Common Sense Economics

Alan Greenspan was being interviewed about his new book The Map and the Territory in Time magazine recently and responded to the question, “Knowing what you know now, what would you have done differently during your time as chairman of the Fed?”  His response was in part, “I always knew debt was important.  If I could go back and recalibrate my psyche and fully understand how toxic debt really is, that would have been very helpful.”  That comment leaves me incredulous.  Chris Carter might respond with “C’mon Man!”  My daughter might say something like “Duh!”  I am holding back a “You think!?!”  I never cease to be perplexed by the inability of individuals to use common sense once they get into a position of power.  Given the insulated nature of the position Mr. Greenspan held, I cannot understand how he could have thought otherwise while leading the Fed.  Everyday Americans understand why debt is a problem.  They know that they pay a premium to use other people’s money.  They also know that if they don’t make their loan payments, someone will come and foreclose on their houses or repossess their cars.  Most Americans live with some debt, but they seek to make it manageable and work hard to prevent it from being passed on to their kids.  They don’t allow it to overwhelm all that they are trying to achieve and they certainly don’t allow it to take away everything that they have worked for in life.

Not so the U.S. government.  It thrives on debt.  Our politicians seem to think there is no debt level too high.  I have a theory about why that is. Our political system is corrupt.  I don’t mean that the politicians are on the take, though there may be an argument there. I mean that we have allowed our indirect democracy to become corrupted by giving our government the ability to give people what they want.   Once we opened that door, we gave politicians the ability to make promises that would be paid for from the public till.  For much of our country’s history, we did a pretty good job keeping this from occurring. There were certainly favors and preferential treatment, but that is significantly different than what we are seeing today. The New Deal began this downward spiral.  It escalated with the advent of the Great Society programs of Lyndon Johnson.  In today’s America, it can be seen in all forms of entitlements from mortgage tax deductions to subsidized loans to food stamps and welfare checks.  Most recently it has taken on the form of healthcare.  Politicians can now come to the American people and without flinching say, “Vote for me and I will increase your Social Security check” or “Vote for me and I will give you health insurance.”  Someone might argue that this is not the same as buying votes, but the distinction is lost on me.  The Founders of this great country wanted to separate the people from people who ruled when possible.  That is why senators and presidents were not elected directly by the people.  I have a hunch they did this in part to prevent the political system from becoming the quid pro quo it has become today.

I would be interested in the thoughts of my economist friends on this one, but common sense seems to suggest that increasing debt above the levels we have now is a problem for the government.  Perhaps it is too simplistic to compare individual debt with governmental, but I think there are some clear indicators that we have gone too far. We have an entire continent to look at across the Atlantic to show us what happens when you let debt get out of hand.  But what constitutes “out of hand”?  During the government shutdown and debates over the debt ceiling, I kept hearing news reporters say that Congress was debating whether or not to raise the debt ceiling so we could borrow more money from foreign countries.  I thought to myself, is anyone listening?  This country has been the creditor for other nations for most of its history.  We rebuilt Europe after World War II, for example.   Now we are the debtors.  Often that debt is owed to countries that don’t have our best interests at heart.  I recently heard that our national debt has risen to the point that if it was divided among individual Americans, each one of the more than 300 million citizens of this country would owe over $50,000.  That is 35% higher than that of the beleaguered nation of Greece.  Now you see why I think we are running out of common sense.  Perhaps Mr. Greenspan has finally regained his, though I am not sure. Later in the interview he was asked about how bad the conflict was in DC.  He responded by saying that “Clearly the problem is within the Republican Party.”  I agree that there is a problem in the Republican Party, but its members were the only ones I heard during the government shutdown saying enough is enough.  We cannot continue to raise the debt without restraint.  But there is plenty of blame to go around.   What will we do when our creditors come to collect?  Foreclosure won’t be an option.   It is time for Americans to stop expecting something from government.  It is time for Americans to demand some common sense.

7 thoughts on “Common Sense Economics”

  1. It’s quite a shame, in my opinion, that the best we can find people talking about these days is deficit-reduction, as though our goal should be to go in to debt slower and slower! We are in such a spot now that even our more conservative budgets continue to project deficits for several years at least.
    What I struggle with is where to cut. Clearly, entitlement programs can’t continue to grow at the rate they are, so cuts should be enacted there. We just can’t handle leaving that much of the budget alone. Conservatives tend to shy away from cutting the military at all, however.
    Wouldn’t it be reasonable to meet somewhere in the middle and discontinue, if only temporarily, some military expenditures? Couldn’t we try cutting, for example, military R&D? Our military is so vastly superior to all our most recent opponents that it seems like continued R&D could be a short-term cut.

  2. Tom
    I share your frustration. No time to really assess the national debt issue economically, but as a short note, I think Nobel Laureate James Buchanan and Dick Wagner (his colleague @ George Mason University) nailed the issue in their book, Democracy in Deficit. Buchanan and Wagner showed that this problem was really the intellectual outcome of the Keynesian revolution in the 30s. Yes it manifested itself in the 60s, but the intellectual defeat which led to it was earlier. I’ll try to do something on the debt in the next few weeks; my macro students are doing their semester paper on it so I better give it some more thought anyway!

  3. I would disagree strongly between your linkage of unsustainable debt levels with the welfare state. Its not an inherent link. Many Scandinavian countries have manageable debt levels because they have higher tax levels.

    I would argue that our debt levels are more a result of divided government. In many democratic governments, there is one center of power, resting in parliament and the PM. This allows winning parties to institute their programs and pay for them. In the U.S.A, we have two champers of congress and the president. This forces compromise (not a bad thing!) but unfortunately, an easy compromise is to institute programs and not pay for them.

    As far as the idea that the problem with Europe was debt levels…..I would argue that the elevated debt levels were a symptom of a larger problem. Not the cause.

    Michael Pettis ( has a great book, called the great rebalancing, on the Global Financial Crisis and how trade imbalances helped create it. He has a chapter on europe.

    To sum the book up shortly, its focuses around one idea. The foundation of accounting is that assets must equal liabilities. Always. Surpluses in one country must be matched by deficits in other countries. Always.

    Most countries around the world have kept their currencies artificially low in order to boost exports. As a result, our dollar is artificially high. Essentially, this allows other countries to import demand into their economies from the U.S.A. This weakens demand in the U.S economy as our exports decline. This creates a situation where the U.S has a current accounts deficit and much of the world has a surplus. The U.S.A then has two choices. It can either increase debt levels through fiscal or monetary policy, in order to weaken our dollar and stimulate the economy, or it can allow unemployment to increase. Obviously, most governments will choose to stimulate. A similar situation happened within the Eurozone. German savings were exported to the periphery. Countries such as Spain were overwhelmed by the cheap credit.

    1. Response to David’s comment: I don’t think it is unreasonable, but we have to recognize that the military has taken significant cutbacks this year already thanks to sequestration. IN addition, the military is somewhere around 17 to 18% of the overall budget and entitlements weigh in at over 60%. So, it seems clear to me where the cutting needs to happen.

      Response to Bluntj: I don’t pretend to have enough knowledge in the trade deficit solution, so I won’t go there now. I think Pettis makes some interesting arguments, however. Your early comments intrigue me, however, as I wonder if you are asking for higher taxes. Yes, the deficit can be addressed through higher taxes and Scandinavian countries do exactly that. But they also damage their economy’s ability to grow by taking so much of the incentive out of the system. We in American already complain about working until May to pay the various tax-men. Do we want “Tax Freedom Day” to be in July or August? If so, I am not sure we are encouraging the type of entrepreneurial innovation that has made this country an economic powerhouse. People want to be free to pursue a profit, but if too much of that profit is taken off the top by the government, incentive is lost.

      I find the divided government argument you introduced intriguing. I am not sure, however, that it resolves the issue I raise in my initial post. Both systems can be corrupted by the quid pro quo problem where politicians pander for votes. I think you suggest this in your final sentence of that paragraph, however.

      1. Personally, I would be fine with tax freedom day being later if that made society more equal, even at the expense of economic growth. I expect we differ on our value systems here, but that’s why we have elections.

        Obviously some taxes are worse than others, a federal consumption tax and/or a carbon tax would be greatly preferable to income tax increases since such taxes would avoid directly penalizing work.

        Have you read John Rawls? I think his original position is a pretty sound thought experiment that supports his justice as fairness concept, this concept leads to, among other things, some form of universal health care.

  4. bluntj
    Calling for a society that is “more equal” is nothing more than expressing displeasure with the current state of affairs. What is unequal that ought to be “more” equal? Are you willing to go all the way with this line of thinking and call for complete equality? If not, why not? If so, are you willing to have some citizens treated unequally to allow for equal outcomes? What moral framework are you using that leads to this? Simply Rawlsian ethics? Are you willing to advocate for complete equality if this leads to all citizens being worse off than in an unequal society?

    Things to think about.

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