[Winstonm]

On the PBS show NOW, Robert Kuttner make some statements that caused me to question the causation and correlation aspects of what he said. He seems to imply that public debt was causitive of thirty years of prosperity rather than having been a correlation.

Quote

Robert Kuttner:  Well, first, we're not at unprecedented debt. Today's public debt, even after Bush's deficits, is only about 40 percent of one year's GDP. After WWII, it was 125 percent. Yet because that debt had gone to rebuild American industry in order to win the War, and to make American science and technology the world's leader, that heavily indebted economy of 1945 ushered in thirty years of prosperity.

Does Kuttner make a valid point? Was the increased national debt responsible for the 30 years of prosperity?

[blackshoe]

No. The use to which the money borrowed was put was responsible.

[kenrexford]

Thinking out loud...

Debt itself is not a bad thing. If I can routinely turn $10 into $20 in one year, but I only have $10, then I might as well borrow as much as possible, assuming that every additional $10 can be turned into $20. At some point, diminishing returns, fluidity concerns, and the like threaten to topple this basic concept. Where the forces break down in the area of trillions of dollars is way beyond me.

[mike777]

I thought private debt was the problem not the Federal level of debt?

I thought the Federal level of debt went to improve productivity, in the sense of education, highways, basic science/medical research and to provide a safety net that did not exist in 1930. Also much went into the defense of the country. No doubt there was wastage.

[Winstonm]

The argument being made by Kuttner (and on another show by economist Galbraith) was to utilize massive government spending to solve the U.S. economic problems. Kuttner was more graphic, saying, to avoid depression....

But the comment he made about WWII debt made me doubt his entire premise. I was wondering what others thought.

[Al_U_Card]

Debt, per se, is not the problem.

Value for money, especially as that value relates to usefulness (yes even for personal gratification too).

The worst times were the result of greedy speculative manipulations that "broke" the unstated understanding that money had value. The more that it is spent on practical and efficient products and systems and services....np.

[hotShot]

It's the amount of dept that causes the problem. Once the interest payments get to a level where it restricts the choices you can make it gets a bad thing.
All the money that goes to repayment and interest is missing for infrastructure, education and other important tasks or even worse taxes have to be raised to get the money.

[NickRW]

Any individual, or company or country may borrow money for what it thinks is a suitable cause. If that cause was to invest in some way in order to make money and the choice was at all wise, the more money will be made, the debt can be repaid and further profits made.

If, on the other hand, the choice was not a wise investment or was not made with the intent of creating new wealth at all, well, then you end up in the *****.

So, if Amerian debt subsequent to WWII left America in a good position with respect to its industry, then of course things would be fine. But it rather has to be said, that America did not face the rebuildng that had to happen in Europe or Japan.

Nick

[kenberg]

Winstonm, on Dec 2 2008, 06:38 PM, said:

On the PBS show NOW, Robert Kuttner make some statements that caused me to question the causation and correlation aspects of what he said. He seems to imply that public debt was causitive of thirty years of prosperity rather than having been a correlation.

Quote

Robert Kuttner:  Well, first, we're not at unprecedented debt. Today's public debt, even after Bush's deficits, is only about 40 percent of one year's GDP. After WWII, it was 125 percent. Yet because that debt had gone to rebuild American industry in order to win the War, and to make American science and technology the world's leader, that heavily indebted economy of 1945 ushered in thirty years of prosperity.

Does Kuttner make a valid point? Was the increased national debt responsible for the 30 years of prosperity?

I do not see this quote as asserting that it was the debt per se that caused prosperity.


"Yet because that debt had gone to rebuild American industry in order to win the War..."

This quote seems to assert that it was rebuilt American industry, science, and technology that was the source of wealth.

The distinction I see is this: Industry, science and technology create prosperity. Perhaps investment in these forces requires debt, perhaps not, but the prosperity will arise from science etc, not from the debt itself. It was not the debt that "ushered in thirty years of prosperity", but what was done with the money that was spent running up the debt.

This seems likely to me to be true but also from your quote it appears to me to be what Kuttner was saying.

The relevance to today's problems: Government spending might well help us out of our troubles but it is critically important to choose wisely what we spend the money on. Tossing out money here and there , for example with stimulus checks, hoping people will spend it on something and anything to get the economy moving may be not such a successful approach.

[awm]

Deficit spending is a valuable strategy for ramping up the economy.

Because demand for services varies, businesses sometimes need loans in order to weather bad times. If a company's sales and revenues are down, their options are basically to take out a loan and hope demand recovers, or to start downsizing their operation.

The problem is that right now, with the economic outlook bleak, many companies are choosing to downsize. Even if a company preferred to take out a loan and weather the storm, this is somewhat difficult to do because the big lending institutions aren't making a lot of loans. In some cases their liquidity is hurt by defaults on previous bad loans and credit swaps, in some cases the lenders themselves are going out of business.

This kind of thing is somewhat self-perpetuating -- if many companies are downsizing because revenues are down, then more people will be out of work. If more people are out of work then they will have less money to spend which will drive demand down further, further reducing company revenues, causing more companies to downsize, etc.

The government can basically solve this by throwing money at the problem. This involves providing loans to businesses that want them at reasonable rates and also directly employing people with infrastructure or energy projects.

Of course, there are definite problems with deficit spending. At some point it becomes difficult for the government to borrow money. And the debt means that the government will be able to do less in "good times" because some high percentage of the budget is devoted to paying interest on the debt.

To some degree we (in the US) are paying for mistakes made over a number of years when the economy was generally good and we chose not to balance the budget or pay off the debt. Now when we really need some deficit spending to stimulate the economy, we are saddled with an already-huge amount of debt. Nonetheless, it makes sense to spend more money until the economy recuperates, much as this will make things harder for us down the road.

[Al_U_Card]

Ant vs. grasshopper?

[y66]

I'm buying Kuttner's argument. I don't think anyone knows how to fine tune macroeconomic policy. The economists I've read recently, like Paul Krugman, argue for erring on the high side -- invest too much rather than too little -- and are not overly concerned about increasing the level of debt at times like this.

But yeah, it seems pretty scary to tell politicians this.

[blackshoe]

NickRW, on Dec 3 2008, 06:58 AM, said:

So, if Amerian debt subsequent to WWII left America in a good position with respect to its industry, then of course things would be fine. But it rather has to be said, that America did not face the rebuildng that had to happen in Europe or Japan.

One of the reasons we borrowed all that money was to finance (at least partly) that rebuilding. It was deemed (correctly) in our best interests to do so. It paid off.

I guess I don't understand your point. What difference does it make who faced rebuilding and who didn't? Particularly given the reasons stated in my previous paragraph?

[PassedOut]

awm, on Dec 3 2008, 11:37 AM, said:

Of course, there are definite problems with deficit spending. At some point it becomes difficult for the government to borrow money. And the debt means that the government will be able to do less in "good times" because some high percentage of the budget is devoted to paying interest on the debt.

To some degree we (in the US) are paying for mistakes made over a number of years when the economy was generally good and we chose not to balance the budget or pay off the debt. Now when we really need some deficit spending to stimulate the economy, we are saddled with an already-huge amount of debt. Nonetheless, it makes sense to spend more money until the economy recuperates, much as this will make things harder for us down the road.

Yes, we're now in a situation where deficit spending is needed to stimulate the economy. But the fiscally irresponsible policies of the Bush administration mean that we are now adding to an existing mountain of completely unnecessary debt.

As Adam pointed out, expenditures for debt service inevitably reduce the amount available to pay for current services and infrastructure projects. When interest rates are low and the debt is low with respect to the GDP, the debt service payments seem manageable. But when inflation takes hold and interest rates rise, those debt service payments become a huge problem.

Drastically increasing the money supply while productivity declines - the strategy needed now - can also create inflationary pressure. So we are in a very tough spot.

[Al_U_Card]

You are renting and borrowing your rent money from the landlord.

He needs to keep the appartment full but how long will he allow the debt to accumulate before he calls it in and ends up evicting you?

Once his balance sheet goes negative is when.

How is the Chinese surplus going these days?

(Hard for the lender to borrow from the debtor, so the buck stops there, Harry.)

[Winstonm]

kenberg, on Dec 3 2008, 11:30 AM, said:

Winstonm, on Dec 2 2008, 06:38 PM, said:

On the PBS show NOW, Robert Kuttner make some statements that caused me to question the causation and correlation aspects of what he said.  He seems to imply that public debt was causitive of thirty years of prosperity rather than having been a correlation.

Quote

Robert Kuttner:  Well, first, we're not at unprecedented debt. Today's public debt, even after Bush's deficits, is only about 40 percent of one year's GDP. After WWII, it was 125 percent. Yet because that debt had gone to rebuild American industry in order to win the War, and to make American science and technology the world's leader, that heavily indebted economy of 1945 ushered in thirty years of prosperity.

Does Kuttner make a valid point? Was the increased national debt responsible for the 30 years of prosperity?

I do not see this quote as asserting that it was the debt per se that caused prosperity.


"Yet because that debt had gone to rebuild American industry in order to win the War..."

This quote seems to assert that it was rebuilt American industry, science, and technology that was the source of wealth.

The distinction I see is this: Industry, science and technology create prosperity. Perhaps investment in these forces requires debt, perhaps not, but the prosperity will arise from science etc, not from the debt itself. It was not the debt that "ushered in thirty years of prosperity", but what was done with the money that was spent running up the debt.

This seems likely to me to be true but also from your quote it appears to me to be what Kuttner was saying.

The relevance to today's problems: Government spending might well help us out of our troubles but it is critically important to choose wisely what we spend the money on. Tossing out money here and there , for example with stimulus checks, hoping people will spend it on something and anything to get the economy moving may be not such a successful approach.

I saw that as well, Ken, but my gut reaction when watching the show was that the emphasis Kuttner was making was on the 125% debt to GDP rather than how the debt was utilized.

His point being that at 40% to GDP now, there is lots of room to expand debt without going too far.

I agree with others who state that it is the type of investment made with the debt that is imperative, but even then there surely must be a cap on where that debt can be.

[kenberg]

I have heard Kuttner speak on this also. My take was that it was sort of "Don't panic, historically speaking and as a fraction of GDP the debt is not huge, for example in comparison with after WWII". There is something to this but there are many other differences between then and now. For example, there was an enormous built up demand for important consumer items beginning with such things as cars and tires (Detroit made tanks, not cars during the war years and anything rubber went to the military) and extending to cigarettes and chewing gum. Europe was devastated and could consume all we could produce and more. There was no serious competitor for our major industries. Much of our industry was based on coal and we had coal galore.

IF the only thing we had to worry about was our national debt we could very well handle it, no doubt. But it is far from our only worry. We may all be largely in agreement (or maybe not) on some basics: We need to get a serious move on in science and technology and government can help. We should not be paralyzed by the thought of debt but it is no trivial matter either.

While thinking back to the WWII years and more generally the world as I knew it growing up, I would say one more thing about the economy: It is important to grasp that there will always be a lot of work that needs doing that does not require a lot of book learning, and we need to see to it that the people who do this work have good lives. It is both fair and in our best interests to do so. Being from the Twin Cities I paid close attention to the TV when the bridge over the Mississippi went down a year and some ago. The camera kept coming back to this young woman (blonde, attractive, hence the camera attention) wading around waist deep in the river carrying out rescue work. Robots won't be doing this soon, and no one cared if she knew calculus. She was a speaker at the Republican convention. We Democrats need to think about why that was so. I think Obama understands this point and I hope he will be working on it. Joe the Plumber, get back to where you once belonged.

I apologize for this last paragraph being off topic.

[PassedOut]

Winstonm, on Dec 3 2008, 03:55 PM, said:

I saw that as well, Ken, but my gut reaction when watching the show was that the emphasis Kuttner was making was on the 125% debt to GDP rather than how the debt was utilized.

His point being that at 40% to GDP now, there is lots of room to expand debt without going too far.

Actually, the gross national debt (which includes social security obligations) reached 69% of GDP last September and is more than that now. It is twice what it was when Jimmy Carter left office: Gross National Debt as a Percent of GDP, by President 1950-2010

Quote

As the highlighted areas show, cumulative debt as a percent of Gross Domestic Product decreased steadily after World War II highs of 90%. It increased during the Reagan-Bush Administrations and under the current Bush Administration. In September 2008, it hit 69% of GDP, the highest level since 1955.

The Gross National Debt chart illustrates with hard numbers which US presidents were fiscally responsible (we can call them the thinking presidents - and they were from both major parties) and those who were irresponsible.

[Winstonm]

Quote

It is important to grasp that there will always be a lot of work that needs doing that does not require a lot of book learning, and we need to see to it that the people who do this work have good lives.

I agree with this but it appears that global wage arbitrage has trumped our ace. We have attempted to delay the polarization of the classes by utilizing personal debt and asset bubbles, but the current worldwide credit calamity has shown that Ponzi Schemes are unsustainable and do not create real wealth.

[Al_U_Card]

Oh that Ponzi guy!!!! What a visionary!

He knew exactly how people (could be) work(ed)...