It takes great foolishness to be relaxed about mounting debt. But, then again, smart persons recognise that debt is to capitalism that which hell is to Christianity: Grossly unpleasant but absolutely essential, since without it the system (economic system or Christian belief system) does not work. So, yes, worrying about hell is part and parcel of being devout just as losing sleep over debt is the sensible thing to do under capitalism, especially during a crisis as great as the present one.
But, I am told by believers, freaking out about hell is not the best way to avoid ending up there. Hell, like debt, is a mere symptom of doing the wrong thing. And the wrong thing to do in a great depression, of the sort we are experiencing now, is exactly what Todd Buchholz is doing now: To freak out about public debt, carefully avoiding a single word regarding the private debt menace looming as families and companies face bankruptcy.
Too smart to put it in his own words, Todd whips up fear of public debt hoping that his readers will reach, all by themselves, the ‘obvious’ conclusion that it is time for austerian public spending cuts for the purpose of reining in the budget deficit.
It is not hard to mislead the public into this conclusion. When the going gets tough in our private lives, with our incomes tanking, you and I have a duty to tighten our belts and to say no to new loans. However, private finances are a terrible basis for thinking about public finance.
You and I are blessed with a wonderful independence between our expenses and our income. When, in response to being in the red, we cut down on our expenses, our budget goes back into the black because our income is independent of what we spend. Tragically, the Treasury is not blessed with this splendid independence between its tax revenues and public expenditure.
Suppose Todd succeeded in pushing everyone into an austerian mindset yielding budget cuts. At a time of falling private expenses (both on consumption and, more ominously, on investment), a subsequent reduction in public spending will mean that the sum of private and public expenditure will fall even faster. But what is this sum? National income! Thus, GDP falls faster when states cut spending in a middle of a slump – a catastrophe for families and companies.
So, by all means let’s worry about debt. But let us first understand that, in a recession, debt will drown us if, like Todd, we focus exclusively on public debt. Put differently, the more government tries to balance its books now, the harder it will be for persons and firms to balance theirs and, as a result, total debt will rise faster as total incomes fall further.
For this reason, a special place in hell (and possibly debtor’s prison!) is reserved for those who whip up fear of public debt in order to lure good, unsuspecting people into the fallacy of austerity.