that future." Well if that's the measure for essentialness, then I guess saving for future spending would also qualify. What makes spending now better than not spending now? If we could claim that the spending bought us something that matters, that would help. Putting people to work would be nice, but if you want the economy to function those people need to be creating value. This essay appears to me to be a very long-winded way of screaming "Breathe!" at a dying patient.

Dec 14, 2011, 3:50 PM

Mizrahi never read Irving Fisher's accurate description of a debt/deflation cycle Jared, so you're wasting your talent on him.

Plus Mizrah's favorite political party, I'm thinking, invented crony capitalism a century ago, and in 2002 eliminated paygo so they could run up the debt bill in good times. Madness.

Run the bill up. They're paying us to take their money. Time to invest instead of dropping bombs on Muslims, or paying oil companies not to drill.

Dec 14, 2011, 3:55 PM

I think Modern Monetary Theory economists like Warren Mosler make a better case against debt and deficit panic by pointing out the fundamental fact that government debt = private sector savings to the penny.

Treasury securities are in essence savings accounts and "paying off debt" when they mature is as simple and pain free as moving balances from these savings accounts to checking (reserve) accounts at the Fed.

Dec 15, 2011, 10:43 AM

Lots of good points in this article... But it's worth pointing out that it's ridiculous to increase the level of debt as a substitute for our generation's unwillingness (esp. that of our generation's rich) to pay their way. Taxes in the US are at historic lows and that's the main reason we have deficits and a national debt.

Secondly, public spending in a recession makes sense in theory... but given the way that the US economy has changed in relation to the world (given our status as a huge importer), we should think twice before just throwing govt money at growing our GDP... even in a recession. The multipliers now appear in China even more than here. It's time to think differently (at least for us to think differently). We should be targeting govt investment to create sustainable jobs and exports... like Europe, Japan and China. We shouldn't be funding "shovel ready" jobs that disappear with govt funding.

The folks setting policy, including Bernstein, need to get smarter. Flying our economy according to the old flight plans "ain't cutting it. "

Dec 15, 2011, 4:42 PM

And btw, I'd say the govt bailout of Chrysler is a prime example of useful govt investment. Investing in green tech would be great too... but in light of a recent "scandal", we have to expect that' we'll sometimes pick losers as well as winners.

Dec 15, 2011, 4:51 PM

To say government engineered the economic crisis is not reality based thinking. It is fantasy. Did government create CDOs (collateralized debt obligations) that purposefully confused investors and cheated them? Did government gamble with Credit Default Swaps which still hang like death over credit markets? No. The government, shackled by ideology based thinkers in the Bush Administration and Congress, tied the hands of regulators that were prevented from doing the jobs that they were legally obligated to pursue. Republicans caused the economic crisis, then blamed in on government because government didn't let "bad firms fail." What a laugh. That was GW Bush and Wall Street's policy, pushed heavily by Republicans. That thinking is the cause of the economic crisis, not the government whose proper function is regulating the abuses of the private sector. It's time to let government do the regulatory job that it, and only it, can do.

Dec 15, 2011, 8:04 PM

"A precious few economists warned of the housing bubble, which was the root cause of the recession."
This is oversimplification to the Nth degree. The "bubble" was not a bubble until two triggers:
1. Job loss...can't pay the mortgage without a job, duh!
2. Effective default of the credit insurance sector...AIG, for example and the incorrectly rating junk derivatives as AAA with no reserves to cover real mortgage defaults. Buffett called them financial weapons of mass destruction for a good reason.

Dec 17, 2011, 7:42 AM
Lonnie Palmer :

Excellent essay. I am frustrated by President Obama's occasional comments that signal some level of agreement with the "We must shrink government and deficits immediately crowd." While these comments play well the political analysts who think they know what independents want (smaller government is their latest guess) these comments inadvertently help to spread harmful misunderstanding regarding when and how much the federal government needs to borrow. As the author has stated the US government should be paying down debt during good times and increasing borrowing to create missing demand during a slack economy. This isn't rocket science. It's Economics 101 in college.

Dec 17, 2011, 8:30 PM

... timing the market? Perhaps I can sell you some stock?

Dec 19, 2011, 1:25 PM
Li /Germany:

The problem about debts is, that they make you dependent on the loaner. Means, if the state borrows money from banks you have to do what banks want you to do. And this means that politics in made by banks and not by the government and the people of a nation.

If America wants to be a free nation, they have to be free of debts first of all.

Though, bankers will tell you the opposite, for obvious reasons.

Feb 1, 2012, 3:07 PM

People like that below me really discredit their own opinion with their anger, and also apparently didnt read the whole piece and completely deny the foundation of historical knowledge that support the basic ideas of public spending. Cronyism in our capitalism and an over concentration on incumbant economic power is a real problem, and legitimate concern, but the fear based reactionary criticism of strongly supported ideas is out of focus, a true rejection of all relevant information.

Feb 3, 2012, 10:46 PM

People like that below me really discredit their own opinion with their anger, and also apparently didnt read the whole piece and completely deny the foundation of historical knowledge that support the basic ideas of public spending. Cronyism in our capitalism and an over concentration on incumbant economic power is a real problem, and legitimate concern, but the fear based reactionary criticism of strongly supported ideas is out of focus, a true rejection of all relevant information.

Feb 3, 2012, 10:48 PM

I am curious about how GDP is mesuared. To me, it seems that our collective wealth as a nation that we all share is made up of goods and services. However, some "services" would be questionable as to whether to include in GDP. For example, any and all services that pertain to income tax, including IRS personnel, tax accountants, and tax lawyers. These services are needed only because we have an arcane tax system that IMO takes away from our collective wealth. If we did not have that ridiculously complex system, most of the people employed in that arena could make more productive contributions to our wealth in some other sector.More generally speaking, most government workers do not add to our real wealth. If those individuals were working for themselves or for companies that produce something useful, our collective wealth would be greater.So if the GDP has increased only because of the expansion of government, I would question the method of GDP calculation.(Over the weekend I read that Federal workers now receive pay that is 20 percent more than their counterparts working in private industry. If you include their benefits package, they receive 50 percent more than workers in private industry!)

Sep 22, 2013, 8:31 PM

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