By Walter Andrew
In the column “What Greece’s experience means” (March 16), Paul Krugman presents only those facts that support his notion that the U.S. needs to expand its frightening deficit spending binge as he cites the pain caused by austerity measures imposed on Greece and Ireland.
To avoid pain here, he proposes more stimulus funded by yet more deficit spending. But he fails to discuss the severe consequences of his proposal. Interestingly, the Greek default clearly illustrates the fallacy of his assertion that debt makes the world neither richer nor poorer because “one man’s debt is another man’s asset” (“Mugged by the debt moralizers,” Oct. 31, 2010). For Greece’s creditors, most of their “asset” has now become a capital loss, and they are, indeed, poorer.
The Greek crisis illustrates another truth: When lenders begin doubting a debtor’s ability to repay, they demand higher interest rates and may refuse to lend at all. Modern Western countries depend on new borrowing to repay maturing debt — the U.S. included. When investor sentiment changes, it can cause an economic death spiral. At what point will excessive U.S. debt and deficits cause a change in investor sentiment? I assure you, we don’t want to find out.
The national debt, the $1 trillion deficit spending, and printing more currency are unsustainable. Their immediate consequences appear in the significant but unacknowledged inflation we are now experiencing. Although the government’s self-assessed inflation numbers are between 2 and 3 percent, real inflation is, in fact, much higher. It is being expressed in the large price rises in food, energy and other necessities government economists specifically exclude from their calculations.
Since food and energy already comprise a large portion of the household budget of the poorest Americans, these increases take a severe toll on them and are causing pain to the middle class as well. My mother recently found two $1 bills in an old purse and asked me if they were valuable. The 1977 Federal Reserve Notes had no collector value, but they were striking in their loss of purchasing power. When new, they bought more than three gallons of gasoline or more than a gallon of milk. We all know what they buy now.
The value they lost is not simply the result of increased worldwide demand but also the Fed’s unrelenting debasement of our currency.
Anyone who compares the growth of U.S. debt and spending to the growth of the GDP should be horrified. The official national debt of $15 trillion now exceeds the U.S. GDP, but that’s only part of the story. Through the magic of government accounting, that number excludes $2.6 trillion in IOUs from the Treasury to the Social Security Administration. The reasoning is that this is money the government owes itself, so it doesn’t count.
Since this money was spent as it was collected, that means Social Security retirement benefits are effectively an unfunded promise dependent on future tax collections. Moreover, Social Security payments have begun to exceed the revenues collected from Social Security taxes. That means the Treasury must begin “paying back” those IOUs. Military and federal employee pensions are likewise underfunded. Thus, we now face the legacy of decades of overpromising, overspending and overprinting our currency. We may get away with this longer than Greece, but sooner or later, all houses of cards collapse.
Unlike Greece, the U.S. controls its own printing presses. That’s one reason we have gotten away with this behavior thus far (except for commodity inflation). Our ability to print money allows us to emulate other European governments from the 20th century, such as the Weimar Republic after World War I and Hungary immediately after World War II. In both cases, those governments used printing presses to finance deficit spending, with disastrous results.
Another difference between the U.S. and Greece is the dollar’s position as the world reserve currency, a position formerly held by the British pound sterling. Being the world reserve currency adds to our ability to abuse our stewardship of the dollar without obvious immediate consequences. But eventually, the system will correct itself, as it did with the pound sterling, and the dollar will lose its reserve currency status. When that happens, and you can be sure it will if we continue our irresponsibility, we will pay heavily. Mr. Krugman and many other “learned” economists don’t believe that can happen. I suggest they spend more time studying history instead of directing us on a course where we will surely repeat it.
Government spending creates no net wealth. It primarily dissipates wealth. Consumer spending creates no net wealth. Wealth and prosperity are created by production of tangible goods. It is that production that pays for consumer spending, service jobs and government. In the last 100 years, government grew from 8 percent to more than 40 percent of GDP, relentlessly absorbing increasing portions of American productivity.
It’s true that immediate, severe cuts in a weak economy can make things worse. But we need years to start reducing government’s bite and stop debasing the dollar. We must start now, before we spark a fatal change in lender sentiment.
Going back to at least the Roman Empire, history is filled with economic policy disasters created through deficit spending and currency debasement. Let’s not repeat it.
Walter Andrew is a professional engineer who holds a master’s degree in business administration.