Monday morning debt recommendations

Lynne Kiesling

Too many people are writing and saying too many interesting things to digest on the debt actions in the eurozong and the debt downgrade in the US … and some people are saying some extremely misinformed and silly things too. But I’d like to highlight a few comments I’ve read today and over the weekend that I think make sense.

In Sunday’s Daily Telegraph (UK), Janet Daley provided a good discussion of how the US history and culture of individual liberty relates to the current debt/spending fiscal crisis facing us; particularly for a non-US audience, I thought her analysis was really useful:

The truly fundamental question that is at the heart of the disaster toward which we are racing is being debated only in America: is it possible for a free market economy to support a democratic socialist society? …

But the US has a very different historical experience from European countries, with their accretions of national remorse and class guilt: it has a far stronger and more resilient belief in the moral value of liberty and the dangers of state power. This is a political as much as an economic crisis, but not for the reasons that Mr Obama believes. The ruckus that nearly paralysed the US economy last week, and led to the loss of its AAA rating from Standard & Poor’s, arose from a confrontation over the most basic principles of American life.

Contrary to what the Obama Democrats claimed, the face-off in Congress did not mean that the nation’s politics were “dysfunctional”. The politics of the US were functioning precisely as the Founding Fathers intended: the legislature was acting as a check on the power of the executive.

After discussing possible policy alternatives in Europe and the US, she makes the Einsteinian conclusion that insanity is to keep doing the same thing and expecting a different outcome:

A general correction of the imbalance between wealth production and wealth redistribution is now a matter of basic necessity, not ideological preference.

The hardest obstacle to overcome will be the idea that anyone who challenges the prevailing consensus of the past 50 years is irrational and irresponsible. That is what is being said about the Tea Partiers. In fact, what is irrational and irresponsible is the assumption that we can go on as we are.

Sounding a similar note is Pete Boettke, with whom I agree that we’re gonna have to face it, we’re addicted to debt:

The global economy doesn’t need an international plan of supervision and stabilization, instead what is required is bold action by policy makers to slash spending and let society reclaim responsibility from the state.

Another aspect of this situation that has been interesting has been how various parties are trying to spin the Friday S&P “$2 trillion math mistake” in the run-up to the downgrade announcement. I took those spin attempts with a grain of salt, as I suspect did anyone who has ever done a forward-looking scenario analysis and sensitivity analysis of financial data. Is one person’s “mistake” another person’s different assumption, or different choice of scenario?

John Taylor, who has much more experience than I do in this type of work, suggests precisely that:

But if you examine the details of the S&P–Treasury–White House dispute, rather than a “math error” you will find what is better described as a “difference of opinion” about a forecast for future government spending.  In other words, the issue is about the appropriate “baseline” for government spending in the absence of more actions. Since when did different views or assumptions about the future become a math error?
In their original draft report, S&P evidently assumed that discretionary government spending would grow by about 5 percent per year over the next 10 years if no further action were taken (beyond the Budget Control Act of 2011). In the final draft, at the urging of the Treasury, they assumed that discretionary spending would grow at about 2.5 percent per year if no further actions were taken.  The first assumption leads to a higher level of debt than the second.  Over 10 years the difference is about $2 trillion.

So this is a matter of different assumptions rather than a math mistake.  In fact, the alternative assumption of faster spending growth is not so unreasonable, and whether or not S&P put it in their final report it is something they or anyone else should worry about.

I recommend reading Taylor’s post carefully as you formulate your own interpretation of the debt downgrade and the policy alternatives available to us.

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