On the same day that the DOW Industrials traded above 12,000 for the first time in more than two years (1/26/2011), the Congressional Budget Office released its estimate for the 2011 Federal Budget Deficit: $1.5 trillion… and counting. There’s an irony in this that ought not to be ignored. There will also be a price to pay.
In President Obama’s State of the Union speech he discussed the need to cut spending while at the same time make investments with federal resources. President Obama and his economic advisory team’s actions have evidenced in recent years that they clearly adhere to the Keynesian economic concept of a multiplier; suggesting that spending on the part of the government will create more output than it consumes. Without going into too much detail regarding Keynesian economics, lets simply note that Keynes proffered a theory wherein governments may spend their way out of high unemployment problems and lack of consumer demand as the millions spent are expected to create jobs; the wages of which are recycled through the economy via consumer spending, etc. Though some prefer not to recognize the validity of Keynes’s multiplier effect, it’s readily observable and like it or not, Keynes was right; he didn’t afford himself the luxury of having to consider the long term costs of such a plan.
Some argue that with real interest rates hovering just above 0%, such spending, even with borrowed money, has little long-term adverse impact. Add on the possibility that these debts may be repaid with inflated dollars makes the scenario yet less irksome for others. On top of that, many dismiss the debt issue by suggesting that since we’re not financing this debt ourselves, as we’re letting the Chinese and others loan it to us, it matters yet less. These are all good thoughts, but wrought with error nonetheless.
I should note here that I admire the work of John Maynard Keynes, his 1936 General Theory of Employment, Interest and Money is masterful and insightful, and as he predicted, it sparked a revolution in economics. What I find most interesting is how the foundation from which Keynes and his concepts rose. While discussing the underpinnings of his economic philosophies, Keynes offered the following:
The political problem of mankind is to combine three things; economic efficiency, social justice, and individual liberty. The first needs criticism, precaution, and technical knowledge; the second, an unselfish and enthusiastic spirit, which loves the ordinary man; the third, tolerance, breadth, appreciation of the excellences of variety and independence, which prefers, above everything, to give unhindered opportunity to the exceptional and the aspiring. The second ingredient is the best possession of the great party of the proletariat. But the first and the third require qualities of a party which, by its traditions and ancient sympathies, has been the home of economic individualism and social liberty. (From the collected works of John Maynard Keynes; Macmillan 1971-89, page 311)
Far from reflecting the rigidity of marginalist or neoclassical economics, such thinking appears to accept a blend of pragmatism and idealism – a combination that’s often difficult to maintain. For good or ill, it’s difficult for me to find fault with his observations; in fact, I find myself connecting to them on many levels, but in the end, reason must win out and popular or not, Keynesian or otherwise, adding hundreds of billions of dollars onto an already out of control debt burden smacks of irresponsibility. The long-term costs Keynes was unable to address are sometimes just too great to reasonably bear.
In the early days of his administration, President Clinton became one of the first national leaders to describe federal spending as investment. Though we later came to understand what he meant by the term, that such expenditures were to be directed towards infrastructure and other potentially meaningful projects, the economic climate, both domestic and global, was altogether different than that which we’re experiencing today. In the end, spending is spending, and while staring at a $1.5 trillion federal budget deficit, it’s hard to understand how seemingly responsible political leaders can advocate more of the same when we’re clearly mired with a debt burden unimaginable only a few years ago.
The Republican victories of last November could easily be erased if the newly elected House of Representatives supports anything short of iron-fisted wallet tightening. The trick is, how to decrease spending while protecting those in need and maintaining important infrastructure; how to differentiate productive expenditures from those that may be wasteful; or how to tell a generation of baby boomers on the verge of retirement that they may have to put off for another year or three or five, that which they’ve planned for over the last thirty plus years. It becomes a difficult task, but it is the type of challenge that requires leadership to address and through which leaders are formed and identified.
To add to the irony of higher market levels and deficit announcements, 2,500 of the world’s wealthiest met in Davos, Switzerland during the same week to address a variety of issues ranging from those referenced above to how to ease nearly a billion Chinese and Indian workers into the market. Ease is such a difficult term to use when speaking about a workforce roughly three times the size of the entire population of the United States, but it’s equally apt. China and India’s leadership are attempting to balance the needs of their poverty class with real concerns over inflation, infrastructure development, and environmental issues. Additionally, China is striving to keep the Yuan as closely pegged to the dollar as possible, while experiencing widely different rates of domestic growth; a strategy that has proven disastrous for other polities that have attempted to maintain similar currency policies. They’re not to be envied and anyone truly aware of the enormity of what they’re dealing with is anxious to see how such a policy plays itself out.
I do, however, find it fascinating to see how they dance around the issues of global competitiveness when there simply isn’t any music playing. The world is wise to pay attention and consider a future with a stronger China and India filled with resource-hungry consumers demanding higher wages and brighter futures.