Reducing ratio of debt is the real issue
President Obama wants to cut the current deficit in half by the end of his first term. Commentator Robert Reich says what Obama should really be focusing on is reducing the ratio of debt to the national economy.
Robert Reich (Robert Reich)
More on Commentaries, Fed. Budget/Govt. Spending, America's Financial Crisis
TEXT OF COMMENTARY
KAI RYSSDAL: The president had a lot of things he wanted to say last night. The speech ran almost an hour. About two-thirds of the way into it he started talking about fiscal responsibility, and how he's going to cut the current deficit in half by the end of his first term.
Commentator Robert Reich says that might be smart politics, but it doesn't make much economic sense.
ROBERT REICH: We're in a deepening recession, in case you hadn't noticed. The biggest immediate challenge is to ramp up aggregate demand. If the slump gets worse, we'll have to have a second stimulus. And if that's not enough, a third. FDR's biggest mistake was spending too little, at least until World War II.
Can we continue to borrow indefinitely? Not without paying higher interest rates to attract global savings. But no reason to worry now. The Chinese and Japanese are not going to yank their money out of Treasury bills, because the slump is worldwide and T-bills are about the best and safest place to park savings. Besides, the Chinese don't want the dollar to plunge. They'd be stuck with a lot of paper worth far less than they paid for, and their exports would be in even worse shape than now.
Blue Dog Democrats and many Republicans will continue to fuss about the skyrocketing debt. The very word "trillions" when juxtaposed with the word "dollars" is enough to send most people into shock and awe. So it makes political sense for Obama to promise fiscal responsibility, especially with his first budget emerging this week. But if the economy needs further boosting, that promise could become a political liability.
The real issue here is the ratio of debt to the national economy. Today, debt is under 50 percent of GDP but it could be much higher six months from now. Getting that ratio down to a reasonable level depends not just on reducing long-term deficits but, more importantly, on getting the economy growing again.
And to get the economy growing, two things have to happen. First, the stimulus has to be big enough to create a lot of jobs and move the economy toward capacity. Second, the nation has to make the public investments necessary to enlarge that capacity -- including investments in the health and education of our workforce.
Cutting the budget deficit in half by 2012 would be nice but it's a sideshow compared to these two main events.
RYSSDAL: Robert Reich is a professor of public policy at the University of California, Berkeley. His most recent book is called "Supercapitalism."
Comments
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03/05/2009
The manufacturing that helped economic recovery came from the need for war machines during WWII, specifically from other companies. Funding was provided to these companies from governments from across the world.
Additionally, you had the CCC that played a far more important role than many economists give it credit for.
In a peaceful world, ramping up manufacturing with government backing will do little good since there are far fewer dollars to buy these items since so many are unemployed.
The economy needs consumers to be able to make GOOD money consistently and to have the whole financial sector reigned in and loan shark fees to be outlawed so money stays in the hands of the consumer to buy said products.
From Holland, MI, 03/01/2009
Our debt to GDP ratio has increased from 33% to 66%! Continuing the analysis made by Peter C in San Francisco, in 2009 our debt to GDP ratio is 66%, ($10.8T dept verses $14.8T GDP). Going back to 1976, or any time in the late seventies, our debt / GDP ratio was only 33%! ($0.7T debt verses $2T GDP ... ballpark). Smartly run households and companies can not run this way ... Can our US government? So, if the data suggests that we can't expect a non-financially trained President or Congress to understand debt management, then who is our CFO? The priorities of our "Office of Federal Financial Management" within our OMB should be reviewed. Does our OFFM have the authority to shout out the obvious? I believe the Chief Financial Officers Act of 1990 was to help get us aligned with with the talent and capabilities of real-world financial managers. How is it going?
From CA, 02/28/2009
Kudos to Peter C for the comment on "Today, debt is under 50 percent of GDP but it could be much higher six months from now." The only way that you can come up with Debt/GDP less than 50% is if you remove the trillions of U.S. debt held by the Social Security trust fund. I think Robert Reich would be one of the last people in the U.S. that would agree to limiting future retiree social security benefits. Thus the Social Security trust fund holding of U.S. liabilities cannot be ignored.
The real problem, and I think Professor Reich will agree, is that the U.S. has extremely large contingent liabilities: Social Security, and Medicare. These contingent liabilities are even less contingent given the recent plans to expand government health care.
From San Francisco, 02/26/2009
A quick search on Google shows national debt at $10.8 trillion and the US GDP at $14.8 billion for 2008. Unless I am looking at the wrong numbers, national debt is more like 66% of GDP, not 50% as Mr. Reich stated.
From Durham, NH, 02/25/2009
Robert Reich should dig a bit deeper into our history. This country had many steep downturns in the 19th century. Government was smaller, guys got wiped out and the system was quickly rebuilt on a stronger foundation. Now wealthy corporations and people lobby to prevent getting wiped out. The 30's depression was exaggerated by government policies. Money spent in WW2 was highly focused on industry and transportation - unlike these stimulus packages. After the war, the rest of the industrialized world was bombed out. We did not carry this huge debt around. Methodologies to calculate inflation, unemployment, and GDP are much changed since 1980 and are now bogus. In short, Reich is smart, has great credentials, articulate, and wrong.
From Winston-Salem, NC, 02/25/2009
"FDR's biggest mistake was spending too little, at least until World War II."
Has Mr. Reich read any history? It was not "spending" that got the US economy going again in the 30's. It was MANUFACTURING. To be successful, any fiscal policy (spending) must be directed at activities that will encourage and increase US manufacturing.
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