An obsession with debt

By Steve Gillon

My good friend Peter had a car problem. He loved old, rare and quirky cars that kept breaking down. He never seemed to have reliable transportation, so he kept buying old, rare and quirky cars. Soon his garage, driveway, and finally his front and back yard were packed with really cool but broken cars. He said that nobody in town was good enough to fix his treasures, and parts were hard to come by, so it was easier to buy another car when he needed one. Nobody could convince Peter he had to stop buying and start maintaining.
Peter’s obsession with cars is a lot like our obsession with debt. The principal cause of the latest economic crisis is borrowing and lending. We borrowed too much, and they lent too much. They borrowed more to lend us more, we borrowed even more, and so on. When we realized we could not pay back everything we borrowed, we stopped borrowing, but the economy depended on borrowing, and it slowed down. Some of us lost jobs, which meant we couldn’t repay our debts, so there was less money to loan out again, and so on, a spiral from an overheated economy dependent on borrowing, to a contracted economy desperately in need of money available to borrow.
With entire industries unable to sustain themselves, and investment capital gone the federal government had to step in to “stimulate” the economy with infusions of cash. The problem is, every dollar the federal government collects in tax revenues is not only spent, but spent before it’s collected. So to stimulate the economy, the federal government borrowed, and borrowed as it’s never borrowed before. The logic is that when the economy recovers there will be more tax revenues, and less need for government stimulus, so the borrowing can be repaid.
There’s nothing wrong with the federal government borrowing to spend now, and taxing to repay that borrowing later. It’s called “fiscal policy.” In good times the federal government raises taxes and reduces government spending, to slow the growth of the economy to a sustainable rate. In bad times, the federal government lowers taxes and increases government spending, to speed up the growth of the economy to about the same, sustainable rate.
At least in theory, the Federal Government is “of the people, by the people, and for the people.” In other words, we ARE the Federal Government, and when the federal government borrows, it borrows from us, so it’s borrowing from itself. Since we are borrowing from ourselves, we can borrow as much as we want, it’s almost like moving a wallet from the right pocket to the left pocket. The money’s in a different pocket, but the same set of pants.
There are two problems with fiscal policy as a tool to dig us out of this economic hole. First, we are all too ready to use fiscal policy to stimulate, but hardly ever willing to use fiscal policy to slow the economy. The only times that the federal government collected more revenue than it spent, since the late ’50s, was in the last years of the Clinton Administration. The federal government has borrowed a staggering amount during the last eight years, to pay for two unending wars, questionable tax reductions, and earmarked appropriations designed to reelect incumbent legislators. Now, when a healthy line of credit would come in handy, the federal government is grossly over extended, and yet it must borrow, and borrow, and borrow some more.
The second problem with fiscal policy is that now we aren’t borrowing from ourselves, but from other countries. We are the largest debtor nation in the world. No other country in the world owes its neighbors more than the U.S., and our largest creditor is China. The political implications of borrowing over one trillion dollars from Communist China are staggering. Moreover, the level of debt we have reached and the vulnerability of our banking system has led investors all over the world to question the strength of the U.S. dollar. There is now speculation that the world may turn to another currency, possibly the Euro, the SDR of the World Bank, maybe even the Yuan, the currency of China, as the new international currency. It almost looks like the world is telling us our debt, like Peter’s car collection, is out of control.
Peter never could control his passion for cars. Fortunately, he fell in love with, and married a woman who could. Soon after they married, she let him keep not one, not two, but three, of his favorite cars. She sold the rest and bought herself a sweet little Mercedes convertible, and a boring but dependable sedan for Peter to drive to work and the car parts store. Hopefully, the lessons we painfully learned in the last two years, some education about the dangers of debt, and enforced discipline in the financial industry will do for our economy what Peter’s bride did for him.

Steve Gillon is associate professor of business and public policy at Kenai Peninsula College. Four of his five vehicles are presently working.

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Posted by on Apr 29th, 2009 and filed under Bay View. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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