Wednesday, July 21, 2010

Down with debt

"My other piece of advice, Copperfield," said Mr. Micawber, "you know. Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery." - Charles Dickens, David Copperfield

Poor Charles would have made a lousy Keynesian. The secret to happiness, as everyone knows, is to spend more than you earn. This is especially important if a nation is to remain economically viable. Should the economically illiterate proles refuse to spend enough to stimulate the economy, the government must step in and do the spending for them. This paradoxical recommendation seems like good material for a satirist, but it can scarcely be deemed good policy.

Yet it appeared credible enough to our leaders. This is perhaps giving more credit where credit is due; it would have been foolish to expect politicians to resist the siren song of spending sprees. It would have been especially foolish seeing that these same politicians were dependent on the people returning them to power. Congress was well aware that a stagnant economy meant a changing of the guard. So they did what any sensible group of cowards would do: cried crisis. Blindly thrashing about, grasping for anything in their power that might conceivably jump start the lagging economy, they stimulated it right good. And twice—first under Bush, then under Obama—just to be doubly sure.

Officially, the recession is over. Fear of a "double-dip" remains, but, for now, two rounds of stimulus have staved off a depression. Their policies implemented, the Keynesians are tentatively triumphant. The Democrats, poised for a drubbing over the health care debacle, may at least rest assured that the economy is doing fine, though making that case to the millions of unemployed Americans will be a tougher sell.

In reality, the polices enacted by the last two administrations have merely draped a facade over an economy which remains structurally unsound. The real estate bubble was made possible by the easy money policy of the Federal Reserve under Greenspan and Bernanke, coupled with the inherently fraudulent system of fractional reserve banking. Passing a two-thousand page financial reform bill in no way addresses the cause of the crisis. In fact, it grants more power to the Federal Reserve, as well as to the regulators who somehow missed the housing bubble.

The dot-com bubble having popped, the Feds inflated another one, this time in housing. When this, too, proved ephemeral, the politicians called on the banks to inflate another. The cure for popped bubbles is more bubbles. Actually, there is another way: allow the malinvestments—McMansions built on credit, strip malls in empty subdivisions, etc.—to be realized as losses. That which never should have been built can only be sold thus. Meanwhile, there is something else we can do: we can tackle the problem of debt, one aspect Keynesian orthodoxy ignores in its quest for a permanent series of bubbles.

In our haste to partake of the Greenspan miracle, we set aside the fact that spending can only be financed by saving. The debt fueled prosperity of the last three decades was largely illusory. This was made apparent by precipitous declines in house prices, which have only buoyed slightly because of government subsidies to first time home buyers. While times are good, no one wants to turn off the easy money spigot and let people know that this is not the way wealth is created. But when the party ends and the hangover hits, we can rethink the wisdom of permanent partying.

On a personal level, if we haven't already done so, we should return to living within our means. Any outstanding debt should be paid off as soon as possible. More debt should only be incurred if absolutely necessary. In time, this behavior will be seen as anti-social; “hoarders” will always be blamed by the profligate. But while one owes a duty to one's family, no one is under any obligation to go into debt for some vague public good.

Governments will need to cut back as well. This starts at the local level. It's true that the problem gets bigger with the scope of the jurisdiction, but locally, the voters have the ability to insist upon austerity. Pensions will need to be renegotiated, as government employees have retired with gratuitous benefits which make it impossible to continue to provide the same level of local services. This will need to be done at the state level as well, though here it becomes more difficult for the people to insist that the politicians make difficult, but necessary, decisions.

At the federal level, the problem may well be insoluble. Passing Obama's health care bill was a wretched idea, but the caterwauling concerning the matter is overwrought. As it stands this year, the federal government is unable to collect the revenue necessary to fund Medicare, Medicaid and Social Security. Even if we eliminated funding for the Empire, ended the two wars in Afghanistan and Iraq—as well as the proxy war in Pakistan—ceased paying foreign aid, eliminated the Departments of Education, Energy, Agriculture, Homeland Security, etc., the government would still face a deficit when confronted with just these three liabilities. Yet making adjustments in any way is political suicide, so the problem will continue to be passed on to the next session of Congress.

The optimists who insist that the economic crisis is over are not to be trusted. The cure for debt is not more debt. Like Copperfield, we cannot be happy until we live within our means. We can do little to effect the change in Washington; too many people will fight to sustain the charade. But we need not despair. We can put our own houses in order. It is a start.

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