When to Save and When to Borrow?
Sept. 10, 2010. Should we start paying down the debt now, or wait? It sounds so obvious. Of course, start now. But what does that mean? Either (1) more taxes, or (2) less spending. That easy — less spending. Right?
That means fewer jobs and more unemployment — at the worst possible time! But why not just cut government waste? Even if it were possible to cut only waste, it would cut just as many jobs! Anytime the government spends money, it (1) hires people, (2) buys things from private business, or (3) hires private companies. Wasteful or not, all of those actions provide jobs, and cutting jobs causes even more unemployment.
What do you do if you find yourself wasting money? Right-wing extremists write to say I favor wasting money. Nonsense. I’m an economist. Our #1 mantra is Efficiency! Ask yourself, if you stop wasting money on microwave popcorn, does that mean you must spend less. No. You can spend your money on something useful instead. Why don’t conservatives get that?
No one really thinks going into debt is a bad idea — everyone wants to buy a house. That means debt. But use debt wisely.
There’s a time to save and a time to borrow. We should save for a “rainy day,” and when it comes we should use what we saved. This is conservative wisdom, instead of conservative nonsense. And if you have a mortgage, you are in debt. But you should still have saving and you should use it when you need it. Doing so means your net debt (debt minus savings) will grow — right when you have a rainy day. And you will save again (reduce your net debt) on sunny days.
Not surprisingly, if you study advanced economics, that’s exactly what you learn is good for the economy. Presidents should pay down the debt in good times, so the government can borrow when Americans are out of work and the economy needs some help.
But will the good times every come? Of course. And they have come. Right after the Reagan recession there was the Reagan boom. Incredible growth — 7% in one year. The perfect time to pay down government debt. But check the graph. Reagan and then H.W. Bush grew the debt like crazy all the way until the next recession! Then, did they spend extra to help America recover? No.
Clinton got his turn. After the economy pulled out of the H.W.-Bush slump he immediately started paying down the national debt check the graph. Then it was W. Bush’s turn. The economy hit a recession and he started deficit spending — mostly by cutting taxes to the rich, which does not help much. And when the economy recovered, that was his chance to help with the debt. Did he pay down the debt? Not at all.
Have Reagan and the Bushes run up so much debt that we cannot afford to help the economy?
Fortunately no. America is so strong we can afford enough spending to pull out of this terrible recession soon. In fact not pulling out will cost us the productivity of 10 million Americans for years to come. And it will cost the unemployed and their families who did not cause the recession untold heartache, and in many cases an undeserved loss of self respect.