Jamie Galbraith’s Dog Whistle (2)
The only problems Jamie seems to find with with debt fueled economic growth are that government might spend too much, or too wastefully:
It’s true that government can spend imprudently. Too much spending, net of taxes, may lead to inflation, often via currency depreciation–though with the world in recession, that’s not an immediate risk. Wasteful spending–on unnecessary military adventures, say–burns real resources.
What he neglects, however, is that this debt fueled growth simply implies that you mortgage your future to put food on your table today – that it premises present consumption on wages which only will be earned in the future. This, he advises us, is no problem for government since:
[Public debt] does not have to be repaid, and in practice it will never be repaid. Personal debts are generally settled during the lifetime of the debtor or at death, because one person cannot easily encumber another. But public debt does not ever have to be repaid. Governments do not die–except in war or revolution, and when that happens, their debts are generally moot anyway.
What then is the purpose of accumulating such public debt? If this debt is never to be repaid, why wouldn’t the government not just print the money it needs in sufficient quantities and not accrue any debt at all? Jamie responds that by borrowing from the banks government is able to generate net income to society:
Far from being a burden, these debts are the foundation of economic growth. Bonds owed by the government yield net income to the private sector, unlike all purely private debts, which merely transfer income from one part of the private sector to another.
Okay. As described here, government borrows money from the banks, thereby creating money that did not exist before. This money has no economic value whatsoever as it just sits on the books of the Treasury unspent – it is just so many digits on a computer. And, it never need be repaid so long as it generates a stream of equally valueless dollars to service the debt, which the government can create as needed.
We can see how all of this leads to the growth of worthless fiat, but it is not clear how any of this leads to economic growth.
So let transfer this money to the unemployed, who are in danger of being homeless and having their cars repossessed. Now those of us who are unemployed can pay our bills – and the banks needn’t come to toss us into the streets. Since the money is the same worthless fiat previously borrowed from the banks, all it has done is make a circuit through Washington, into your banks account, and finally back to the bank.
Again, it is possible to see how this results in the growth of worthless fiat, but it is not clear how any of this leads to economic growth.
Finally, let’s assume that instead of simply paying their bill the unemployed use this sudden flood of riches to purchase a new home or a new car. Now we seem to be getting somewhere! Autoworkers and construction crews are being employed to produce new goods. GDP dutifully expands, and recovery is on the horizon! Side by side with the expansion of worthless fiat, there is an expansion of real output.
Jamie economics has been vindicated.
Based on this successful exercise in debt fueled growth, we now hold a lottery. Each year government will borrow money from the banks and purchase a home and two cars for 100,000 lucky couples. (In order to accommodate the moralities of Congresspersons Stupak and Ashburn, we limit eligibility to those couples that are “traditional” partners, and, only where the woman has not had an abortion.) If 100,000 couples is too large a number – we do want to avoid inflation – we can reduce the figure to 50,000 or even 25,000.
The results are equally positive for GDP – economic output continues to rise, tens of thousands of auto and construction workers are hired. People have money in their pockets. Our new Cash 4 Consumption program is a big hit with the auto and construction industries. Until, of course, it comes to an end. And, then these industries shed workers like a cheap suit. But, its worse than that. Even if we do not end the program, because of changes in the productivity in the industries, each year the same lottery produces less GDP growth. So, in order to maintain a given path of GDP growth, each year more couples have to be added to the program.
Steve Keen expresses the problem this way:
A debt-dependent economy has no choice but to record rising levels of debt to GDP every year to avoid a recession. Unfortunately, this makes a debt-servicing crisis inevitable at some point, especially when a large fraction of the increase in debt is financing Ponzi-speculation on asset prices, since this adds to debt without increasing society’s capacity to finance that debt.
In a classical model of an economy, money was a real thing – gold, for example – unlike our economy where it can be printed into existence and has no value at all. This is why whatever economic value the fiat money has must be based on the assumption that it will be paid for (so to speak) over time – that you will mortgage your future to give it some definite value equal to some definite future period of work.
On the one hand, this implies an expansion of present consumption by bringing forward future earnings of society to fund this present consumption. And so far this has resulted in about three to four years of GDP being pledged to past consumption. (The debt to GDP ratio for the United States is equal to about these many years of unpaid work by the nation.) Moreover, as Keen shows, since deflationary changes are taking place in the economy as productivity improves, the amount of unpaid pledged work must increase each year.
One the other hand, with economic growth dependent on an ever growing share of future earnings, the near term probability rises of an inevitable massive catastrophic event (triggered by any cause, but most likely by the normal business cycle) which makes realization of this pledge to future earnings impossible to fulfill. If unemployment rises, an increasing number of people are unable to realize these claims on future earnings. Periods of high unemployment, therefore, present society with incredible risk of economic collapse.
The growth of government deficits do not lessen the probability of such an event, the deficits actually exacerbate the fundamental causes of the crisis, allow for their stable growth, and make the inevitable final unfolding of the inevitable crisis that much more serious. This has nothing to do with the capacity of government to print money, its solvency, or the willingness of domestic or foreign entities to hold on to its debt.
As we will show in the final segment of this piece, the inevitability of crisis is to be found in the very assumptions of debt fueled growth itself.