The Disgraceful Debt Crisis (from July 31)

The United States has two problems: the national deficit/debt, and the unemployment rate. Their relationship is subtle. The worst aspect of our situation is that, in the short term, any action we take to fix one problem is likely to exacerbate the other, because federal spending maintains not only public-sector but also private-sector jobs by generating demand for goods and services (by way of government purchases) and giving money to individuals and businesses (by way of entitlement programs and tax incentives). In the short term, increasing government spending (all else equal) will decrease unemployment and grow the economy; conversely, decreasing government spending will increase unemployment and shrink the economy.

This very bad situation is being made worse by the Republicans in Congress, whose approach is clearly summarized in the following statements of Congressman Boehner from his speech on 26 July:

"…right now, we have a government so big and so expensive it's sapping the drive of our people and keeping our economy from running at full capacity."

"There is no symptom of big government more menacing than our debt. Break its grip, and we begin to liberate our economy and our future."

(CNN: http://edition.cnn.com/2011/POLITICS/07/25/boehner.speech.transcript/)

The Republicans are claiming that our two problems — the deficit/debt and unemployment — are related in exactly the opposite way than they really are — that is, they are claiming that the deficit/debt is harming the economy (and thus maintaining high unemployment) and that therefore we can improve the economy by reducing the deficit/debt. In fact, they take the stronger position that the deficit/debt must be reduced only by drastically cutting federal spending.

There are indeed scenarios in which the federal deficit/debt can harm the economy. In one scenario, the government is borrowing so much money (and offering such good interest rates) that borrowers in the private sector (that is, businesses) cannot borrow enough at a low enough rate to make investments and create jobs — in economics jargon, the government is "crowding out" private borrowers. We can see that this is not happening by looking at interest rates: Treasury yields are normal, and money-market rates are very low.

Another scenario is more interesting. In this one, businesses are afraid to invest because of their uncertainty about what Washington will do with its debt, its spending, and the dollar. For example, they are afraid that Washington will default on its debt, or act so stupidly that rating agencies will downgrade its debt (sound familiar?), or cut spending, or cause too much inflation. This scenario is interesting because the Republicans have increased this uncertainty by using the debt limit as a bargaining chip. When Moody's announced that it was putting the US's credit rating under review, it said that it was because of the possibility that the debt ceiling would not be raised in time. (Bloomberg: http://www.bloomberg.com/news/2011-07-13/u-s-debt-rating-placed-on-review-for-downgrade-by-moody-s-as-talks-stall.html)

We are in a very sad situation. The fight in Washington over the debt-limit is hurting our economy, and what we get out of that fight — massive spending cuts — is likely to hurt it even more. Simply put, at a time of 9.2% unemployment, Washington is fighting not over the best way to create jobs but over how much to do something that will put more people out of work. The Republicans are the most to blame: they have set the terms of this debate and have promoted a dangerously incorrect idea of how our two problems are related. At least some of them must understand the effects of their actions; unfortunately, they have no incentive to fix the economy in the short-term, because in the short-term Obama must run for reelection, and everybody knows that presidents presiding over high unemployment do not get reelected.

I do not put all the blame on the Republicans, though. The Democrats (including the president) have either ignored the deficit/debt problem or proposed fake solutions to it, thus allowing the Republicans to take this issue and beat the shit out of them with it. Instead of demanding tax increases (which they now seem pathetically to have given up on), they should have beat the Republicans over the head with the issue of unemployment. To me, the right soundbyte is obvious: "The Republicans are more worried about federal accounting and debts to China than they are about whether Americans have jobs!"

To be clear, I believe that both problems exist, and that it would be very good to reduce our national debt. I also believe that our entitlement programs are unsustainable. My complaint is that, in the midst of an unemployment crisis, politicians have created a debt crisis that can only be fixed at the economy's expense.