Thursday, April 28, 2016

Common Sense

" No nation ought to be without a debt."

-From Common Sense by Thomas Paine-

But everyone today is an Economist and everyone knows debt is bad and the secret to good government is parsimony.  After all, a government is just like a business, isn't it?

"The world needs more U.S. Government debt" 

wrote Narayana Kocherlakota in Bloomberg View yesterday.  He is the Lionel W. McKenzie professor of economics at the University of Rochester who served as president of the Federal Reserve Bank of Minneapolis from 2009 through 2015.

He feels the immense earning power of the United States allows us to produce the extremely safe bonds the world wants and which are in  short supply. No business would act like this, he says. A corporation with such a safe cash flow and such low borrowing costs would issue debt to pay shareholders and fund expansion.  Analogously, the US government could cut taxes and build infrastructure. Instead market forces steer capital into risky investments like sub-prime mortgages and businesses and households are reluctant to spend, keeping short term rates low.

Every nation should have a debt and yet, because of political pressure from a party teaching the voters that personal debt and government debt are the same thing, artificial  constraints are imposed on debt, contrary to market demand:

" constraints that punish savers, choke off economic growth and could sow the seeds of the next financial crisis."
But of course the ultimate test of policy is not whether it works: whether it increases prosperity  and stability, the test is whether it sells to a public kept on the edge of panic and outrage by political interests.  Platitudes, and attitudes and outright deception rule and apparently we like it that way. We look for leaders with no experience, we look to those with no experience for advice on world markets, fiscal and monetary policy and sleazy, vulgar and misogynistic  real estate developers for advice on social and ethical problems and we develop a debt that can't be repaid and that  keeps us like a ship taking on water with a captain who doesn't believe in bilge pumps. No nation ought to be like this.

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