We need long term and short term debt strategies

Published in The News Tribune, April 29, 2011

When it comes to the economy, it’s hard to know what we should be worried about these days. Not long ago, most everyone agreed that demand –to be precise, a lack of it — was the key concern.  To shore it up, the federal government embarked on a massive spending spree.  The Federal Reserve also enacted a policy of “quantitative easing”, with the hope that this too would help convince us to spend more.

Seemingly overnight, however, the watchword has somehow turned from “demand” to “debt”.   The TNT (4-19) trumpeted this new concern across its headlines recently, referring simultaneously to the growing federal debt as well as the large state debt.    Republicans and Democrats in Washington, DC are now sparring over whose debt-reducing package is better.   And legislators in Olympia are considering a bill that would shrink the state’s debt.

What’s puzzling here is that debt is typically the flip side of demand.  To pay off debt, you need savings.  To save, someone has to spend less.   To pay down the federal debt, for instance, the federal government must spend less (less demand) or it must raise taxes — which would leave us all demanding fewer goods and services.

Despite some confusion in all of this about what we as good citizens are supposed to be doing –spend or vote ourselves higher tax rates? — there could be good news here.     A preoccupation with demand generally reflects immediate problems.  Concern with debt generally reflects the luxury of addressing longer-term problems.

Think of it this way.  If you are hungry, you don’t worry about your credit card debt.  It might even make sense to use that credit card and increase your debt.  Once you are no longer hungry, you might then start to think about strategies to reduce that debt.

Unfortunately, this simple analogy doesn’t really work because it would imply that now the economy must be out of the woods, and therefore we can start thinking about longer-term problems such as our federal debt.  But with about one out of five workers still unemployed or underemployed, we clearly aren’t out of the woods yet.

So while it’s the right thing to turn our attention to the federal debt, it’s also much too early to stop worrying about the current economy.  The size of the federal debt is not by any stretch of the imagination a new problem.  While at about 100 percent of GDP it is now especially large, its current size is largely the result of a long term trend dating to 30 years ago – back when it was a mere 30 percent of GDP.  With the rate at which health care costs and Social Security payments are growing, we’ve known for decades that structural problems existed with our government finances.

The trick now with addressing the debt is to do it in a way that also strengthens rather than weakens a feeble economy.  This may sound impossible, but it shouldn’t be.  What is needed is a long term plan that commits us to lowering the debt, but that at the same time acknowledges that in the short term, more debt is needed.  With half of Japan’s debt, we aren’t at any immediate risk of defaulting, even though political rhetoric might suggest otherwise.

How do we both reduce our debt while increasing demand?  David Brooks of the New York Times wrote recently that the public is in a dark mood, pessimistic about the future.   Indications by Standard and Poor’s that it may downgrade the U.S. government’s credit rating contributes to this mood.  Developing a long term strategy for addressing the structural problems in our government finances could help restore people’s confidence in the future.  Combining this with a renewed short term commitment to shoring up our lagging economy could provide just the economic stimulus that we need.

So while it’s a good think we may finally take action on the federal debt, let’s not lose sight of the short term.