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Faith & Social Justice: In the spirit of Richard Overton and the 17th C. Levellers

Economic Justice Primer 4): Not All Debt is Equal

We know in our personal lives that debt is bad. It hurts us and our loved ones. When we fail to budget properly and we run ‘budget deficits,’ it leads to longterm debt, poor credit ratings, and can even lead to foreclosures, bankruptcies, garnished wages, possibly even homelessness.  Likewise, we are wise to be concerned about excess debt for governments, including our government.   For most of our history as a nation, we’ve had some debt, but it has usually been small and manageable.  Now, for the second time in 20 years (the first time was 1981-1993), it looms very large. When coupled with a large trade deficit (we import much more than we export), it weakens our overall economy. It leads, if unchecked, to higher interest rates and a very weak dollar–and this hurts not only the government, but the nation as a whole.

So, normally, we should be ‘fiscal conservatives’ and ‘deficit hawks,’ attempting to balance the federal budget and reduce the federal debt.  But not all debt is equal and there are times when a government must go further into debt even if it is in a weakened economic position.  Recessions and depressions need massive government spending to end–even if it means postponing reducing the problem of government debt.

Let’s explain this with an analogy from personal finances.  Excessive debt is normally very bad.  Specifically, maxing out all your credit cards on luxuries is foolish.  But, suppose a storm blows the roof off your house.  You have to fix the roof even if it means getting a loan from the bank.  If you have previously run up your credit cards and have a poor credit rating, you can’t wait until your finances are better to fix your roof. You have to get the roof fixed immediately. So, that probably means borrowing at a higher interest rate and will probably mean that it takes longer to get your credit in good shape and reduce your indebtedness. That’s bad, but you have no choice.

A recession is like having your roof blown off.  The recession that began in Nov. ’07 and led to the stockmarket crash of  August ’08 has been much bigger than most recessions: a mini-depression or “Great Recession.” It’s like having the roof blown completely off and damage to 3 of the 4 walls, too.  So, is all the government spending on recovery, infrastructure, healthcare reform, school reform, etc. risky? Yes.  It probably means that it will take longer and hurt more to get the budget balanced, end the deficits, and reduce the national debt.  We have some national pain coming.  It would have been better if the Bush administration had not run up the national credit cards and put us in this weakened position when the financial roof was blown off, but they did.  Failure to spend (wisely) now would lead to worse problems than the problem of postponing the debt reduction–just as leaving your house without a roof would be worse than the painful borrowing of money at high interest to fix it while you had a bad credit rating from previously foolish habits.

Now, WHY must government spend during a recession or depression? It seems counter-intuitive.  When times are hard, families tighten their belts and spend less. So do most businesses. They cut expenditures any way they can in lean times. Why shouldn’t government do the same? 

Remember the law of supply and demand? It’s the most basic law of economic, right?  If demand (for a certain product or service or, in really good times, for MANY goods and services) is high and supply is low, what happens? The prices on the goods and services in short supply and high demand go up, right? Right.  That can lead to the problem of inflation which, when too high, can end an economic upswing.  But when supplies are plentiful and demand is low, what happens? Prices go down–maybe even drop through the floor.  Now, a recession or depression involves HIGH supply and VERY low demand. (Remember the news photos of all those new cars last fall sitting in ports with no call to go to dealerships. High supply and low demand.) And it creates a vicious cycle:  Money is tight, so people cut back their spending.  People aren’t buying, so businesses cut back their orders. Then the businesses start laying off workers.  People without jobs spend less, which leads to more cut-backs, etc. (Unemployment is a LAGGING economic indicator. When it begins, it means a recession has already been underway for a time.  When a recession starts to end, unemployment is the last thing to get better.) So, if government cut back spending, too, it would just lead to even less money in the system, making matters worse.

In a recession/depression, the way out is for government to become the “spender of last resort.”  Government does road repair and bridge repair and new roads and bridges–and spends money. The contractors have to hire new people. The people buy things. Government spends on “cash for clunkers” and it keeps dealerships and car parts manufacturers from heading into the same death cycle the auto manufacturers were in.  Government buys new fleets of cars for the FBI, etc.  The spending–the more the better–creates jobs and, over time, reverses the recession.  We know this from history:  This is how Franklin D. Roosevelt and the New Deal got America out of the Great Depression–which had been going for FOUR YEARS when he took office.  It was quite a hole to dig out of and it took time–especially since this kind of repair was new and experimental. But by 1936, it seemed the Depression was ending. So, Roosevelt gave into the critics and became more conservative:  Cut spending, raised taxes, and balanced the budget–and we slipped back down into Depression in 1937 since the economy was still too weak to stand on its own.

Wait! You’re saying. I learned that what finally got the U.S. out of the Depression was not the New Deal but World War II.  That’s right, but it wasn’t the war itself.  Wars are expensive and usually hard on economies even for the victors.  (That’s why G.W. Bush’s insistence on further tax cuts during two major wars was disastrous–you NEVER cut taxes during wartime. It meant borrowing the $3 trillion–and counting–for the wars in Afghanistan and Iraq. It was part of that running up of the credit cards which made us so economically vulnerable to this huge recession.) WWII helped the U.S. out of the Depression because it was a MASSIVE government spending program–far larger than anything ever envisioned by the New Deal.  We needed to replace every ship destroyed in Pearl Harbor, plus build more. We had to build a new Army Air Force from scratch. We needed new tanks, new guns. The draft itself was a massive jobs program that overnight nearly ended unemployment.  From an economic standpoint (as opposed to actually beating the Axis powers) we could have pushed all those planes and tanks and battleships into the oceans and kept building more. Factories reopened for the war effort. Thousands were hired. New money was put into the economy in a virtuous cycle. THAT’S why WWII brought us out of the Great Depression–nothing to do with war itself.

When wars end there is usually an economic slowdown–a recession or depression.  We had one at the end of almost every war the U.S. has fought, including the Civil War (unemployment doubled after the war–not counting the newly freed slaves now entering the job market–and the South, which had been the richest part of the nation, became the poorest for most of the next century), the Korean War, the Vietnam War (ended in ’75 and Jimmy Carter got stuck with the bill om Jan. ’77), and Gulf War I (led to the Bush I recession).  So, why was there no recession at the end of WWII?  Several reasons–all of which illustrate our main point that not all debt or all spending is equal.

  1. The Marshall Plan.  The U.S. spent millions of dollars to rebuild Europe and Japan after WWII.  And we cancelled war debts. That made it harder for us to balance our federal budget in the short run, but it gave us markets for U.S. goods and services:  So, that U.S. manufacturers that were no longer making many tanks or bombers could make and sell other things.
  2. The G.I. Bill.  Returning soldiers were helped by federal spending to go to college or learn a trade that led to higher wages and less unemployment–it also delayed some of their return to the job market, so that unemployment didn’t rise dramatically.
  3. The women (Rosie the Riveter and her friends) who left their homes to work in the factories while their husbands and fathers and brothers fought and died overseas, mostly chose to return to domestic life–which allowed the returning male soldiers to take their place–also preventing a huge unemployment spike at the end of WWII.
  4. VA and FHA loans for houses.  The federal government helped many American families (there was racial discrimination here so that most of the help went to white families) buy their own homes–especially returning soldiers.  This, along with the federal highway system under Eisenhower (more infrastructure spending), created the suburbs–which may or may not be a good thing in our new ecological era.  But at the time, it was a great boon to the American economy. Every house built was more money into the economy and so was every home purchased.  And none of it would have happened without federal programs.

So, yes, high deficits and debt on behalf of government is usually bad.  Frivolous spending should be avoided:  Like price supports for tobbacco and farm aid programs started during the Great Depression aimed at small family farms that are now going to subsidize millionaires who don’t live anywhere near the factory farms they own.  Or the military budget which is higher than the next 25 nations combined (and, except for a global war following a Depression, excessive military spending is usually bad).  Tax giveaways to the rich also lead to massive deficits–as they did under Reagan and Bush I as well as Bush II. We know from history that “trickle down” economics doesn’t work–not much trickles down.  Balanced budgets and a “pay as you go” system is normally much smarter.

But not all debt is equal and there are times when all governments need to engage in deficit spending–or deficit investment.  Think of it similarly to times when small businesses realize that they either have to grow or fail–and they borrow (carefully, we hope) to invest in new or better equipment, to hire new people, open a new branch. They don’t expect to see the fruits of this investment in terms of profits for a few years.  Similarly deficit spending during a recession is an investment that should pay off when the recession ends. How soon depends on factors such as how big the recession is and how big the deficit was BEFORE the recession.

September 27, 2009 - Posted by | economic justice

5 Comments

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  3. Hi Michael. Both the Left and the Right have the common goal of wanting to get money into people’s hands. The Right’s proposal is tax cuts, whereas that of many on the Left is for the government to spend money, which will then get into the hands of those who’ll spend it. But, if getting money into people’s hands were the solution, why did Bush’s release of stimulus checks fail?

    Comment by jamesbradfordpate | September 29, 2009

  4. James, it had to do with the size of the recession–the biggest in decades. Tax cuts, especially when targetted to the working poor (who need the extra cash for groceries, gas, etc.) can have a stimulus effect on the economy. The rich will simply save it. In a larger recession, tax cuts don’t do much because everyone just holds onto their money. Infrastructure projects (in addition to being needed for the health of the whole economy) work because the opportunity to just save $ and keep it out of circulation isn’t there.

    Comment by Michael Westmoreland-White | September 29, 2009

  5. […] more here:  Economic Justice Primer 4): Not All Debt is Equal « Levellers Share and […]

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